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 September 27, 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 October 26, 1998, the registrant had 5,945,473 outstanding shares of common
stock, $ .01 par value.
<PAGE>
FUNCO, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
ITEM 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income - Quarter and six months
ended September 27, 1998 and September 28, 1997 ........... 3
Consolidated Balance Sheets - September 27, 1998 and March 29,
1998 ...................................................... 4
Consolidated Statements of Cash Flows - Six months ended
September 27, 1998 and September 28, 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 ..... 12
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. Legal Proceedings .............................................. 12
ITEM 4. Submission of Matters to a Vote of Security Holders ............ 13
ITEM 5. Other Information .............................................. 13
ITEM 6. Exhibits and Reports on Form 8-K ............................... 14
SIGNATURES ................................................................ 15
- ----------
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
FUNCO, INC.
Consolidated Statements of Income
(in thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
------------------------------- -------------------------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales .............................. $ 35,299 $ 26,760 $ 68,193 $ 50,761
Cost of sales .......................... 23,037 16,955 44,301 31,544
------------ ------------ ------------ ------------
Gross profit ........................... 12,262 9,805 23,892 19,217
Operating expenses ..................... 8,919 6,884 17,321 13,242
General and administrative expenses .... 2,501 2,125 5,015 4,233
------------ ------------ ------------ ------------
Operating income ....................... 842 796 1,556 1,742
Interest income ........................ 91 66 211 145
------------ ------------ ------------ ------------
Net income before income taxes ......... 933 862 1,767 1,887
Income tax provision ................... 373 327 707 717
------------ ------------ ------------ ------------
Net income ............................. $ 560 $ 535 $ 1,060 $ 1,170
============ ============ ============ ============
Basic Earnings Per Share:
- -------------------------
Basic net income per share ............. $ 0.09 $ 0.09 $ 0.17 $ 0.19
Weighted average number of common
shares ................................. 6,204,179 6,137,470 6,199,815 6,102,755
Diluted Earnings Per Share:
- ---------------------------
Diluted net income per share ........... $ 0.09 $ 0.08 $ 0.16 $ 0.18
Weighted average number of common
and common equivalent shares ........... 6,499,990 6,633,441 6,535,181 6,553,335
</TABLE>
SEE ACCOMPANYING NOTES
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<PAGE>
FUNCO, INC.
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
September 27, March 29,
1998 1998
------------ -----------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
- ------
Current Assets
Cash and cash equivalents .................... $ 1,808 $ 9,295
Short-term investments ....................... 1,077 1,460
Accounts receivable .......................... 1,695 2,127
Inventories .................................. 27,451 21,487
Prepaid expenses ............................. 1,111 1,175
Current deferred tax asset ................... 603 603
----------- -----------
Total current assets ...................... 33,745 36,147
Net property and equipment ..................... 8,940 8,201
Long-term deferred tax asset ................... 1,122 1,122
Other assets ................................... 110 156
----------- -----------
Total assets ................................... $ 43,917 $ 45,626
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Accounts payable ............................. $ 5,264 $ 4,834
Accrued liabilities .......................... 4,326 6,219
Deferred revenue ............................. 668 892
----------- -----------
Total current liabilities ................. 10,258 11,945
Accrued rent ................................... 164 156
Shareholders' Equity
Common stock (issued: 6,140,490 and 6,184,477) 61 62
Additional paid-in capital ................... 18,545 19,634
Retained earnings ............................ 14,889 13,829
----------- -----------
Total shareholders' equity ................ 33,495 33,525
----------- -----------
Total liabilities and shareholders' equity ..... $ 43,917 $ 45,626
=========== ===========
</TABLE>
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.
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<PAGE>
FUNCO, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------------
September 27, September 28,
1998 1997
------------- -------------
<S> <C> <C>
Operating Activities
Net income .............................................. $ 1,060 $ 1,170
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization ........................ 1,680 1,520
Net loss on disposal of property and equipment ....... 30 14
Changes in operating assets and liabilities:
Accounts receivable ............................... 432 (160)
Inventories ....................................... (5,964) (9,075)
Prepaid expenses .................................. 64 (1,533)
Accounts payable .................................. 430 6,294
Accrued liabilities ............................... (1,885) (1,034)
Deferred revenue .................................. (224) (91)
----------- -----------
Net cash used in operating activities .......... (4,377) (2,895)
Investing Activities
Additions of property and equipment ..................... (2,403) (2,123)
Increase in other assets ................................ -- (53)
Purchase of short-term investments ...................... (1,974) --
Sale of short-term investments .......................... 2,357 --
----------- -----------
Net cash used in investing activities ............. (2,020) (2,176)
Financing Activities
Payments of obligations under capital leases ............ -- (20)
Payments for repurchase of common stock ................. (1,291) --
Net proceeds from issuance of common stock .............. 201 536
----------- -----------
Net cash provided by (used in) financing activities (1,090) 516
Decrease in cash and cash equivalents ...................... (7,487) (4,555)
Cash and cash equivalents at beginning of period ........... 9,295 8,408
----------- -----------
Cash and cash equivalents at end of period ................. $ 1,808 $ 3,853
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
5 of 15
<PAGE>
FUNCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Company
Funco, Inc. (the Company) was incorporated in March 1988 and is a leading
national specialty retailer of interactive home entertainment, primarily through
the purchase and resale of new and previously played video games along with
related hardware and accessory items through its FUNCOLAND(R) stores. The store
strategy is complemented by the Company's mail order operation, the FUNCOLAND
SUPERSTORE Web site and publication of GAME INFORMER(R), a video game magazine.
The Company operated 270 retail locations at September 27, 1998, compared to 215
retail locations at September 28, 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.
Due to the seasonal nature of the Company's business, the operating results for
the quarter ended September 27, 1998 are not necessarily indicative of the
results that may be expected for the year ending March 28, 1999.
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. Common Stock
In the second quarter of fiscal 1999, the Board of Directors authorized the
repurchase of up to 400,000 shares of the Company's common stock. During the
quarter ended September 27, 1998, the Company repurchased 101,200 shares at an
aggregate cost of $1,290,850. Subsequent to September 27, 1998, the Company has
repurchased an additional 200,100 shares at an aggregate cost of $2,402,638,
increasing the total number of repurchased shares to 301,300.
6 of 15
<PAGE>
Note 5. Net Income per Share
The following table sets forth the computation of basic and diluted net income
per share:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
------------------------------- -------------------------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Numerator:
Net income .......................................... $ 560,000 $ 535,000 $ 1,060,000 $ 1,170,000
============ ============ ============ ============
Denominator:
Denominator for basic net income per
share - weighted average shares ................... 6,204,179 6,137,470 6,199,815 6,102,755
Dilutive securities:
Employee and nonemployee director stock options ..... 295,811 495,971 335,366 450,580
------------ ------------ ------------ ------------
Denominator for diluted earnings per share - adjusted
weighted average shares ........................... 6,499,990 6,633,441 6,535,181 6,553,335
============ ============ ============ ============
Basic earnings per share ............................... $ 0.09 $ 0.09 $ 0.17 $ 0.19
============ ============ ============ ============
Diluted earnings per share ............................. $ 0.09 $ 0.08 $ 0.16 $ 0.18
============ ============ ============ ============
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth certain items in the statements of income
expressed as (i) percentage of net sales for the quarter indicated and (ii)
percentage changes from the comparable period prior year.
<TABLE>
<CAPTION>
Percent Percent
Quarter Ended Inc (Dec) Six Months Ended Inc (Dec)
------------------------------ --------- ------------------------------ ---------
September 27, September 28, 1999 over September 27, September 28, 1999 over
1998 1997 1998 1998 1997 1998
------------- ------------- --------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales...................... 100.0% 100.0% 31.9% 100.0% 100.0% 34.3%
Cost of sales.................. 65.3 63.4 35.9 65.0 62.1 40.4
------------- ------------- ------------- -------------
Gross profit................... 34.7 36.6 25.1 35.0 37.9 24.3
Operating expenses............. 25.3 25.7 29.6 25.4 26.1 30.8
General and admin. expenses.... 7.1 7.9 17.7 7.4 8.3 18.5
------------- ------------- ------------- -------------
Operating income............... 2.4 3.0 5.8 2.3 3.4 (10.7)
Interest income................ 0.3 0.2 37.9 0.3 0.3 45.5
------------- ------------- ------------- -------------
Net income before taxes........ 2.6 3.2 8.2 2.6 3.7 (6.4)
Income tax provision........... 1.1 1.2 14.1 1.0 1.4 (1.4)
------------- ------------- ------------- -------------
Net income..................... 1.6% 2.0% 4.7% 1.6% 2.3% (9.4)%
============= ============= ============= =============
</TABLE>
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Second Quarter Fiscal 1999 to Second Quarter Fiscal 1998
Net sales for the quarter increased from $26,760,000 in 1998 to $35,299,000 in
1999, an increase of 31.9%. The Company opened 18 new stores during the quarter
and operated a total of 270 locations at the end of the quarter this year
compared to 215 locations at the end of the same period prior year. Comparable
store sales for the quarter increased 13%. The strong sales increase is
primarily due to operating a greater number of stores compared to prior year and
continued growth of the Sony PlayStation and Nintendo 64 product categories.
Cost of sales for the quarter increased from $16,955,000 in 1998 to $23,037,000
in 1999, an increase of 35.9%. The dollar increase in cost of sales is primarily
due to the strong growth in sales. Cost of sales as a percentage of net sales
increased from 63.4% in 1998 to 65.3% in 1999. This increase is primarily due to
sales mix for the quarter reflecting an increased proportion of new product
sales which are sold at lower gross margin percentages than previously played
product.
Operating expenses for the quarter increased from $6,884,000 in 1998 to
$8,919,000 in 1999, an increase of 29.6%. This increase is primarily due to
higher store payroll expense which occurred both as the Company operated a
greater number of stores than in the same period prior year and also to support
the 13% increase in comparable store sales. Operating expenses decreased
favorably as a percentage of net sales from 25.7% in 1998 to 25.3% in 1999, due
to leveraging as net sales increased by 31.9%.
General and administrative expenses for the quarter increased from $2,125,000 in
1998 to $2,501,000 in 1999, an increase of 17.7%. This increase occurred to
support the store base which grew to 270 locations from 215 locations at the end
of the same period in the prior year. General and administrative expenses
decreased favorably as a percentage of net sales from 7.9% in 1998 to 7.1% in
1999, due to leveraging as net sales increased by 31.9%.
The Company generated operating income for the quarter of $842,000 compared to
$796,000 in the same period prior year, an increase of 5.8%.
Interest income for the quarter increased from $66,000 in 1998 to $91,000 in
1999, an increase of 37.9%, 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 $933,000
compared to net income before income taxes of $862,000 in the same period prior
year, an increase of 8.2%. As a result the Company recorded income tax expense
for the quarter of $373,000 compared to income tax expense of $327,000 for the
same period prior year.
Due to the above factors, the Company generated net income for the quarter of
$560,000, or $0.09 per share, compared to net income of $535,000, or $0.08 per
share, for the same period prior year.
Comparison of Six Month Period Fiscal 1999 to Six Month Period Fiscal 1998
Net sales for the six month period increased from $50,761,000 in 1998 to
$68,193,000 in 1999, an increase of 34.3%. The Company opened 21 new stores and
closed one store during the six month period and operated a total of 270
locations at the end of the six month period this year compared to 215 locations
at the end of
8 of 15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
the same period prior year. Comparable store sales for the six month period
increased 13%. The strong sales increase is primarily due to operating a greater
number of stores compared to prior year and continued growth of the Sony
PlayStation and Nintendo 64 product categories.
Cost of sales for the six month period increased from $31,544,000 in 1998 to
$44,301,000 in 1999, an increase of 40.4%. 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 62.1% in 1998 to 65.0% in 1999. This increase is
primarily due to sales mix for the six month period reflecting an increased
proportion of new product sales which are sold at lower gross margin percentages
than previously played product.
Operating expenses for the six month period increased from $13,242,000 in 1998
to $17,321,000 in 1999, an increase of 30.8%. This increase is primarily due to
higher store payroll expense which occurred both as the Company operated a
greater number of stores than in the same period prior year and also to support
the 13% increase in comparable store sales. Operating expenses decreased
favorably as a percentage of net sales from 26.1% in 1998 to 25.4% in 1999, due
to leveraging as net sales increased by 34.3%.
General and administrative expenses for the six month period increased from
$4,233,000 in 1998 to $5,015,000 in 1999, an increase of 18.5%. This increase
occurred to support the store base which grew to 270 locations from 215
locations at the end of the same period in the prior year. General and
administrative expenses decreased favorably as a percentage of net sales from
8.3% in 1998 to 7.4% in 1999, due to leveraging as net sales increased by 34.3%.
The Company generated operating income for the six month period of $1,556,000
compared to operating income of $1,742,000 in the same period prior year, a
decrease of 10.7%.
Interest income for the six month period increased from $145,000 in 1998 to
$211,000 in 1999, an increase of 45.5%, 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 six month period of
$1,767,000 compared to net income before income taxes of $1,887,000 in the same
period prior year, a decrease of 6.4%. As a result the Company recorded income
tax expense for the six month period of $707,000 compared to income tax expense
of $717,000 for the same period prior year.
Due to the above factors, the Company generated net income for the six month
period of $1,060,000, or $0.16 per share, compared to net income of $1,170,000,
or $0.18 per share, for the same period prior year.
9 of 15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Seasonality and Quarterly Fluctuations
The Company's business is seasonal with a majority of net sales generated in the
third and fourth fiscal quarters, which include the holiday selling season. In
addition to sales seasonality, the Company's quarterly results are also impacted
by factors including new product introductions and the number and timing of new
store openings. 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 ten quarters:
<TABLE>
<CAPTION>
Net Sales (in thousands) Number of Stores Open at Quarter End
- --------------------------------------------- -----------------------------------------
Fiscal Fiscal
Quarter 1999 1998 1997 Quarter 1999 1998 1997
- --------- --------- --------- --------- --------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
First $32,894 $24,001 $18,862 First 252 193 173
Second 35,299 26,760 20,415 Second 270 215 176
Third 67,036 46,461 Third 249 188
Fourth 45,519 34,817 Fourth 250 188
</TABLE>
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 six months ended September 27, 1998, the Company used $4,377,000 of
cash for operating activities primarily for the purchase of inventory, and used
$2,020,000 of cash in investing activities, primarily for capital expenditures.
The Company also used $1,291,000 of cash for the repurchase of 101,200 shares of
the Company's common stock. For the six months ended September 28, 1997, the
Company used $2,895,000 of cash for operating activities and used $2,176,000 of
cash in investing activities.
The Company has a $10,000,000 unsecured credit facility available, representing
the seasonally adjusted increase to its $3,000,000 revolving credit facility
with a commercial bank. The interest rate on outstanding borrowings under the
facility (8.19% at September 27, 1998) is based upon LIBOR plus 250 basis
points. The facility requires the Company to maintain certain financial ratios
and achieve certain operating results. The Company had no borrowings under this
facility at September 27, 1998 and currently has no borrowings.
During fiscal 1999, the Company plans to incur capital expenditures of
approximately $6,500,000, of which $2,403,000 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.
10 of 15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Year 2000 Readiness
The Company's year 2000 Readiness plan is primarily directed towards ensuring
that the Company will be able to perform its critical functions: (1) accurately
process sale and purchase transactions through its retail, mail order, and web
site operations, (2) order and receive merchandise from vendors, (3) make
appropriate decisions as to inventory pricing and distribution and (4) assure
integrity of business operations, controls and financial reporting.
The Company is involved in an ongoing assessment of year 2000 compliance and is
undergoing a company-wide program of adapting its computer systems and
applications for the year 2000. Substantially all in-house developed software
has been written to be year 2000 compliant. Older systems, some of which are not
year 2000 compliant, are in the process of being modified or upgraded. These
system upgrades, which include inventory, financial and store point-of-sale
systems are designed to be year 2000 compliant and are being undertaken
primarily to support the Company's growth and to take advantage of advanced
technologies.
The Company plans to begin an assessment of year 2000 issues associated with its
various business partners, including vendors and service providers, and intends
to work with these third parties to identify and mitigate common risks. The
Company also recognizes the potential for year 2000 issues in areas not directly
related to its computer systems such as telephone and communication systems,
distribution processes, utilities, alarm systems and transportation services.
These various third party and non-information technology assessments are
scheduled to commence in the current fiscal quarter.
Costs
Costs associated with year 2000 compliance have not been material to date, and
costs to achieve year 2000 compliance are expected to be less than $500,000.
However, there can be no assurance that costs will not exceed this level. The
Company does not expect to incur material costs associated with the use of
external resources.
Risks
The variety, nature and complexity of year 2000 issues, the dependence on
technical skills and expertise of Company employees and independent contractors
and issues associated with the readiness of third parties are factors which
could result in the Company's efforts toward year 2000 compliance being less
than fully effective.
Failure to properly assess and correct year 2000 issues could result in
materially adverse financial consequences through an inability to adequately
process retail, mail order or web site transactions, or due to the failure of
the Company's systems to provide accurate information for ordering, pricing or
distributing merchandise. Accurate financial reporting is dependent upon year
2000 compliance. Failures caused by vendors not being year 2000 compliant could
lead to costly delays in receiving product shipments. Year 2000 compliance
difficulties on the part of financial institutions could interfere with cash
collections, payments and funding for the Company. In addition to the above, the
Company believes that other significant risks could be associated with failure
of year 2000 compliance by the Company or third parties.
11 of 15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Contingency Plans
The Company believes that its program of assessment, correction and testing,
along with selected system upgrades will enable it to successfully meet the year
2000 challenge. The Company has not formalized a contingency plan at this time
and believes that in the event of failures associated with year 2000 compliance,
adequate resources could be focused on correcting isolated internal failures.
However, there can be no assurance that the Company or its business partners
will be year 2000 compliant on a timely basis.
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, general economic conditions, 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 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.
12 of 15
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Meeting of Shareholders on July 31,
1998.
(b) The Shareholders voted on the election of Directors, each to serve a
one year term. The vote was as follows for each of the nominees:
NAME AFFIRMATIVE AUTHORITY WITHHELD
------------------- ----------- ------------------
David R. Pomije 5,468,327 266,889
Stanley A. Bodine 5,468,077 267,139
Richard T. Guidera 5,468,077 267,139
George E. Mileusnic 5,468,077 267,139
Patrick J. Ferrell 5,468,077 267,139
(c) The Shareholders voted on an amendment to the 1993 Stock Option Plan
to increase the number of shares reserved for issuance under such
plan. The vote was as follows:
AFFIRMATIVE AUTHORITY WITHHELD ABSTENTIONS BROKER NON-VOTE
----------- ------------------ ----------- ---------------
4,751,047 952,421 20,460 11,288
(d) The Shareholders also voted on the appointment of Ernst & Young LLP
as the Company's independent auditors for the 1999 fiscal year. The
vote was as follows:
AFFIRMATIVE AUTHORITY WITHHELD ABSTENTIONS
----------- ------------------ -----------
5,729,477 1,273 4,466
ITEM 5. OTHER INFORMATION
a. Certain Information Regarding Shareholder Proposals
Proxy rules of the Securities and Exchange Commission permit
shareholders of a company, after timely notice to the company, to
present proposals for shareholder consideration for inclusion in the
Company's proxy statement unless said proposals can be omitted by the
Company in accordance with the proxy rules. The Funco, Inc. 1999 Annual
Meeting of Shareholders is expected to be held on or about July 30,
1999, and proxy materials in connection with that annual meeting are
expected to be mailed on or about June 25, 1999. In order to be included
in the Company's proxy materials for the 1999 Annual Meeting,
shareholder proposals prepared in accordance with the proxy rules must
be received by the Company on or before February 26, 1999.
In addition, pursuant to a recent amendment to Commission Rule 14a-4, a
shareholder must give notice to the Company prior to May 11, 1999, of
any proposal which such shareholder intends to raise at the 1999 Annual
Meeting. If the Company receives notice of such proposal after May 11,
1999, the persons named in the proxy solicited by the Company's Board of
Directors for the 1999 Annual Meeting may exercise discretionary voting
power with respect to such proposal.
Further, under the Company's Bylaws, for business to be properly brought
before the 1999 Annual Meeting, a shareholder must give notice in
writing to the Secretary of the Company no later than June 10, 1999. Any
proposal not submitted by such date will not be considered at the 1999
Annual Meeting.
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ITEM 5. OTHER INFORMATION - CONTINUED
b. Resignation of Director
Richard T. Guidera has retired from the Board of Directors of the
Company with his resignation effective September 25, 1998. Mr. Guidera
had been a director since 1992.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed with this Form 10-Q:
3.2 Corporate Bylaws as restated and amended July 31, 1998
10.1a Amendment to Credit Agreement effective June 30, 1998, by and
between the Registrant and Marquette Capital Bank, N.A., and
the Amended and Restated Promissory Note
10.2 Amendment to 1992 Employee Incentive Stock Option Plan as
approved by the Board of Directors on July 31, 1998
10.3 Amendment to Stock Option Plan for Nonemployee Directors as
approved by the Board of Directors on July 31, 1998
10.4 1993 Stock Option Plan as restated and amended on July 31,
1998
27 Financial Data Schedule
(b) No report on Form 8-K was filed by the registrant during the quarter
ended September 27, 1998.
14 of 15
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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: October 27, 1998 By: /s/ David R. Pomije
------------------------------------
David R. Pomije
Chief Executive Officer
By: /s/ Robert M. Hiben
------------------------------------
Robert M. Hiben
Chief Financial Officer
15 of 15
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS OF
FUNCO, INC.
THROUGH JULY 31, 1998
TABLE OF CONTENTS
Page
----
ARTICLE I: OFFICES; CORPORATE SEAL....................................... 3
Section 1.1. Registered Office................................... 3
Section 1.2. Corporate Seal...................................... 3
ARTICLE II: MEETINGS OF SHAREHOLDERS.................................... 3
Section 2.1. Place of Meeting.................................... 3
Section 2.2. Annual Meeting...................................... 3
Section 2.3. Special Meetings.................................... 3
Section 2.4. Meetings Held upon Shareholder Demand............... 3
Section 2.5. Notice of Meetings.................................. 4
Section 2.6. Waiver of Notice.................................... 4
Section 2.7. Quorum; Adjourned Meetings.......................... 4
Section 2.8. Vote Required....................................... 5
Section 2.9. Voting Rights....................................... 5
Section 2.10. Proxies............................................. 5
Section 2.11. Action Without a Meeting............................ 5
Section 2.12. Record Date......................................... 5
Section 2.13. Advance Notice Requirements......................... 6
ARTICLE III: DIRECTORS................................................... 7
Section 3.1. General Powers...................................... 7
Section 3.2. Number, Qualifications, and Term of Office.......... 7
Section 3.3. Meetings; Place and Notice.......................... 7
Section 3.4. Electronic Communications........................... 7
Section 3.5. Waiver of Notice.................................... 8
Section 3.6. Quorum; Acts of Board............................... 8
Section 3.7. Vacancies........................................... 8
Section 3.8. Removal............................................. 8
Section 3.9. Resignation......................................... 8
Section 3.10. Committees.......................................... 8
Section 3.11. Special Litigation Committee........................ 9
Section 3.12. Absent Directors.................................... 9
Section 3.13. Presumption of Assent............................... 9
Section 3.14. Action Without a Meeting............................ 9
Section 3.15. Compensation of Directors........................... 9
Section 3.16. Limitation of Directors' Liabilities................ 9
ARTICLE IV: OFFICERS..................................................... 10
Section 4.1. Number and Designation.............................. 10
Section 4.2. Chief Executive Officer............................. 10
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Section 4.3. Chief Financial Officer............................. 10
Section 4.4. Chairman of the Board............................... 10
Section 4.5. President........................................... 10
Section 4.6. Vice Presidents..................................... 10
Section 4.7. Secretary........................................... 11
Section 4.8. Treasurer........................................... 11
Section 4.9. Treasurer's Bond.................................... 11
Section 4.10. Vacancies........................................... 11
Section 4.11. Authority and Duties................................ 11
Section 4.12. Term; Resignation; Removal; Vacancies............... 11
Section 4.13. Salaries............................................ 11
ARTICLE V: SHARES AND THEIR TRANSFER.................................... 12
Section 5.1. Certificates for Shares............................. 12
Section 5.2. Uncertificated Shares............................... 12
Section 5.3. Transfer of Shares.................................. 12
Section 5.4. Lost, Destroyed, or Stolen Certificates............. 12
Section 5.5. Transfer Agent and Registrar........................ 12
Section 5.6. Facsimile Signature................................. 12
Section 5.7. Closing of Transfer Books; Record Date.............. 13
Section 5.8. Registered Shareholders............................. 13
ARTICLE VI: INDEMNIFICATION............................................. 13
Section 6.1. Indemnification..................................... 13
Section 6.2. Insurance........................................... 13
ARTICLE VII: GENERAL CORPORATE MATTERS.................................. 13
Section 7.1. Distributions....................................... 13
Section 7.2. Reserves............................................ 13
Section 7.3. Deposits............................................ 14
Section 7.4. Loans............................................... 14
Section 7.5. Advances............................................ 14
ARTICLE VIII: BOOKS OF RECORD; AUDIT; FISCAL YEAR....................... 14
Section 8.1. Share Register...................................... 14
Section 8.2. Books, Records, and Other Documents................. 14
Section 8.3. Financial Statements................................ 15
Section 8.4. Audit............................................... 15
Section 8.5. Fiscal Year......................................... 15
ARTICLE IX: AMENDMENTS.................................................. 15
Section 9.1. Amendments.......................................... 15
2
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AMENDED AND RESTATED BYLAWS OF
FUNCO, INC.
THROUGH JULY 31, 1998
ARTICLE I
OFFICES; CORPORATE SEAL
Section 1.1. Registered Office. The registered office of the
Corporation in Minnesota shall be that set forth in the Articles of
Incorporation or in the most recent amendment of the Articles of Incorporation
or in a statement of the Board of Directors filed with the Secretary of State of
the State of Minnesota changing the registered office in the manner prescribed
by law. The Corporation may have such other offices, within or without the State
of Minnesota, as the Board of Directors shall, from time to time, determine.
Section 1.2. Corporate Seal. If so directed by the Board of Directors,
the Corporation may use a corporate seal. The failure to use such seal, however,
shall not affect the validity of any documents executed on behalf of the
Corporation. The seal need only include the word "seal," but it may also
include, at the discretion of the Board, such additional wording as is permitted
by law.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 2.1. Place of Meeting. Each meeting of the shareholders shall
be held at the principal executive office of the Corporation or such other place
as may be designated by the Board of Directors or the chief executive officer;
provided, however, that any meeting called by or at the demand of a shareholder
or shareholders shall be held in the county where the principal executive office
of the Corporation is located.
Section 2.2. Annual Meeting. An annual meeting of the shareholders
shall be held on an annual basis as determined by the Board of Directors. At
each annual meeting the shareholders shall elect qualified successors for
directors whose terms have expired or are due to expire within six (6) months
after the date of the meeting and may transact any other business.
Section 2.3. Special Meetings. A special meeting of the shareholders
may be called for any purpose or purposes at any time by the chief executive
officer or the chief financial officer, by the Board of Directors, or any two or
more members thereof, or by one or more shareholders holding not less than ten
percent (10%) of the voting power of all shares of the Corporation entitled to
vote as provided in Section 2.4(b) hereof, except that a special meeting for the
purpose of considering any action to directly or indirectly facilitate or effect
a business combination, including any action to change or otherwise affect the
composition of the board of directors for that purpose, must be called by
twenty-five percent (25%) or more of the voting power of all shares entitled to
vote. The chief executive officer or the Board of Directors shall be authorized
to fix the time and date of any special meeting of the shareholders. Notice of
any special meeting shall state the purpose for which the meeting has been
called, and the business transacted at any special meeting shall be limited to
the purpose stated in the notice, unless all of the shareholders are present in
person or by proxy and none of them objects to the consideration of additional
business.
Section 2.4. Meetings Held upon Shareholder Demand. Annual or special
meetings of the shareholders may be demanded by a shareholder under the
following circumstances:
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(a) If an annual meeting of shareholders has not been held
during the immediately preceding fifteen (15) months, a shareholder or
shareholders holding three percent (3%) or more of all voting shares
may demand an annual meeting of shareholders by written notice of
demand given to the chief executive officer or chief financial officer
of the Corporation. If the Board fails to cause an annual meeting to
be called and held as required by law, the shareholder or shareholders
making the demand may call the meeting by giving notice as required by
law, all at the expense of the Corporation.
(b) To demand a special meeting of the shareholders, a
shareholder or shareholders shall give written notice to the chief
executive officer or the chief financial officer of the Corporation
specifying the purposes of such meeting. Upon receipt by the chief
executive officer or chief financial officer of the Corporation of a
demand for a special meeting of shareholders from any shareholder or
shareholders entitled to call such a meeting, the Board of Directors
shall cause such meeting to be called and held in compliance with the
timing requirements of Minnesota Statutes 302A.433, Subd. 2, as
amended from time to time.
Section 2.5. Notice of Meetings.
(a) Notice of all meetings of shareholders shall be given to
every shareholder entitled to vote, except where the meeting is an
adjourned meeting and the date, time, and place of the meeting were
announced at the time of adjournment. The notice shall be given at
least ten (10) days but not more than sixty (60) days prior to the
meeting; provided, however, that at least fourteen (14) days' notice
must be given of a meeting at which the adoption of an agreement of
merger or plan of exchange is to be considered.
(b) Notice of meetings shall be given to each shareholder
entitled thereto by oral communication, by mailing a copy thereof to
such shareholder at the address he has designated or to the last known
address of such shareholder, by handing a copy thereof to such
shareholder, or by any other delivery that conforms to law. Notice by
mail shall be deemed given when deposited in the United States mail
with sufficient postage affixed.
Section 2.6. Waiver of Notice. A shareholder may waive notice of any
meeting of shareholders. A waiver of notice by a shareholder entitled to notice
is effective whether given before, at, or after the meeting and whether given in
writing, orally, or by attendance. Attendance by a shareholder at a meeting
shall constitute waiver of notice of that meeting, except where the shareholder
objects at the beginning of the meeting to the transaction of business because
the meeting is not lawfully called or convened or objects before a vote on an
item of business because the item may not lawfully be considered at the meeting
and the shareholder does not participate in consideration of the item at the
meeting.
Section 2.7. Quorum; Adjourned Meetings. The presence either in person
or by proxy of the holders of a majority of the voting power of the shares
entitled to vote at the meeting shall constitute a quorum for the transaction of
business. If, however, a quorum shall not be present in person or by proxy at
any meeting of the shareholders, those present shall have the power to adjourn
the meeting from time to time, without notice other than by announcement at the
meeting of the date, time, and location of the reconvening of the adjourned
meeting, until the requisite number of voting shares shall be represented. At
any such adjourned meeting at which the required number of voting shares shall
be represented, any business may be transacted which might have been transacted
at the meeting as originally noticed. If a quorum is present when a duly called
or held meeting is convened, the shareholders may continue to transact business
until adjournment even though the withdrawal of shareholders originally present
leaves less than the proportion or number otherwise required for a quorum.
4
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Section 2.8. Vote Required. The shareholders shall take action by the
affirmative vote of the holders of the greater of (a) a majority of the voting
power of the shares present and entitled to vote on that item of business or (b)
a majority of the voting power of the minimum number of the shares entitled to
vote that would constitute a quorum for the transaction of business at the
meeting, except where a larger proportion or number is required by statute or
the Articles of Incorporation. If the Articles of Incorporation require a larger
proportion or number than is required by statute for a particular action, the
Articles of Incorporation shall control.
Section 2.9. Voting Rights.
(a) At each meeting of the shareholders, every shareholder
having the right to vote shall be entitled to vote either in person or
by proxy. Unless otherwise provided by the Articles of Incorporation
or resolution of the Board of Directors filed with the Secretary of
State, each shareholder shall have one vote for each share held.
Shares owned by two or more shareholders may be voted by any one of
them unless the Corporation receives written notice, addressed to the
Board of Directors at the address of the registered office, from any
one of them denying the authority of any other person or persons to
vote those shares. Upon demand of any shareholder, the vote upon any
question before the meeting shall be by ballot.
(b) There shall be no cumulative voting for the election of
directors.
Section 2.10. Proxies. At any meeting of the shareholders, any
shareholder may be represented and vote by a proxy or proxies appointed by an
instrument in writing and filed with an officer of the Corporation at or before
the meeting. An appointment of a proxy or proxies for shares held jointly by two
or more shareholders is valid if signed by any one of them, unless and until the
Corporation receives from any one of those shareholders written notice denying
the authority of such other person or persons to appoint a proxy or proxies or
appointing a different proxy or proxies, in which case no proxy shall be
appointed unless all joint owners sign the appointment. In the event that any
instrument shall designate two or more persons to act as proxies, a majority of
such persons present at the meeting, or if only one shall be present then that
one, shall have and may exercise all of the proxies so designated unless the
instrument shall otherwise provide. If the proxies present at the meeting are
equally divided on an issue, the shares represented by such proxies shall not be
voted on such issue. No proxy shall be valid after the expiration of eleven (II)
months from the date of its execution unless coupled with an interest or unless
the person executing it specifies therein the length of time for which it is to
continue in force, which in no case shall exceed three (3) years from the date
of its execution. Subject to the above, any duly executed proxy shall continue
in full force and effect and shall not be revoked unless written notice of its
revocation or a duly executed proxy bearing a later date is filed with an
officer of the Corporation.
Section 2.11. Action Without a Meeting. Any action required or
permitted to be taken at a meeting of the shareholders may be taken without a
meeting, if authorized in writing or writings signed by all shareholders who
would be entitled to vote on that action. The written action is effective when
it has been signed by all such shareholders, unless a different effective date
is provided in the written action.
Section 2.12. Record Date. The Board of Directors may fix a date, not
exceeding sixty (60) days preceding the date of any meeting of shareholders, as
a record date for the determination of the shareholders entitled to notice of
and to vote at such meeting, and in such case only shareholders of record on the
date so fixed, or their legal representatives, shall be entitled to notice of
and to vote at such meeting, notwithstanding any transfer of any shares on the
books of the Corporation after any record date so fixed. The Board of Directors
may close the books of the Corporation against transfer of shares during the
whole or any part of such
5
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period. If the Board of Directors fails to fix a record date for determination
of the shareholders entitled to notice of and to vote at any meeting of
shareholders, the record date shall be the twentieth (20th) day preceding the
date of such meeting.
Section 2.13. Advance Notice Requirements. Only persons who are
nominated in accordance with the procedures set forth in this Section 2.13 shall
be eligible for election as directors. Nominations of persons for election to
the Board of Directors of the Corporation may be made at a meeting of
shareholders (a) by or at the direction of the Board of Directors or (b) by any
shareholder of the Corporation entitled to vote for the election of directors at
the meeting who complies with the notice procedures set forth in this Section
2.13. Nominations by shareholders shall be made pursuant to timely notice in
writing to the Secretary of the Corporation. To be timely, a shareholder's
notice must be delivered to or mailed and received at the principal executive
offices of the corporation not less than 50 days prior to the meeting; provided,
however, that in the event that less than 60 days' notice or prior public
disclosure of the date of the meeting is given or made to shareholders, notice
by the shareholder to be timely must be so received not later than the close of
business on the 10th day following the first day on which such notice of the
date of the meeting was mailed or such public disclosure was made. Such
shareholder's notice shall set forth (x) as to each person whom the shareholder
proposes to nominate for election or re-election as a director, (i) such
person's name and (ii) all information relating to such person that is required
to be disclosed in solicitations of proxies for election of directors, or is
otherwise required, pursuant to Regulation 14A under the Securities Exchange Act
of 1934, as amended (including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected); and
(y) as to the shareholder giving the notice, (i) the name and address, as they
appear on the Corporation's books, of such shareholder and (ii) the class and
number of shares of the Corporation which are beneficially owned by such
shareholder. At the request of the Board of Directors, any person nominated by
the Board of Directors for election as a director shall furnish to the Secretary
of the Corporation that information required to be set forth in a shareholder's
notice of nomination which pertains to a nominee. Notwithstanding anything in
these Bylaws to the contrary, no person shall be eligible for election as a
director of the Corporation unless nominated in accordance with the procedures
set forth in this Section 2.13. The Chairman of the meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed in this Section 2.13 and, if the
Chairman should so determine, the Chairman shall so declare to the meeting and
the defective nomination shall be disregarded.
At any regular or special meeting of shareholders, only such business
shall be conducted as shall have been brought before the meeting (a) by or at
the direction of the Board of Directors or (b) by any shareholder of the
Corporation who complies with the notice procedures set forth in this Section
2.13. For business to be properly brought before any regular or special meeting
by a shareholder, the shareholder must have given timely notice thereof in
writing to the Secretary of the Corporation. To be timely, a shareholder's
notice must be delivered to or mailed and received at the principal executive
offices of the corporation not less than 50 days prior to the meeting; provided,
however, that in the event that less than 60 days' notice or prior public
disclosure of the date of the meeting is given or made to shareholders, notice
by the shareholder to be timely must be received not later than the close of
business on the 10th day following the first day on which either such notice of
the date of the regular or special meeting was mailed or such public disclosure
was made. A shareholder's notice to the Secretary shall set forth as to each
matter the shareholder proposes to bring before the regular or special meeting
(w) a brief description of the business desired to be brought before the meeting
and the reasons for
6
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conducting such business at the meeting, (x) the name and address, as they
appear on the Corporation's books, of the shareholder proposing such business,
(y) the class and number of shares of the Corporation which are beneficially
owned by the shareholder and (z) any material interest of the shareholder in
such business. Notwithstanding anything in these Bylaws to the contrary, no
business shall be conducted at any regular or special meeting except in
accordance with the procedures set forth in this Section 2.13 and, as an
additional limitation, the business transacted at any special meeting shall be
limited to the purposes stated in the notice of the special meeting. The
Chairman of the meeting shall, if the facts warrant, determine and declare to
the meeting that business was not properly brought before the meeting in
accordance with the provisions of this Section 2.13 and, if the Chairman should
so determine, the Chairman shall so declare to the meeting and any such business
not properly brought before the meeting shall not be transacted.
ARTICLE III
DIRECTORS
Section 3.1. General Powers. The property, affairs, and business of
the Corporation shall be managed by the Board of Directors. The Board of
Directors may exercise all powers of the Corporation and do all lawful acts not
required by the Articles of Incorporation, these Bylaws, or law to be done by
the shareholders.
Section 3.2. Number, Qualifications, and Term of Office. The number of
directors which shall constitute the whole Board shall be at least one (1), or
such other number as may be determined by the Board of Directors or by the
shareholders at an annual meeting or a special meeting called and held for that
purpose; provided, however, that the Board of Directors may not decrease the
number of directors below the number last designated by the shareholders. The
creation of any new directorship by action of the Board of Directors shall
require the affirmative vote of a majority of the directors serving at the time
of the increase. Each of the directors shall serve until the next annual meeting
of the shareholders and until his successor shall has been duly elected and has
qualified, or until his earlier death, resignation, removal, or
disqualification. Directors need not be residents of the State of Minnesota or
shareholders of the Corporation.
Section 3.3. Meetings; Place and Notice. Meetings of the Board of
Directors may be held from time to time at any place within or without the State
of Minnesota that the Board of Directors may designate. In the absence of
designation by the Board of Directors, Board meetings shall be held at the
principal executive office of the Corporation, except as may be otherwise
unanimously agreed orally or in writing or by attendance. Board meetings may be
called by the chairman of the Board or chief executive officer on 24 hours
notice or by any director on three (3) days notice to each director. Every such
notice shall state the date, time, and place of the meeting. Notice of a meeting
called by a director other than a director who is the chairman of the board or
chief executive officer shall state the purpose of the meeting. Notice may be
given by mail, telephone, telegram, or in person. If a meeting schedule is
adopted by the Board, or if the date and time of a Board meeting has been
announced at a previous meeting, no notice is required.
Section 3.4. Electronic Communications. A conference among directors
by any means of communication through which the directors may simultaneously
hear one another during the conference constitutes a Board meeting if the notice
required by Section 3.3 of these Bylaws is given of the conference and if the
number of directors participating in the conference would be sufficient to
constitute a quorum. Participation in a meeting by such means constitutes
presence in person at the meeting.
7
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Section 3.5. Waiver of Notice. A director may waive notice of a
meeting of the Board. Waiver of notice is effective, whether given before, at,
or after the meeting and whether given in writing, orally, or by attendance.
Attendance by a director at a meeting constitutes waiver of notice for that
meeting, except where the director objects at the beginning of the meeting to
the transaction of business because the meeting is not lawfully called or
convened and does not participate thereafter in the meeting.
Section 3.6. Quorum; Acts of Board. A majority of the directors
currently holding office shall be a quorum for the transaction of business;
provided, however, that if any vacancies exist by reason of death, resignation,
or otherwise, a majority of the remaining directors (provided such majority
consists of not less than two directors) shall constitute a quorum. In the
absence of a quorum, a majority of the directors present may adjourn the meeting
from time to time until a quorum is present. If a quorum is present when a duly
called or held meeting is convened, the directors present may continue to
transact business until adjournment, even though the withdrawal of a number of
directors originally present leaves less than the proportion or number otherwise
required for a quorum. Except as otherwise required by law or the Articles of
Incorporation or these Bylaws, the acts of a majority of the directors present
at a meeting at which a quorum is present shall be the acts of the Board of
Directors.
Section 3.7. Vacancies. Vacancies on the Board resulting from the
death, resignation, or removal of a director may be filled by the affirmative
vote of a majority of the remaining directors, even though less than a quorum.
Vacancies on the Board resulting from newly created directorships may be filled
by the affirmative vote of a majority of the directors serving at the time of
the increase. Subject to removal as provided in Section 3.8 of these Bylaws,
each director elected under this Section to fill a vacancy shall hold office
until a qualified successor is elected by the shareholders at the next annual
meeting or at a special meeting of the shareholders called for that purpose.
Section 3.8. Removal. Except as otherwise provided by law, the entire
Board of Directors or any individual director may be removed from office with or
without cause by a vote of the shareholders holding a majority of the shares
entitled to vote for the election of directors. The shareholders, by the same
majority vote, may fill any vacancy or vacancies created by such removal. Any
such vacancy not so filled may be filled by the directors as provided in Section
3.7 hereof. Any director named by the Board to fill a vacancy may be removed at
any time, with or without cause, by the affirmative vote of the majority of the
remaining directors, even if the remaining directors constitute less than a
quorum, if the shareholders have not elected directors in the interval between
the appointment to fill the vacancy and the time of removal.
Section 3.9. Resignation. Any director may resign at any time by
giving written notice to the Corporation. Such resignation shall take effect on
the date of the Corporation's receipt of such notice or at any later date or
time specified therein, and, unless otherwise specified therein, the acceptance
of such resignation shall not be necessary to make the resignation effective.
Section 3.10. Committees.
(a) A resolution approved by the affirmative vote of a
majority of the Board may establish committees having the authority of
the Board in the management of the business of the Corporation to the
extent provided in the resolution. Except for any special litigation
committee established under Section 3.11 hereof, committees shall be
subject at all times to the direction and control of the Board.
(b) A committee shall consist of one or more natural
persons, who need not be directors, appointed by the affirmative vote
of a majority of the directors present at a duly held meeting of the
Board.
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(c) Minutes, if any, of committee meetings shall be made
available upon request to members of the committee and to any
director.
Section 3.11. Special Litigation Committee. Pursuant to the procedure
set forth in Section 3.10, the Board may establish a committee composed of one
or more independent directors or other independent persons to consider legal
rights or remedies of the Corporation and whether those rights or remedies
should be pursued.
Section 3.12. Absent Directors. A director may give written consent or
opposition to a proposal to be acted on at a Board meeting by giving a written
statement to the Chairman of the Board or acting Chairman of the Board setting
forth a summary of the proposal to be voted on and containing a statement from
the director on how he votes on such proposal. If the director is not present at
the meeting, consent or opposition to a proposal does not constitute presence
for purposes of determining the existence of a quorum, but consent or opposition
shall be counted as a vote in favor of, or against, the proposal and shall be
entered in the minutes or other record of action of the meeting if the proposal
acted on at the meeting is substantially the same or has substantially the same
effect as the proposal to which the director has consented or objected.
Section 3.13. Presumption of Assent. A director who is present at a
meeting of the Board when an action is approved by the affirmative vote of a
majority of the directors present is presumed to have assented to the action
approved, unless the director;
(a) objects at the beginning of the meeting to the
transaction of the business because the meeting is not lawfully called
or convened and does not participate thereafter in the meeting, in
which case the director shall not be considered to be present at the
meeting for any purpose; and
(b) votes against the action at the meeting; or
(c) is prohibited by law from voting on the action.
Section 3.14. Action Without a Meeting. Any action required or
permitted to be taken at a Board meeting may be taken by written consent of the
number of directors that would be required to take the same action at a meeting
of the Board of Directors at which all directors were present, provided that the
proposed action need not be approved by the shareholders and that the Articles
of Incorporation so provide. The written action is effective when signed by the
necessary number of directors unless a different effective date is stated in the
written action.
Section 3.15. Compensation of Directors. By resolution of the Board of
Directors, each director may be paid his or her expenses, if any, of attendance
at each Board meeting and may be paid a stated amount as a director or a fixed
sum for attendance at each Board meeting, or both. No such payment shall
preclude a director from serving the Corporation in any other capacity and
receiving compensation therefor. Members of special or standing committees may
be allowed like compensation for attending committee meetings.
Section 3.16. Limitation of Directors' Liabilities. A director shall
not be liable to the Corporation or its share-holders for dividends illegally
declared, distributions illegally made to shareholders, or any other action
taken in good faith reliance upon financial statements of the Corporation
represented to him to be correct by the chief executive officer of the
Corporation or the officer having charge of its books of account or certified by
an independent or certified public accountant to fairly reflect the financial
condition of the Corporation; nor shall any director be liable if in good faith
in determining the amount available for dividends or distribution the Board
values the assets in a manner allowable under applicable law.
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ARTICLE IV
OFFICERS
Section 4.1. Number and Designation. The officers of the Corporation
shall be elected or appointed by the Board of Directors. The Corporation shall
have one or more natural persons exercising the functions of the offices of
chief executive officer and chief financial officer. The Board of Directors may
elect or appoint such other officers or agents as it deems necessary for the
operation and management of the Corporation, with such powers, rights, duties,
and responsibilities as may be determined by the Board, including, without
limitation, a chairman of the Board (who shall be a director), a president, a
secretary, and a treasurer, each of whom shall have the powers, rights, duties,
and responsibilities set forth in these Bylaws, unless otherwise determined by
the Board. Any of the offices or functions of those offices may be held or
performed by the same person.
Section 4.2. Chief Executive Officer. Unless provided otherwise by a
resolution adopted by the Board of Directors, the chief executive officer (a)
shall be responsible for the general active management of the business of the
Corporation; (b) shall, when present, preside at all meetings of the
shareholders; (c) shall be responsible for implementing all orders and
resolutions of the Board; (d) shall sign and deliver in the name of the
Corporation any deeds, mortgages, bonds, contracts, or other instruments
pertaining to the business of the Corporation, except where authority to sign
and deliver is required or permitted by law to be exercised by another person
and except where such authority is expressly delegated by these Bylaws or by the
Board to some other officer or agent of the Corporation; (e) may maintain
records of and certify proceedings of the Board and shareholders; and (f) shall
perform such other duties as may from time to time be assigned by the Board.
Section 4.3. Chief Financial Officer. Unless provided otherwise by a
resolution adopted by the Board of Directors, the chief financial officer (a)
shall keep accurate financial records for the Corporation; (b) shall deposit all
monies, drafts, and checks in the name of and to the credit of the Corporation
in such banks and depositories as the Board of Directors shall designate from
time to time; (c) shall endorse for deposit all notes, checks, and drafts
received by the Corporation as ordered by the Board, making proper vouchers
therefor; (d) shall disburse the funds of the Corporation as may be ordered by
the Board of Directors or the chief executive officer, making proper vouchers
therefor; (e) shall render to the chief executive officer and the Board of
Directors, whenever requested, an account of all of his transactions as chief
financial officer and of the financial condition of the Corporation; and (f)
shall perform such other duties as may be assigned by the Board of Directors or
the chief executive officer from time to time.
Section 4.4. Chairman of the Board. The chairman of the Board of the
Corporation shall preside at all meetings of the Board of Directors and shall
perform such other functions as may be determined from time to time by the
Board.
Section 4.5. President. Unless otherwise determined by the Board of
Directors, the president shall be the chief executive officer of the
Corporation. If an officer other than the president is designated chief
executive officer, the president shall perform such duties as may from time to
time be assigned to him by the Board, or if authorized by the Board, such duties
as are assigned to him by the chief executive officer.
Section 4.6. Vice Presidents. Any one or more vice presidents, if any,
may be appointed by the Board of Directors. During the absence or disability of
the president, it shall be the duty of the highest ranking vice president to
perform the duties of the president. The determination of who is the highest
ranking of two or more persons holding the same office shall, in the absence of
specific designation of order or rank by the Board of Directors, be made on the
basis of the
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earliest date of appointment or election, or, in the event of simultaneous
appointment or election, on the basis of the longest continuous employment by
the Corporation.
Section 4.7. Secretary. The secretary, unless otherwise determined by
the Board, shall attend all meetings of the shareholders and all meetings of the
Board of Directors, shall record or cause to be recorded all proceedings thereof
in a book to be kept for that purpose, and may certify such proceedings. Except
as otherwise required or permitted by law or by these Bylaws, the secretary
shall give or cause to be given notice of all meetings of the shareholders and
all meetings of the Board of Directors.
Section 4.8. Treasurer. Unless otherwise determined by the Board, the
treasurer shall be the chief financial officer of the Corporation. If an officer
other than the treasurer is designated chief financial officer, the treasurer
shall perform such duties as may from time to time be assigned to him by the
Board.
Section 4.9. Treasurer's Bond. If required by the Board of Directors,
the treasurer shall give the Corporation a bond in such sum and with such surety
or sureties as shall be satisfactory to the Board of Directors for the faithful
performance of the duties of his office and for the restoration to the
Corporation, in case of his death, resignation, retirement, or removal from
office, of all books, papers, vouchers, money, and other property of whatever
kind in his possession or under his control belonging to the Corporation.
Section 4.10. Vacancies. If any office becomes vacant by reason of
death, resignation, retirement, disqualification, removal, or other cause, the
directors then in office, although less than a quorum, may by a majority vote,
choose a successor or successors who shall hold office for the unexpired term in
respect of which such vacancy occurred.
Section 4.11. Authority and Duties. In addition to the foregoing
authority and duties, all officers of the Corporation shall respectively have
such authority and perform such duties i the management of the business of the
Corporation as may be designated from time to time by the Board of Directors.
Unless prohibited by a resolution approved by the affirmative vote of majority
of the directors present, an officer elected or appointed by the Board may,
without the approval of the Board delegate some or all of the duties and powers
of an office to other persons.
Section 4.12. Term; Resignation; Removal; Vacancies:
(a) All officers of the Corporation shall hold office until
their respective successors are chosen and have qualified or until
their earlier death, resignation, removal.
(b) An officer may resign at any time by giving written
notice to the Corporation. The resignation is effective without
acceptance when the notice is given to the Corporation, unless a later
effective date is specified in the notice.
(c) An officer may be removed at any time, with or without
cause, by a resolution approved by an affirmative vote of the majority
of the directors present at a duly held Board meeting.
(d) A vacancy in an office because of death, resignation,
removal, disqualification, or other cause may, or in the case of a
vacancy in the office of chief executive officer or chief financial
officer shall, be filled by the Board.
Section 4.13. Salaries. The salaries of all officers of the
Corporation shall be fixed by the Board of Directors or by the chief executive
officer, if authorized by the Board.
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ARTICLE V
SHARES AND THEIR TRANSFER
Section 5.1. Certificates for Shares.
(a) Certificates of shares, if any, of the Corporation shall
be in such form as shall be prescribed by law and adopted by the Board
of Directors, certifying the number of shares of the Corporation owned
by each shareholder. The certificates shall be numbered in the order
in which they are issued and shall be signed, in the name of the
Corporation, by the chief executive officer or the chief financial
officer or secretary or by such officers as the Board of Directors may
designate. Such signatures may be by facsimile if authorized by the
Board of Directors or these Bylaws. Such certificates shall also have
such legends as may be required by any shareholder agreement or other
agreement.
(b) A certificate representing shares issued by the
Corporation shall, if the Corporation is authorized to issue shares of
more than one class or series, set forth upon the face or back of the
certificate, or shall state that the Corporation will furnish to any
shareholder upon request and without charge, a full statement of the
designations, preferences, limitations, and relative rights of the
shares of each class or series authorized to be issued, so far as they
have been determined, and the authority of the Board to determine the
relative rights and preferences of subsequent classes or series.
Section 5.2. Uncertificated Shares. Some or all of any or all classes
and series of the shares of stock of this Corporation, upon a resolution
approved by the Board of Directors, may be uncertificated shares. Within twenty
(20) calendar days after the issuance or transfer of uncertificated shares, the
chief executive officer shall send to the shareholder such notice as may be
required by law.
Section 5.3. Transfer of Shares. Transfer of certificated shares on
the books of the Corporation may be authorized only by the shareholder named in
the certificate, or the shareholder's legal representative, or the shareholder's
duly authorized attorney-in-fact, and upon surrender of the certificate or the
certificates for such shares therefor properly endorsed. The Corporation may
treat, as the absolute owner of shares of the Corporation, the person or persons
in whose name or names the shares are registered on the books of the
Corporation. The transfer of uncertificated shares, if any, shall be made by the
means determined by the Board of Directors. Every certificate surrendered to the
Corporation for exchange or transfer shall be canceled, and no new certificate
or certificates shall be issued in exchange for any existing certificate until
such existing certificate shall have been so canceled.
Section 5.4. Lost, Destroyed, or Stolen Certificates. Any shareholder
claiming that a certificate for shares has been lost, destroyed, or stolen shall
make an affidavit of that fact in such form as the Board of Directors may
require and shall, if the Board of Directors so requires, give the Corporation a
sufficient indemnity bond, in form, in an amount, and with one or more sureties
satisfactory to the Board of Directors, to indemnify the Corporation against any
claims that may be made against it on account of the reissue of such
certificate. A replacement certificate shall then be issued for the same number
of shares as represented by the certificate alleged to have been lost,
destroyed, or stolen.
Section 5.5. Transfer Agent and Registrar. The Board of Directors may
appoint one or more transfer agents or transfer clerks and one or more
registrars and may require all certificates for shares to bear the signature or
signatures of any of them.
Section 5.6. Facsimile Signature. Where any certificate is manually
signed by a transfer agent, a transfer clerk, or a registrar appointed by the
Board of Directors to perform such duties,
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a facsimile or engraved signature of the chief executive officer or other proper
officer of the Corporation authorized by the Board of Directors may be inscribed
on the certificate in lieu of the actual signature of the officer. The fact that
a certificate bears the facsimile signature of an officer who no longer holds
office shall not affect the validity of the certificate, and such certificate,
if otherwise validly issued, shall have the same effect as if the former officer
held that office at the date the certificate was issued.
Section 5.7. Closing of Transfer Books; Record Date. The Board of
Directors may close the stock transfer books of the Corporation for a period not
exceeding sixty (60) days preceding the date of any meeting of shareholders, the
date for payment of any dividend or distribution or the date any change,
conversion, or exchange of capital stock shall become effective. In lieu of
closing the stock transfer books, the Board of Directors may fix in advance a
date, not exceeding sixty (60) days preceding the date for payment of any
dividend or distribution, or the date any change, conversion, or exchange of
capital stock shall become effective, as a record date for the determination of
the shareholders entitled to receive payment of any such dividend or
distribution, or to exercise the rights in respect of any such change,
conversion, or exchange of capital stock, and in such case such shareholders and
only such shareholders shall be shareholders of record on the date so fixed and
shall be entitled to receive payment of such dividend or distribution, or to
exercise such rights, notwithstanding any transfer of any stock on the books of
the Corporation after any such record date. If the Board of Directors fails to
fix such a record date the record date shall be the twentieth (20th) day
preceding the date of payment or the date the change, conversion, or exchange
becomes effective.
Section 5.8. Registered Shareholders. The Corporation shall be
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends and to vote as such owner, and shall be
entitled to hold liable for calls and assessments a person so registered on its
books as the owner of shares, and shall not be bound to recognize any equitable
or other claim to or interest in such share or shares on the part of any other
person, whether or not it shall have express or other notice thereof, except as
otherwise provided by applicable law.
ARTICLE VI
INDEMNIFICATION
Section 6.1. Indemnification. The Corporation, shall indemnify such
persons, for such expenses and liabilities, j such manner, under such
circumstances, and to such extent, as required or permitted by Minn. Stat. SS.
302A.521, as amended from time to time, or as required or permitted by other
provisions c law.
Section 6.2. Insurance. The Corporation may purchase and maintain
insurance on behalf of any person in such person's official capacity against any
liability asserted against and incurred by such person in or arising from that
capacity, whether or not the Corporation would otherwise be required to
indemnify the person against the liability.
ARTICLE VII
GENERAL CORPORATE MATTERS
Section 7.1. Distributions. Subject to the Articles of Incorporation
and these Bylaws, the Board of Directors may declare dividends payable in either
cash, property or shares, acquire or exchange shares, or make other
distributions with respect to shares of the Corporation whenever and in such
amounts as, in its opinion, the condition and affairs of the Corporation shall
render advisable.
Section 7.2. Reserves. Before payment of any dividend, the Board of
Directors may set aside out of any funds of the Corporation available for
dividends such sum or sums as the Board
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of Directors from time to time deems proper as a reserve or reserves to meet
contingencies, for equalizing dividends, for repairing or maintaining any
property of the Corporation, or for such other purposes as the Board of
Directors deems conducive to the interest of the Corporation, and the Board of
Directors may modify or abolish any such reserve.
Section 7.3. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies, or other depositories as the Board of Directors
may select.
Section 7.4. Loans. The Corporation shall not lend money to, guarantee
the obligation of, become a surety for, or otherwise financially assist any
person unless the transaction, or class of transactions to which the transaction
belongs, has been approved by the affirmative vote of a majority of directors
present and:
(a) is in the usual and regular course of business of the
Corporation;
(b) is with, or for the benefit of, a related corporation,
an organization in which the Corporation has a financial interest, an
organization with which the Corporation has a business relationship,
or an organization to which the Corporation has the power to make
donations;
(c) is with, or for the benefit of, an officer or other
employee of the Corporation or a subsidiary, including an officer or
employee who is a director of the Corporation or a subsidiary, and may
reasonably be expected, in the judgment of the Board of Directors, to
benefit the Corporation; or
(d) has been approved by the affirmative vote of the holders
of two-thirds of the outstanding shares, including both voting and
nonvoting shares.
Section 7.5. Advances. The Corporation may, without a vote of the
directors, advance money to its directors, officers, or employees to cover
expenses that can reasonably be anticipated to be incurred by them in the
performance of their duties and for which they would be entitled to
reimbursement in the absence of an advance.
ARTICLE VIII
BOOKS OF RECORD; AUDIT; FISCAL YEAR
Section 8.1. Share Register. The Board of Directors of the Corporation
shall cause to be kept at its principal executive office, or such other place or
places within the United States as determined by the Board, a share register not
more than one year old, containing the names and addresses of the shareholders
and the number and classes of the shares held, and the dates on which the
certificates therefor were issued.
Section 8.2. Books, Records, and Other Documents. The Board of
Directors shall cause to be kept at its principal executive office, originals or
copies of:
a) records of all proceedings of the shareholders and
directors for the last three years;
b) Articles of Incorporation of the Corporation and all
amendments thereto currently in effect;
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c) Bylaws of the Corporation and all amendments thereto
currently in effect;
d) financial statements as described in Section 8.3 hereof,
if such statements have been prepared by or for the Corporation;
e) reports made to shareholders generally within the
immediately preceding three years;
f) a statement of the names and usual business addresses of
the directors and principal officers of the Corporation;
g) voting trust agreements; and
h) shareholder control agreements, if any.
Section 8.3. Financial Statements. To the extent that they have been
prepared by or for the Corporation, the financial statements required to be kept
at the principal executive or registered office of the Corporation pursuant to
Section 8.2(d) hereof are as follows:
a) annual financial statements, including at least a balance
sheet as of the end of , and a statement of income for, each fiscal
year; and
b) financial statements for the most recent interim period
prepared in the course of the operations of the Corporation for
distribution to the shareholders or submission to a governmental
agency as a matter of public record.
Section 8.4. Audit. The Board of Directors may cause the records and
books of account of the Corporation to be audited each fiscal year.
Section 8.5. Fiscal Year. The fiscal year of the Corporation shall be
determined by the Board of Directors.
ARTICLE IX
AMENDMENTS
Section 9.1. Amendments. Except as limited by the Articles of
Incorporation, these Bylaws may be altered, amended, or repealed by the
affirmative vote of a majority of the members of the Board of Directors. This
authority of the Board of Directors is subject to the power of the shareholders
to change or repeal such Bylaws, and the Board of Directors shall not make or
alter any Bylaws fixing a quorum for meetings of shareholders, prescribing
procedures for removing directors or filling vacancies on the Board, or fixing
the number of directors or their classifications, qualifications, or terms of
office, but the Board may adopt or amend a Bylaw to increase the number of
directors.
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The undersigned, Chief Executive Officer of Funco, Inc., a Minnesota
corporation, does hereby certify that the foregoing Amended and Restated Bylaws
were duly adopted as the Bylaws of the Corporation by its Board of Directors and
Shareholders effective May 4, 1992.
/s/ David R. Pomije
----------------------------
David R. Pomije
Chief Executive Officer
Effective July 31, 1998, the Bylaws have been amended by adding Section 2.13.
Advance Notice Requirements.
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EXHIBIT 10.1a
AMENDMENT TO CREDIT AGREEMENT
THIS AMENDMENT is entered into as of June 30, 1998 by and between
FUNCO, INC., a Minnesota corporation (the "Borrower"), and MARQUETTE CAPITAL
BANK, N.A. (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 and by an Amendment to Credit Agreement dated June 30, 1997
(the "Credit Agreement"), is amended as follows:
a. 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, 1999, 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, 1998 through
December 15, 1998, 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 28, 1998 through March 28, 1999 the
Borrower shall cause the aggregate outstanding amount of Advances to
be zero for 45 consecutive days.
b. 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, 1998 in favor of the Bank
(together with any amendments, extensions, renewals and replacements
thereof, called the "Revolving Note").
c. All references to June 30, 1998 are changed to June 30, 1999 in
Section 2.08 of the Credit Agreement.
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d. Section 5.01(c) of the Credit Agreement is amended to read as
follows:
(c) As soon as available and in any event within 35 days
after the end of each fiscal quarter of the Borrower: (I) the
consolidated and consolidating balance sheets of the Borrower and the
Subsidiaries and the summary inventory report of the Borrower as of
the end of such quarter and the related consolidated and consolidating
statements of income and cash flow of the Borrower and the
Subsidiaries for such quarter and for the year to date, all in
reasonable detail, prepared and certified by the chief financial
officer of the Borrower to have been prepared in accordance with GAAP,
subject, however, to year-end audit adjustments, and (ii) a Covenant
Compliance Certificate completed with amounts as of the end of such
quarter and executed by the chief financial officer of the Borrower.
e. The reference to $250,000.00 is changed to $4,000,000.00 in Section
5.10 of the Credit Agreement.
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 28,
1999 to exceed $6,500,000.00.
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) $28,000,000.00 at any time
during the period from June 30, 1998 through March 27, 1999; or (b)
$32,000,000.00 at any time during the period after March 27, 1999. '
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 I at any time during the period from June 30, 1998
through August 23, 1998; or (b) 1.50 to I at any time during the
period from August 24, 1998 through November 22, 1998; or (c) 2.00 to
I at any time during the period from November 23, 1998 through March
27, 1999; or (d) 3.00 to I on March 28, 1999; or (e) 2.00 to I at any
time after March 28,1999.
i. Section 5.18 of the Credit Agreement is amended to read as follows:
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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 6/30/98 through 3/27/99 $ 8,000,000.00
After 3/27/99 $10,000,000.00
j. Section 5.19 to the Credit Agreement is amended to read as follows:
Section 5.19 New Stores. In the Borrower's fiscal year
ending March 28, 1999, 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. The following Section 5.20 is added to Article V of the Credit
Agreement:
Section 5.20 Year 2000 Compliance. "Year 2000 Compliant"
means, with regard to any person or entity, that all software,
embedded microchips, and other processing capabilities utilized by,
and material to the business operations or financial condition of,
such person or entity are able to interpret and manipulate data on and
involving all calendar dates correctly and without causing any
abnormal ending scenario including, but not limited to, all dates in
and after the year 2000. The Borrower represents and warrants to the
Bank and agrees that" (a) on or before June 30, 1999, the Borrower
will make due inquiry to determine whether the computer applications
and hardware of the Borrower and the Borrower's material suppliers
will be Year 2000 Compliant by January 1, 2000; and (b) the Borrower
has a plan in place to become Year 2000 Compliant by January 1, 2000,
and the Borrower agrees to devote adequate resources toward,
diligently pursue, and take reasonable actions necessary to complete
such plan and become Year 2000 Compliant by January 1, 2000; and (c)
the Borrower agrees to deliver to the Bank such information as may be
available in the normal course of business regarding the plans and
progress of the Borrower toward becoming Year 2000 Compliant as the
Bank may reasonably request from time to time including, but not
limited to, any existing assessment by a third party of the Borrower's
efforts to become Year 2000 Compliant; and (d) the Borrower agrees to
notify the Bank when the Borrower becomes aware that one if its
material suppliers is not Year 2000 compliant; and (e) at the Bank's
request from time to time, the Borrower shall deliver to the Bank a
copy of any existing audits of the Borrower's plans and progress to
become Year 2000 Compliant by January 1, 2000, and solely at the
Bank's expense, the Borrower shall permit the Bank and the Bank's
representatives to conduct audits of the Borrower's operations for
such purpose. Breach of any
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representation, warranty or agreement in this paragraph, or failure of
the Borrower to become Year 2000 Compliant by January 1, 2000 shall
constitute an Even of Default under this agreement.
2. 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. No provision of this Amendment can be amended, modified,
waived or tenninated, 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 CFO
----------------------------------------
MARQUETTE CAPITAL BANK, N.A.
By /s/ Margaret Mary Yanez
---------------------------------------
Title Vice President
---------------------------------------
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AMENDED AND RESTATED PROMISSORY NOTE
Date: June 30,1998
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, 1997, payable to the order of
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, 1999, 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 2.50% per annum in excess of the Index Rate and that shall
change when and as the Index Rate shall change. Interest is due and payable on
the last day of each month and at maturity. In each calendar month, "Index Rate"
means the average 1-month LIBOR Rate published in The Wall Street Journal in the
previous calendar month. If the Index Rate is no longer available, the Bank may
select a comparable rate to be used as the Index Rate under this Note. The Bank
may lend to its customer at rates that are equal to, greater than, or less than
the Index Rate. Notwithstanding the foregoing, after an Event of Default this
Note shall bear interest until paid at 2.00% per annum in excess of the rate
otherwise then in effect, which rate shall continue to vary based on further
changes in the Index 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, 1998 through December 15, 1998.
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, 1998 through December 15, 1998, 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
and replaced 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
<PAGE>
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, 1998.
FUNCO, INC.
By /s/ Robert M. Hiben
----------------------------------------
Title CFO
----------------------------------------
Marquette Capital Bank, N.A. agrees to this Amended and Restated Promissory
Note.
Executed as of June 30, 1998.
MARQUETTE CAPITAL BANK, N.A.
By /s/ Margaret Mary Yanez
----------------------------------------
Title Vice President
----------------------------------------
EXHIBIT 10.2
Amendment to the
Funco, Inc. 1992 Employee Incentive Stock Option Plan
Pursuant to the terms of the 1992 Employee Incentive Stock Option Plan, dated
January 2, 1992, the Plan is hereby amended by the revision of Section 2(a) and
Section 11(j) and (k) as follows:
"Section 2 Administration (a) Board of Directors
The plan shall be administered by the Board of Directors of the
Company (the "Board"), which, to the extent it shall determine, may
delegate its powers with respect to the administration of the Plan
(except its powers under Section 12(c) to a committee (the
"Committee") appointed by the Board and composed of not less than two
members of the Board. If the Board chooses to appoint a Committee,
references hereinafter to the Board (except in Section 12(c)) shall be
deemed to refer to the Committee. Notwithstanding the preceding
provisions of the Section, if at any time the Company is registered
under Section 12 of the Securities Exchange Act of 1934 (the "1934
Act") with regard to grants of stock options to persons subject to
Section 16 of the 1934 Act, the Committee shall consist of persons who
satisfy the requirements set forth in Rule 16b-3 thereunder."
"Section 11 Miscellaneous (j) Repurchase of Shares
Deleted in its entirety."
"Section 11 Miscellaneous (k) Subscription Agreement
Deleted in its entirety."
Except as stated above, the Plan remains in full force and effect.
Amendment Adopted July 31, 1998
EXHIBIT 10.3
Amendment to the
Funco, Inc. Stock Option Plan
For Nonemployee Directors
Pursuant to the terms of the Stock Option Plan For Nonemployee Directors dated
June 26, 1992, the Plan is hereby amended as follows:
"Section 2 Definitions. (f) Disinterested Person
The definition of "Disinterested Person" has been deleted."
"Section 5 Options. (d) Method of Exercise
Stock Options may be exercised in whole or in part at any time during
the term of the Option. Payment of the exercise price shall be made by
(i) cash or certified bank check, (ii) delivery of shares of Stock
already owned by the Participant, (iii) through the delivery of stock
acquired by successive exercises of the Option ("pyramiding"), or (iv)
any combination of the foregoing. For purposes of this paragraph,
shares of Stock that are delivered in payment of the exercise price
shall be valued at their Fair Market Value as of the date of the
exercise of this Option. The Company's obligation to deliver shares
upon the exercise of Options shall be subject to applicable federal,
state, and local tax withholding requirements. Unless otherwise
determined by the Committee, withholding obligations may be settled
with Stock, including Stock received as part of the exercise giving
rise to the withholding requirement."
"Section 5 Options. (e) Restrictions on Transfer of Option.
Each Option granted under this Plan shall be transferable. No Option
granted under the Plan or any of the rights and privileges thereby
conferred shall be subject to execution, attachment, or similar
process. An Option may be exercised during the Participant's lifetime
only by the Participant, his or her guardian or legal representative
or any transferee."
"Section 9 Amendment of Plan.
The Board of Directors may suspend or terminate the Plan or any
portion thereof at any time, and the Board of Directors or the
Committee may amend the Plan from time to time as may be deemed to be
in the best interests of the Company; provided, however, that no such
amendment, alteration or discontinuation shall be made (a) that would
impair the rights of a Nonemployee Director with respect to Options
therefore awarded, without such person's consent, or (b) without the
approval of the shareholders (i) if such approval is necessary to
comply with any legal, tax, or regulatory requirement, including any
approval requirement that is a
<PAGE>
prerequisite for exemptive relief from Section 16(b) of the Exchange
Act, or (ii) to increase the maximum number of shares of Stock subject
to this Plan, increase the maximum number of shares issuable to any
Nonemployee Director under this Plan, or change the definition of
persons eligible to receive Options under this Plan."
Except as stated above, the Plan remains in full force and effect.
Amendment Adopted July 31, 1998
EXHIBIT 10.4
FUNCO, INC.
1993 STOCK OPTION PLAN
AMENDED AND RESTATED
THROUGH JULY 31, 1998
TABLE OF CONTENTS
ITEM DESCRIPTION PAGE
- ---- ----------- ----
SECTION 1 Purpose; Definitions....................................... 2
SECTION 2 Administration............................................. 4
SECTION 3 Stock Subject to Plan...................................... 5
SECTION 4 Eligibility................................................ 5
SECTION 5 Stock Options.............................................. 5
SECTION 6 Change in Control Provisions............................... 8
SECTION 7 Amendments and Termination................................. 10
SECTION 8 Unfunded Status of Plan.................................... 11
SECTION 9 General Provisions......................................... 11
SECTION 10 Effective Date of Plan..................................... 12
SECTION 11 Term of Plan............................................... 13
SECTION 12 Applicability to Grants under Other Company Plans.......... 13
<PAGE>
FUNCO, INC.
1993 STOCK OPTION PLAN
AMENDED AND RESTATED
THROUGH JULY 31, 1998
SECTION 1. Purpose; Definitions.
The purpose of the Funco, Inc. 1993 Stock Option Plan (the "Plan") is
to enable Funco, Inc. (the "Company") to attract, retain, and reward employees
of the Company and its Parents, Subsidiaries, and Affiliates, and strengthen the
mutuality of interests between such employees and the Company's shareholders, by
offering such employees an opportunity to purchase stock of the Company and
participate in its growth.
In addition to definitions that may be contained elsewhere in this
Plan, for purposes of the Plan, the following terms shall be defined as set
forth below:
a. "Affiliate" means any entity other than the Company and
its Parents and Subsidiaries that is designated by the Board as a
participating employer under the Plan, provided that the Company
directly or indirectly owns at least 20% of the combined voting power
of all classes of stock of such entity or at least 20% of the
ownership interests in such entity.
b. "Option Agreement" means any written agreement, contract,
or other instrument or document evidencing any Option granted by the
Committee hereunder and signed by both the Company and the
Participant.
c. "Board" means the Board of Directors of the Company.
d. "Code" means the Internal Revenue Code of 1986, as
amended from time to time, and any successor thereto.
e. "Committee" means the Committee referred to in Section 2
of the Plan. If at any time no Committee shall be in office, then the
functions of the Committee specified in the Plan shall be exercised by
the Board.
f. "Company" means Funco, Inc., a corporation organized
under the laws of the State of Minnesota, or any successor
corporation.
g. "Disability" means disability as determined under
procedures established by the Committee for purposes of this Plan or,
as applied to Incentive Stock Options, as defined in Section 22(e)(3)
of the Code.
h. "Commission" means the Securities and Exchange
Commission.
2
<PAGE>
i. "Exchange Act" means the Securities Exchange Act of 1934,
as amended from time to time.
j. "Fair Market Value" means as of any given date, unless
otherwise determined by the Committee in good faith, the average for
the preceding five business days of the closing sale prices of the
Stock as reported on The National Association of Securities Dealers,
Inc. Small-Cap Market ("NASDAQ") or, if the Stock is then traded on
the NASDAQ/National Market System ("NASDAQ/NMS") or on a national
securities exchange, the average for the preceding five business days
of the closing price of the Stock on NASDAQ/NMS or such exchange.
k. "Incentive Stock Option" means any Stock Option intended
to be and designated as an "Incentive Stock Option" within the meaning
of Section 422 of the Code.
l. "Nonqualified Stock Option" means any Stock Option that
is not an Incentive Stock Option.
m. "Parent" means any corporation (other than the Company)
in an unbroken chain of corporations ending with the Company if, at
the time of the granting of an Option, each of the corporations other
than the Company owns stock possessing 50% or more of the total
combined voting power of all classes of stock in one of the other
corporations in the chain.
n. "Participant" means an employee of the Company or any
Subsidiary, Parent, or Affiliate of the Company who is selected by the
Committee to receive an Option under the Plan.
o. "Plan" means this Funco, Inc. 1993 Stock Option Plan, as
hereafter amended from time to time.
p. "Stock" means the Common Stock, $.01 par value per share,
of the Company.
q. "Stock Option" or "Option" means any option to purchase
shares of Stock granted pursuant to Section 5 hereof.
r. "Subsidiary" means any corporation (other than the
Company) in an unbroken chain of corporations beginning with the
Company if, at the time of the granting of an Option, each of the
corporations other than the last corporation in the unbroken chain
owns stock possessing 50% or more of the total combined voting power
of all classes of stock in one of the other corporations in the chain.
In addition, the terms "Change in Control," "Potential Change in
Control," and "Change in Control Price" shall have the meanings set forth,
respectively, in Sections 6(b), (c), and (d) below.
3
<PAGE>
SECTION 2. Administration.
The Plan shall be administered by a Committee of not fewer than two
members of the Board, who shall be appointed by and serve at the pleasure of the
Board. Each member of the Committee shall be a "nonemployee director" as defined
in Rule 16b-3. The functions of the Committee specified in the Plan shall be
exercised by the Board, if and to the extent that no Committee exists that has
the authority to so administer the Plan. As to the selection of and grants of
Options to persons who are not subject to Section 16 of the Exchange Act, the
Committee may delegate any or all of its responsibilities to members of the
Company's administration. The selection of and grants of Options to persons who
are subject to Section 16 of the Exchange Act shall be made in a manner that
satisfies Rule 16b-3 under the Exchange Act, or any successor rule.
The Committee shall have full power and authority, consistent with the
provisions of the Plan and subject to such orders or resolutions not
inconsistent with the provisions of the Plan as may be adopted by the Board:
(i) to select the employees of the Company and any Parent,
Subsidiary, or Affiliate to whom Options may from time to
time be granted hereunder;
(ii) to determine the type or types of Options to be granted to
employees hereunder;
(iii) to determine the number of shares of Stock to be covered by
each Option granted hereunder;
(iv) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any Option granted hereunder;
(v) to determine whether, to what extent, and under what
circumstances an Option may be exercised by cash, Stock, or
other property or canceled or suspended;
(vi) to interpret and administer the Plan and any instrument or
agreement entered into thereunder;
(vii) to establish such rules and regulations and appoint such
agents as it shall deem appropriate for proper
administration of the Plan; and
(viii) to make any other determination and take any other action
that the Committee deems necessary or desirable for
administration of the Plan.
Members of the Board and of the Committee acting under the Plan shall
be fully protected in relying in good faith upon the advice of counsel and shall
incur no liability except for gross negligence or willful misconduct in the
performance of their duties.
4
<PAGE>
Decisions of the Committee shall be made in the Committee's sole
discretion and shall be final, conclusive, and binding on all persons, including
the Company, any Participant, any shareholder, and any employee of the Company
or any Parent, Subsidiary, or Affiliate.
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 l% of the number of shares of the
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 948,750.
If any shares of Stock subject to an Option are not issued to a
Participant because the Option is not exercised or is otherwise forfeited or
terminates without Stock being issued to the Participant, such shares shall
again be available for distribution in connection with future Options under the
Plan.
In the event of any merger, reorganization, consolidation,
recapitalization, Stock dividend, Stock split, or other change in corporate
structure affecting the Stock, such substitution or adjustment shall be made in
the aggregate number of shares reserved for issuance under the Plan and in the
number and option price of shares subject to outstanding Options granted under
the Plan as may be determined to be appropriate by the Board, in its sole
discretion, provided that the number of shares subject to any Option shall
always be a whole number.
SECTION 4. Eligibility.
Except as otherwise provided herein, officers, management, or highly
compensated employees of the Company and any Subsidiary, Parent, or Affiliate
(but excluding members of the Committee) are eligible to be granted Options
under the Plan. The Committee shall have the exclusive authority to determine
what constitutes management or a "highly compensated employee" and in making
such a determination shall take into consideration guidelines established by the
Department of Labor and court decisions as to what constitutes a "select group
of management or highly compensated employees."
SECTION 5. Stock Options.
Stock Options granted under the Plan may be of two types; (i)
Incentive Stock Options and (ii) Nonqualified Stock Options.
Options granted under the Plan shall be subject to the following terms
and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable:
5
<PAGE>
a. Exercise Price. Except as provided in Section 5 (i), the
exercise price per share of Stock purchasable under a Stock Option
shall be determined by the Committee at the time of grant but shall be
not less than 85% of the Fair Market Value of the Stock on the date of
grant.
b. Option Term. Except as provided in Section 5(i) hereof,
the term of each Stock Option shall be fixed by the Committee.
c. Exercisability. Stock Options shall be exercisable at
such time or times and subject to such terms and conditions as shall
be determined by the Committee at or after grant; provided, however,
that, except as provided in Sections 5(f), (g), and (h) and Section 6,
unless otherwise determined by the Committee at or after grant, no
Stock Option shall be exercisable prior to the first anniversary date
of the granting of the Option. If the Committee provides, in its sole
discretion, that any Stock Option is exercisable only in installments,
the Committee may waive such installment exercise provisions at any
time at or after grant in whole or in part, based on such factors as
the Committee shall determine, in its sole discretion.
d. Method of Exercise. Subject to whatever installment
exercise provisions apply under Section 5(c), Stock Options may be
exercised in whole or in part at any time during the option period.
Payment of the exercise price may be made by check, note
(if approved by the Board), or such other instrument or method as the
Committee may accept. As determined by the Committee, in its sole
discretion, at or after grant, payment in full or in part may also be
made in the form of Stock already owned by the optionee (based on the
Fair Market Value of the Stock on the date the Option is exercised, as
determined by the Committee). With the prior approval of the Committee
or as provided in the related Option Agreement, the exercise price of
an Option may be paid through the delivery of Stock acquired by
successive exercises of the Option ("pyramiding").
No shares of Stock shall be issued until full payment
therefore has been made. An optionee shall generally have the rights
to dividends or other rights of a shareholder with respect to shares
subject to the Option after the optionee has given written notice of
exercise, has paid in full for such Stock, and, if requested, has
given the representation described in Section 9(a).
e. Nontransferability of Options. Subject to Section 5(i),
and except as otherwise may be approved by the Committee, no Stock
Option shall be transferable by the optionee otherwise than by will or
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 ("ERISA"), or the rules
thereunder, and all Stock Options shall be exercisable during the
optionee's lifetime only by the optionee.
6
<PAGE>
f. Termination by Death. Subject to Section 5(i), if an
optionee's employment by the Company or any Subsidiary, Parent, or
Affiliate terminates by reason of death, any Stock Option held by such
optionee may thereafter be exercised, to the extent such option was
exercisable at the time of death or on such accelerated basis as the
Committee may determine at or after grant (or as may be determined in
accordance with procedures established by the Committee), 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 Committee may specify
at grant) from the date of such death or until the expiration of the
stated term of such Stock Option, whichever period is the shorter.
g. Termination by Reason of Disability. Subject to Section
5(i), if an optionee's employment by the Company or any Subsidiary,
Parent, or Affiliate terminates by reason of Disability, any Stock
Option held by such optionee may thereafter be exercised by the
optionee, to the extent it was exercisable at the time of termination
or on such accelerated basis as the Committee may determine at or
after grant (or as may be determined in accordance with procedures
established by the Committee), for a period of one year (or such other
period as the Committee may specify at grant) from the date of such
termination of employment or until the expiration of the stated term
of such Stock Option, whichever period is the shorter; provided,
however, that, if the optionee dies within such one-year period (or
such other period as the Committee shall specify at grant), any
unexercised Stock Option held by such optionee shall thereafter be
exercisable to the extent to which it was exercisable at the time of
death for a period of one year from the date of such death or until
the expiration of the stated term of such Stock Option, whichever
period is the shorter.
h. Other Termination. Subject to Section 5(i), unless
otherwise determined by the Committee (or pursuant to procedures
established by the Committee) at or after grant, if an optionee's
employment by the Company or any Subsidiary, Parent, or Affiliate
terminates for any reason other than death or Disability, the Stock
Option shall be exercisable, to the extent otherwise then exercisable,
for the lesser of three months from the date of termination of
employment or the balance of such Stock Option's term.
i. Incentive Stock Options. Anything in the Plan to the
contrary notwithstanding, no term of this Plan relating to Incentive
Stock Options shall be interpreted, amended, or altered, nor shall any
discretion or authority granted under the Plan be so exercised, so as
to disqualify the Plan under Section 422 of the Code or, without the
consent of the optionee(s) affected, to disqualify any Incentive Stock
Option under such Section 422.
To the extent required for "incentive stock option" status
under Section 422 of the Code (taking into account applicable Internal
Revenue Service regulations and pronouncements and court decisions),
the Plan shall be deemed to provide:
(i) that Incentive Stock Options may be granted only
to employees of the Company or any Parent or
Subsidiary of the Company;
7
<PAGE>
(ii) that the exercise price of any incentive Stock
Option shall not be less than 100% of the Fair
Market Value of the Stock as of the date of grant
(110% for an optionee who owns stock possessing
more than 10% of the voting power of all classes
of stock of the Company or of a Parent or
Subsidiary);
(iii) that the maximum term of exercise for any
Incentive Stock Option shall not exceed ten years
(five years in the case of an optionee who owns
stock possessing more than 10% of the voting power
of all classes of stock of the Company or of a
Parent or Subsidiary); and
(iv) that Incentive Stock Options shall not be
transferable by the optionee otherwise than by
will or the laws of descent and distribution and
shall be exercisable, during the optionee's
lifetime, only by the optionee.
To the extent permitted under Section 422 of the Code or
applicable regulations thereunder or any applicable Internal Revenue
Service pronouncements:
(i) if a Participant's employment is terminated by
reason of death or Disability and the portion of
any Incentive Stock Option that becomes
exercisable during the post-termination period
specified in Section 5(f) or (g) hereof exceeds
the $100,000 limitation contained in Section
422(d) of the Code, such excess shall be treated
as a Nonqualified Stock Option; and
(ii) if the exercise of an Incentive Stock Option is
accelerated by reason of a Change in Control or
Potential Change in Control, any portion of such
Option that exceeds the $100,000 limitation
contained in Section 422(d) of the Code shall be
treated as a Nonqualified Stock Option.
j. No Tandem Options. Options consisting of both an
Incentive Stock Option and a Nonqualified Stock Option shall not be
granted under the Plan.
SECTION 6. Change in Control Provisions.
a. Impact of Event. In the event of:
(i) a "Change in Control" as defined in Section 6(b)
or
(ii) a "Potential Change in Control" as defined in
Section 6(c), but only if and to the extent so
determined by the Committee or the Board at or
after grant (subject to any right of approval
expressly reserved by the Committee or the Board
at the time of such determination), the following
acceleration and valuation provisions shall apply:
(A) Any Option, if so provided in the related Option
Agreement, shall
8
<PAGE>
become fully exercisable and vested.
(B) The value of all outstanding Options shall, unless
otherwise determined by the Committee in its sole
discretion at or after grant but prior to any
Change in Control, be cashed out on the basis of
the "Change in Control Price" as defined in
Section 6(d) as of the date such Change in Control
or Potential Change in Control is determined to
have occurred or such other date as the Committee
may determine prior to the Change in Control.
b. Definition of "Change in Control." For purposes of
Section 6(a), a "Change in Control" means the happening of any of the
following:
(i) When any "person" as defined in Section 3(a)(9) of
the Exchange Act and as used in Sections 13(d) and
14(d) thereof, including a "group" as defined in
Section 13(d) of the Exchange Act, but excluding
the Company or any Subsidiary or Parent or any
employee benefit plan sponsored or maintained by
the Company or any Subsidiary or Parent (including
any trustee of such plan acting as trustee),
directly or indirectly, becomes the "beneficial
owner" (as defined in Rule 13d-3 under the
Exchange Act, as amended from time to time), of
securities of the Company representing 20 percent
or more of the combined voting power of the
Company's then outstanding securities;
(ii) When, during any period of 24 consecutive months
during the existence of the Plan, the individuals
who, at the beginning of such period, constitute
the Board (the "Incumbent Directors") cease for
any reason other than death to constitute at least
a majority thereof; provided, however, that a
director who was not a director at the beginning
of such 24-month period shall be deemed to have
satisfied such 24-month requirement (and be an
Incumbent Director) if such director was elected
by, or on the recommendation of, or with the
approval of, at least 60% of the directors who
then qualified as Incumbent Directors either
actually (because they were directors at the
beginning of such 24-month period) or by prior
operation of this Section 6(b)(ii); 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 purchase of
assets, or by merger, or otherwise.
c. Definition of Potential Change in Control. For purposes
of Section 6(a), a Potential Change in Control" means the happening of
any one of the following:
(i) The approval by the Board of an agreement by the
Company, the consummation of which would result in
a Change in Control of the Company as defined in
Section 6(b); or
(ii) The acquisition of beneficial ownership, directly
or indirectly, by any entity,
9
<PAGE>
person, or group (other than the Company or a
Subsidiary or Parent or any Company employee
benefit plan (including any trustee of such plan
acting as such trustee)) of securities 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.
d. Change in Control Price. For purposes of this Section 6,
"Change in Control Price" means the highest price per share paid in
any transaction reported on NASDAQ or, if the Company's Stock is
listed on NASDAQ/NMS or on a national securities exchange, NASDAQ/NMS
or such exchange, or paid or offered in any bona fide transaction
related to the potential or actual Change in Control of the Company at
any time during the 60-day period immediately preceding the occurrence
of the Change in Control (or, where applicable, the occurrence of the
Potential Change in Control event), in each case as determined by the
Committee, except that, in the case of Incentive Stock Options, such
price shall be based only on transactions reported for the date on
which a cashout occurs under Section 6(a)(B).
SECTION 7. Amendments and Termination.
The Board may amend, alter, discontinue, or terminate the Plan, or any
portion thereof, but no amendment, alteration, or discontinuation shall be made
which would impair the vested rights of a Participant under any Option
theretofore granted, without the Participant's consent, or which, without the
approval of the Company's shareholders, would:
a. except as expressly provided in this Plan, increase the
total number of shares reserved for the purpose of the Plan;
b. decrease the option price of any Incentive Stock Option
to less than 100% of the Fair Market Value on the date of grant;
c. permit the issuance of Stock prior to payment in full
therefor;
d. change the employees or class of employees eligible to
participate in the Plan;
e. extend the maximum option period under Section 5(i) of
the Plan.
The Committee may amend the terms of any Option theretofore granted,
prospectively or retroactively, but, subject to Section 3 above, no such
amendment shall impair the vested rights of any holder without the holder's
consent. The Committee may also substitute new Stock Options for previously
granted Stock Options (on a one-for-one or other basis), including previously
granted Stock Options having higher option exercise prices.
All Options which are granted pursuant to an amendment to the Plan
requiring shareholder approval, and prior to the date on which such amendment is
approved by a majority of the voting
10
<PAGE>
stock of the Company represented in person or by proxy at a duly held
stockholders' meeting, shall be effective when granted but contingent upon such
approval. If such approval is not received within 12 months after the earlier of
the effective date of the amendment or the date on which such amendment is
adopted by the Board, any such Options shall be void, and of no force or effect.
Subject to the above provisions, the Board shall have broad authority
to amend the Plan to take into account changes in applicable securities and tax
laws and accounting rules, as well as other developments.
SECTION 8. Unfunded Status of Plan.
The Plan is intended to constitute an "unfunded" plan for incentive
and deferred compensation. With respect to any payments not yet made to a
Participant by the Company, nothing contained herein shall give any such
Participant any rights that are greater than those of a general creditor of the
Company. In its sole discretion, the Committee may authorize the creation of
trusts or other arrangements to meet the obligations created under the Plan to
deliver Stock or payments in lieu of or with respect to Options hereunder;
provided, however, that, unless the Committee otherwise determines with the
consent of the affected Participant, the existence of such trusts or other
arrangements is consistent with the "unfunded" status of the Plan.
SECTION 9. General Provisions.
a. The Committee may require each person purchasing shares
pursuant to a Stock Option to represent to and agree with the Company
in writing that the Participant is acquiring the shares without a view
to distribution thereof. The certificates for such shares may include
any legend which the Committee deems appropriate to reflect any
restrictions on transfer.
All certificates for shares of Stock or other securities
delivered under the Plan shall be subject to such stock transfer
orders and other restrictions as the Committee may deem advisable
under the rules, regulations, and other requirements of the Securities
and Exchange Commission, any over-the-counter market on which the
Stock is quoted, any stock exchange upon which the Stock is then
listed, and any applicable federal or state securities law, and the
Committee may cause a legend or legends to be put on any such
certificates to make appropriate reference to such restrictions.
b. The Committee may at any time offer to buy out for a
payment in cash or Stock an Option previously granted, based on such
terms and conditions as the Committee shall establish and communicate
to the Participant at the time that such offer is made.
c. Nothing contained in this Plan shall prevent the Board
from adopting other or additional compensation arrangements, subject
to shareholder approval if such approval is required; and such
arrangements may be either generally applicable or applicable only in
11
<PAGE>
specific cases.
d. The adoption of the Plan shall not confer upon any
employee of the Company or any Subsidiary, Parent, or Affiliate any
right to continued employment with the Company or a Subsidiary,
Parent, or Affiliate, as the case may be, nor shall it interfere in
any way with the right of the Company or a Subsidiary, Parent, or
Affiliate to terminate the employment of any of its employees at any
time.
e. No later than the date as of which an amount first
becomes includible in the gross income of the Participant for federal
income tax purposes with respect to any Option under the Plan, the
Participant shall pay to the Company, or make arrangements
satisfactory to the Committee regarding the payment of any federal,
state, or local taxes of any kind required by law to be withheld with
respect to such amount. Unless otherwise determined by the Committee,
withholding obligations may be settled with Stock, including Stock
that is part of the Option that gives rise to the withholding
requirement. The obligations of the Company under the Plan shall be
conditional on such payment or arrangements, and the Company and any
Subsidiary, Parent, or Affiliate shall, to the extent permitted by
law, have the right to deduct any such taxes from any payment of any
kind otherwise due to the Participant.
f. If so provided in the related Option Agreement, any
Participant may elect to satisfy tax withholding consequences by using
Stock acquired as part of the Option exercise giving rise to the tax
consequences.
g. To the extent that federal laws (such as the Code, the
Exchange Act, or the Employee Retirement Income Security Act of 1974)
do not otherwise control, the Plan and all Options granted and actions
taken hereunder shall be governed by and construed in accordance with
the laws of the State of Minnesota.
h. Except as may be otherwise approved by the Committee, no
rights granted hereunder may be assigned, transferred, pledged or
hypothecated (whether by operation of law or otherwise) or be subject
to execution, attachment, or similar process, and any attempted
assignment, transfer, pledge, hypothecation, or other disposition or
levy of attachment or similar process upon any such right will be null
and void and without effect.
i. If any term, provision, or portion of this Plan or any
Option granted hereunder shall be deemed unenforceable or in violation
of applicable law, such term, provision, or portion of the Plan or the
Option shall be deemed severable from all other terms, provisions, or
portions of this Plan or the Option or any other Options granted
hereunder, which shall otherwise continue in full force and effect.
SECTION 10. Effective Date of Plan.
The Plan shall be effective as of May 28, 1993, subject to the
approval of the Plan by a majority of the votes cast by the holders of the
Company's Common Stock at a meeting held
12
<PAGE>
within twelve months of such date. Any grants made under the Plan prior to such
approval shall be effective when made (unless otherwise specified by the
Committee at the time of grant), but shall be conditioned on, and subject to,
such approval of the Plan by such shareholders.
SECTION 11. Term of Plan.
No Incentive Stock Option shall be granted pursuant to the Plan on or
after the tenth anniversary of the date of adoption of the Plan, but Incentive
Stock Options granted prior to such tenth anniversary may extend beyond that
date. Nonqualified Stock Options may be granted at any time and for any period
unless otherwise provided by the Plan.
SECTION 12. Applicability to Grants under Other Company Plans.
Subject to approval of the Plan by the Shareholders as set forth in
Section 10 hereof, no further options shall be granted under the Employee
Incentive Stock Option Plan adopted January 2, 1992, which shall remain in
effect until all options granted pursuant thereto have been exercised or have
expired or been terminated by their terms.
The undersigned hereby certifies the foregoing constitutes the 1993
Stock Option Plan of Funco, Inc. as adopted by the Board of Directors on May 28,
1993 and which is to be submitted for approval by the shareholders at the next
annual meeting of the shareholders on or about August 17, 1993.
FUNCO, INC.
By: /s/ David R. Pomije
------------------------------------------------
David R. Pomije
Its: Chief Executive Officer, President and Secretary
Dated: May 28, 1993
Effective July 31, 1998 this Plan has been restated to reflect:
(i) An increase of 300,000 shares authorized to be
issued under the Plan as adopted by the Board of
Directors and shareholders of Funco, Inc. at the
1996 Annual Meeting.
(ii) An increase of 300,000 shares authorized to be
issued under the Plan as adopted by the Board of
Directors and shareholders of Funco, Inc. at the
1998 Annual Meeting.
(iii) Effective June 15, 1994, Sections 4 and 7 were
amended.
13
<PAGE>
(iv) Approved and adopted by the Board of Directors of
Funco, Inc. as of July 31, 1998, 1) Revision to
Section 1(h), defining the term "commission," 2)
Revision to Section 2, providing that members of
the committee are to be "nonemployee directors,"
3) Revision to Section 5(d), regarding payment of
exercise price, 4) Revision to Section 5(e),
regarding transfer of stock options, 5) Revision
to Section 9(f), regarding tax withholding
elections, 6) Revision to Section 9(h), to be
consistent with revision to Section 5(e), and 7)
Deletion of Section 9(j) regarding option holding
period.
14
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