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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 28, 1999
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
MINNEAPOLIS, MN 55344
(Address and zip code of principal executive offices)
(612) 946-8883
(Issuer's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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___
Indicate by check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of Common Stock held by nonaffiliates as of June 15,
1999: $101,671,622 (For the purpose of this calculation, only directors and
executive officers are considered affiliates.)
Number of shares of Common Stock outstanding as of the close of business on
June 15, 1999: 5,954,181
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of Shareholders, July 30, 1999 ("Proxy
Statement") PART III
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<PAGE>
PART I
ITEM 1.
BUSINESS
GENERAL
Funco, Inc. (the "Company") was incorporated in March 1988 under the laws
of the State of Minnesota. The Company, through its FUNCOLAND(R) stores, is a
leading national specialty retailer of new and previously played interactive
entertainment products. The Company's product line includes a broad selection of
console-based video games, related hardware and accessories, with each store
offering approximately 4,000 new and previously played items. Approximately 61%
of the Company's retail sales are from new video game products, featuring
competitive prices on hot new video game releases. The remaining 39% of the
Company's retail sales are from previously played merchandise and are sold at an
average of half the price for which these products originally sold. The
FUNCOLAND store concept provides consumers an opportunity to sell video games
that they no longer play and apply the proceeds toward other previously played
or new video game products. The Company emphasizes personalized attention to its
customers through its store-based FUNCOLAND Game Advisors and provides game
sampling areas to assist the customer in the selection of new and previously
played games. At March 28, 1999, the Company operated 312 retail stores in 26
major metropolitan areas. The Company's retail store strategy is complemented by
Funco's mail order operation, the FUNCOLAND SUPERSTORE Web site and publication
of GAME INFORMER(R), a video game magazine with over 195,000 paid subscribers.
INDUSTRY OVERVIEW
Video games are a preferred form of entertainment for a broad base of
consumers ranging from children to adults. Video game play involves a hardware
game system, or console, typically connected to a television set, together with
video game software which runs on the system. Software is either contained on a
game cartridge or a CD. Along with Sony, Nintendo and Sega, who currently
dominate the video game hardware market, third party publishers such as
Electronic Arts also develop and provide software for these game systems.
Several years ago, the consumer market for video games was primarily
comprised of pre-adolescent and teenage males. However, the demographics of the
video game market have expanded due to the increased sophistication of games
(both from a content and a technological standpoint) and the fact that
individuals introduced to video games in their childhood maintain a strong
interest in the sector as they grow older. Overall, the U.S. console-based video
game industry has exhibited very strong growth over its relatively short
history, increasing at a greater than 23% compound annual growth rate from
approximately $500 million in calendar 1986 to $6.3 billion in calendar 1998.
The console-based video game industry has experienced three major
technological advancements that have resulted in the introduction of new
hardware platforms. These introductions have come at four to five year
intervals. Each subsequent generation has featured improvements in areas
including graphics, processing speed and sound, and has achieved a larger
installed base than that of the prior generation. As technologies advance,
consumers look to the manufacturers to develop gaming systems capable of
providing even richer game playing experiences.
The 8-bit Nintendo system, introduced in 1985, was followed by the 16-bit
Sega Genesis and Super Nintendo systems which arrived on the market in 1989 and
1991, respectively. The 32-bit Sega Saturn and Sony PlayStation were introduced
in 1995 and the 64-bit Nintendo 64 was introduced in 1996. Each generation of
hardware systems has generally followed bell-shaped unit sales curves over their
life cycles, with product prices highest in the introduction stage, then
declining over time. Software sales increase in conjunction with growth of the
installed hardware base and generally peak within a year of each generation's
hardware sales peak.
The industry transition from 8-bit systems to the 16-bit generation
occurred between 1989 and 1991, resulting in a slowdown in overall industry
revenue growth. The Company was opening its first retail stores at that time and
experienced growth and positive operating results during that period. Overall,
this industry transition was relatively smooth and the industry continued to
grow. Conversely, the
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transition that occurred in late 1994 and 1995 led to a significant decrease in
overall industry revenues, adversely impacting the Company's operations. This
severe downturn occurred due to a sharp decline in the appeal of 16-bit product
as consumers anticipated the introduction of 32- and 64-bit products which, in
relation to expectations, were delayed in reaching the market. Following their
introductions, the growing popularity of Sony PlayStation, introduced in late
1995, and Nintendo 64, introduced in 1996, has led the industry to record sales
levels, with the Company also achieving record results.
The Company expects continued advancements in technology and software
development to drive long-term industry growth. Industry sources forecast
continued sales growth for the current generation of hardware and software in
calendar 1999. In addition, the U.S. introduction of the first of the next
generation 128-bit hardware platforms, Sega Dreamcast, is planned for September
1999. Both Sony and Nintendo have indicated plans for next generation system
introductions beginning in calendar 2000. The new Sony PlayStation is expected
to be backwards compatible, meaning that current generation PlayStation software
will be playable on it. The Company believes that the upcoming industry
transition will be relatively smooth as the introduction of new hardware
platforms occurs while sales of current generation products remain strong.
Additional factors signaling a smoother transition include (1) the strength and
market leadership of Sony and Nintendo, (2) expected backwards compatability of
the new Sony PlayStation, (3) indications of new, dedicated production
facilities for the new Sony PlayStation, (4) expanding consumer demographics,
and (5) anticipated pricing below that of previous generation hardware
introductions.
The launch of Sega Dreamcast and competitive responses from the industry
leaders, Sony and Nintendo, can be expected to significantly impact the industry
for the first few years of the 21st century. Failure of the industry to
periodically introduce exciting new hardware systems and compelling software
acceptable to consumers could lead to future industry downturns and could affect
the Company's operations.
COMPANY STRATEGY
The Company's primary goal is to strengthen its position as a leading
provider of new and previously played interactive entertainment. During fiscal
2000, the Company's primary emphasis will be on increasing its store base and
profitability. The Company's retail store expansion strategy includes adding
stores in its existing markets as well as selectively evaluating and entering
new markets. In future years, the Company expects to further enhance its
position through increases in both the number of FUNCOLAND stores and the number
of metropolitan areas in which the stores are located. The Company targets
selected metropolitan areas based on market size, demographics and competitive
factors.
The Company believes it has achieved and will continue to achieve
substantial economies in the areas of marketing and advertising, product
distribution, store interior build-outs and lease terms as a result of
implementing a rapid, multiple-site rollout strategy in selected metropolitan
areas. This strategy positions the Company as the leading retailer of previously
played video game merchandise in a given metropolitan area, enabling it to
compete more effectively against generally smaller competitors. The Company's
aggressive expansion strategy has also contributed to the Company's rapidly
growing market share in the new product category.
The Company intends to capitalize on its position as the leading specialty
retailer focused on the console-based video game industry by rapidly expanding
its Internet sales through the FUNCOLAND SUPERSTORE Web site. The Web site
provides consumers an exciting means of direct on-line shopping for both new and
previously played video game products, attracting visitors with its game tips
and other gaming content. The Web site also acts as a promotional tool to drive
customer traffic to the Company's retail outlets via an interactive store
directory.
The Company also plans to grow the GAME INFORMER subscriber base, increase
advertising revenues and utilize the publication's content and industry
expertise to enhance both the FUNCOLAND SUPERSTORE Web site and its retail
operations. The Company believes that it can significantly increase readership
by promoting the magazine to an expanding target customer demographic through a
growing base of stores. GAME INFORMER also provides sought-after content that
draws on-line shoppers to the FUNCOLAND SUPERSTORE Web site.
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MERCHANDISING
The Company's stores offer substantial value to the video game consumer by
providing a broad selection of previously played video game merchandise at
approximately half the price for which these games were originally sold; an
opportunity to sell video game products that they no longer play and to apply
the proceeds towards the purchase of other video game merchandise; and a broad
selection of new video game products featuring hot new releases at competitive
prices.
The Company's net sales are generated primarily through the sale of a broad
selection of Sony PlayStation, Nintendo and Sega video games, hardware and
accessories. Previously played product (Funco's specialty niche) currently
represents approximately 39% of sales, but generates approximately 48% of the
Company's gross margin dollars. To assure customers that they will not sacrifice
quality or performance, the Company provides limited warranties on its
previously played products. The Company's previously played video game selection
includes the newer 32- and 64-bit product categories, as well as the older 8-
and 16-bit product categories. Because manufacturers generally limit the number
of game cartridges or CD's produced for any given game title, after a time, many
older titles offered by the Company are unavailable through retailers of
exclusively new merchandise. The majority of the Company's top selling
previously played games, as measured by unit sales, are no longer readily
available new. The Company's inventory of individual titles is frequently
modified to adapt to changing consumer preferences for particular games, game
systems and categories of games. Games fall into one of several categories
including sports, adventure, action, role playing and family games.
The Company provides the opportunity for video game consumers to sell video
game merchandise in exchange for store credit or a check from corporate
headquarters. The price the Company will pay for each item of previously played
merchandise is posted in the stores and is periodically adjusted, providing
video game enthusiasts a reason to stop in on a regular basis. By maintaining a
secondary market for video games and equipment, the Company reduces the overall
cost of playing video games and encourages the purchase of new games and
upgrades to more advanced systems. The Company believes that this active
secondary market helps to expand consumer interest in video games and increases
overall purchases of video games and equipment.
PRODUCT SUPPLY
The Company purchases new interactive entertainment hardware, software and
accessories from the industry's leading licensees and manufacturers and
generally has achieved top ten account status with these vendors, indicative of
the Company's market share position and growth. The Company has established
strong relationships within the industry and has successfully participated in
the launch of many new products. Vendors support the FUNCOLAND previously played
concept because it promotes interest in the video game industry, introduces the
category to customers unable to afford higher new game prices and offers video
game enthusiasts the opportunity to sell older games, providing liquidity to
stimulate new game purchases. Because the Company is a significant retailer of
these vendors' new games, the Company receives cooperative advertising funds and
immediate access to hot new game releases, which tend to drive store traffic.
The Company expects that new product quality, pricing, availability, acceptance
and market penetration will affect future operating results.
The Company obtains most of its previously played inventory from its
customers, primarily from purchases made in its retail operations. Over the last
nine years the Company has developed and utilized a model to manage its
previously played inventory and to maintain the desired mix of product. The
Company adjusts the price that it pays for each item of previously played
merchandise (the "bid" price) regularly and currently adjusts its selling price
(the "ask" price) on a monthly basis. All purchase and selling prices are
determined by corporate management and are not subject to change at the store
level. By adjusting these bid and ask prices, the Company strives to maintain
substantial company-wide control over both its inventory levels, as well as its
gross margins, on an item-by-item basis.
Through its bid/ask model, the Company accumulates inventory to stock new
stores as they open and to meet seasonal demands. All new stores are initially
set up with inventory shipped from the Company's central distribution center.
This start-up inventory includes previously played merchandise accumulated from
customers at the store level as well as new products purchased directly from
video game licensees and manufacturers. Once a store opens, approximately 80% of
its previously played stock
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needs are satisfied by merchandise purchased from the store's local customer
trading base, with the remainder supplied by the Company's distribution center.
Periodic pull-backs of inventory from the Company's stores to the distribution
center provide merchandise for store-to-store stock balancing and new store
openings.
STORE LOCATIONS AND SITE SELECTION
At March 28, 1999, the Company operated 312 FUNCOLAND stores in 26
metropolitan markets. The number of stores open in these markets at each
respective year end date is summarized below:
<TABLE>
<CAPTION>
MARCH 28, MARCH 29, MARCH 30, MARCH 31, APRIL 2,
1999 1998 1997 1996 1995
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Central Region:
Minneapolis ....................... 15 15 14 13 13
Dallas ............................ 13 12 12 12 14
Houston ........................... 8 8 8 7 9
Chicago ........................... 32 31 30 30 34
Milwaukee ......................... 8 8 6 6 6
Detroit ........................... 28 28 24 21 21
Kansas City ....................... 5 5 5 5 5
Columbus .......................... 4 4 - - -
Indianapolis ...................... 4 4 - - -
Louisville ........................ 7 4 - - -
St. Louis ......................... 5 5 - - -
Cincinnati ........................ 6 5 - - -
Cleveland ......................... 12 2 - - -
Austin/San Antonio ................ 6 - - - -
Memphis ........................... 4 - - - -
Nashville ......................... 3 - - - -
Pittsburgh ........................ 3 - - - -
--- --- --- --- ---
Subtotal Central Region ............ 163 131 99 94 102
East Coast Region:
New York .......................... 41 39 36 37 38
Philadelphia ...................... 21 21 16 15 16
Baltimore/Washington, DC .......... 20 18 15 16 16
Boston ............................ 18 15 13 11 10
Virginia Beach/Richmond ........... 7 - - - -
--- --- --- --- ---
Subtotal East Coast Region ......... 107 93 80 79 80
West Coast Region:
San Francisco ..................... 13 12 9 - -
Sacramento ........................ 8 6 - - -
Seattle ........................... 10 8 - - -
Los Angeles ....................... 11 - - - -
--- --- --- --- ---
Subtotal West Coast Region ......... 42 26 9 - -
--- --- --- --- ---
Total Stores ....................... 312 250 188 173 182
=== === === === ===
</TABLE>
FUNCOLAND stores are generally located in high traffic "power strip
centers" near major regional malls or in high-density retail areas. These
locations provide visibility, easy access and high traffic counts. The Company
targets centers that are well recognized, well maintained and have a balanced
tenant mix.
STORE LAYOUT AND DESIGN
FUNCOLAND stores range in size from 1,000 to 3,000 square feet, with the
average store containing approximately 1,650 square feet. The basic design of a
FUNCOLAND store is generally consistent throughout the Company and is intended
to create a bright and colorful shopping environment with
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well-merchandised shelves emphasizing the store's broad product selection.
Stores are equipped with several television monitors that display operating
video games, creating an environment conducive to video game purchase. Each
store is also equipped with several video game sampling areas that provide the
consumer the opportunity to play games before purchase.
FUNCOLAND SUPERSTORE WEB SITE
The Company operates the FUNCOLAND SUPERSTORE Web site, www.funcoland.com,
which provides consumers an exciting means of secure, direct on-line shopping
for new and previously played video game products. The Company's site features
an interactive database of approximately 5,000 items for sale including
software, hardware, accessories, movies and other related products. The Company
recently expanded the Superstore offerings to include new PC entertainment
software titles and also began offering both new and previously played products
as a charter merchant of Amazon.com Auctions. The Superstore site attracts
visitors with schedules of new game arrivals, reviews of new and classic games,
game tips and other compelling content. The Web site also acts as a promotional
tool to drive customer traffic to the Company's retail outlets via an
interactive store directory. Internet sales have grown dramatically since the
launch of the Web site, increasing more than 424% to $1,572,000 in fiscal 1999
from $300,000 in fiscal 1998. The Company's Internet operations are profitable
at the current level of sales. The Company expects continued strong growth in
Internet sales.
MAIL ORDER
The Company's mail order operation is primarily engaged in selling video
games and related equipment from its headquarters in Eden Prairie, Minnesota.
The Company mails a bi-monthly video game catalog to approximately 60,000
customers who generally live in geographic areas not served by FUNCOLAND retail
stores. In addition, the Company places direct response advertising in several
leading video game magazines. Mail order transactions accounted for
approximately 1% of total sales in fiscal 1999.
GAME INFORMER MAGAZINE
The Company publishes GAME INFORMER, a monthly video game magazine
featuring reviews of new title releases, tips and secrets about existing games
and news regarding current developments in interactive entertainment. For its
March 1999 issue, the magazine had more than 195,000 paid subscribers. The
magazine is sold via subscription and through displays in FUNCOLAND retail
stores. Revenues are also generated through the sale of advertising space. GAME
INFORMER is published by Sunrise Publications, Inc., a wholly-owned subsidiary
of Funco, Inc. Video game enthusiasts can also access the popular content of
GAME INFORMER magazine through the FUNCOLAND SUPERSTORE as well as the dedicated
GAME INFORMER Web site at www.gameinformer.com.
COMPETITION
The console-based video game retailing business currently can be
categorized into the following segments: mass merchandisers such as Target,
Wal-Mart and Kmart; national retail chains that specialize in computer software
such as Babbage's Etc. and Electronics Boutique; toy retailers including Toys
"R" Us and KB Toys; consumer electronics superstores such as Best Buy and
Circuit City; department store chains and other entertainment product retailers.
Each of these segments historically has played a different role in the life
cycle of video game products, with specialty retailers being the most important
channel at a product's launch and mass merchants and consumer electronics
retailers increasing in importance over time as a product's price decreases.
A number of competitors, including Babbage's Etc. and Electronics Boutique,
also feature trade-in opportunities through which consumers are able to realize
value for their previously played product. These retailers then sell the
previously played product in their stores. There can be no assurance that these
competing retailers, many of whom have substantially greater resources than the
Company, will not move more aggressively into the previously played market,
thereby becoming direct competitors in both the new and previously played
categories. Additionally, retailers which deeply discount new merchandise may
also compete on price with Funco's previously played products.
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Previously played video game merchandise is sold primarily through regional
and local companies, although, as described above, Babbage's Etc. and
Electronics Boutique also participate in the purchase and sale of previously
played products. With 312 stores in 26 metropolitan areas at March 28, 1999, the
Company is the nation's leading specialty retailer focusing largely on
previously played product. The Company is aware of a limited number of smaller
companies with stores in the United States, including It's About Games and
MicroPlay, that buy and sell previously played video games through company-owned
and franchised stores. In addition to competing with these specialty retail
operations in its current geographic markets, the Company frequently competes
with smaller businesses which buy and sell previously played video game
merchandise.
The Company also competes with movie/video rental outlets such as
Blockbuster and Hollywood Video that rent or sell new or previously played
games. For some consumers, renting a video game for multiple day rates is an
alternative to buying new or previously played games. The Company believes that
video game rental outlets historically have not been substantial competitors of
the Company and that they have, in fact, supported the sale of video game
products by maintaining consumer interest in interactive home entertainment and
by providing consumers the opportunity to sample games and systems before
purchase. However, there can be no assurance that the rental or sale of video
games in these rental outlets will not become a significant source of
competition to the Company in the future. Hollywood Video has publicly stated an
intent to significantly expand their presence in the video game category.
Due to the strength of the interactive entertainment industry over the past
three years, the Company believes that both existing competitors and new
entrants may intensify competitive efforts. The Company may be required to
compete with other retailers in its existing markets, as it expands into new
markets, and on the Internet. The Company believes that it competes on the basis
of broad selection, price, customer service and convenience and that it measures
favorably against competition with respect to these factors.
To date, video games and equipment have been distributed primarily through
retail stores. Other distribution channels for interactive entertainment include
on-line retailing and gaming over the Internet. Although the Company believes
that alternate delivery systems tend to broaden exposure and promote interactive
entertainment, there can be no assurance that any such means of distributing
games will not reduce sales of interactive video games and equipment through the
Company's retail stores. Any such reduction could materially adversely affect
the Company's operating results and financial condition.
The market for interactive entertainment products is characterized by
rapidly changing technology and user preferences, evolving industry standards
and frequent new product introductions. Game systems introduced in the past four
years include Sega Saturn, Sony PlayStation and Nintendo 64. Of these, Sony
PlayStation and Nintendo 64 currently dominate the market. The first of the next
generation systems, Sega Dreamcast, is scheduled for U.S. introduction in
September 1999, with new offerings from Sony and Nintendo expected in calendar
2000 and 2001. Although the Company believes that its concept of creating a
secondary market for previously played games and equipment applies to the
systems currently on the market, there can be no assurance that future systems
and technology will gain market acceptance with consumers or that the Company
can successfully operate a secondary market for such future products.
TRADEMARKS AND SERVICE MARKS
FUNCOLAND(R), FUNCO LAND(R), FUNCO(R), GAME INFORMER(R), EXPERIENCE THE FUN
AT FUNCOLAND(R), FUNCOLAND YOUR SOURCE FOR INTERACTIVE ENTERTAINMENT(R), BRING
HOME THE FUN(R), FUNCOLAND FUN CLUB(R), AMERICA'S PLACE TO SHOP FOR VIDEO
GAMES(R), FUNCOLAND NATIONAL VIDEO GAME CHAMPIONSHIPS(R), SUNRISE
PUBLICATIONS(R), FUNCOLAND, PLUS DESIGN(R) (claim of colors) and MORE VIDEO
GAMES AT HALF THE PRICE(R) have been registered as trademarks and service marks
by the Company with the United States Patent and Trademark Office (the "USPTO").
The Company believes these trademarks and service marks are of considerable
value to its business and important to its marketing efforts.
EMPLOYEES
At March 28, 1999, the Company had 867 full-time employees, including 189
corporate and administrative personnel and 678 store personnel, and 980
part-time employees. During seasonal peak periods, the Company adds temporary
part-time employees.
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ITEM 2.
PROPERTIES
All of the Company's retail stores are leased. Leases typically provide for
an initial three-year term, with varying options for renewal. The Company
operated 312 locations at March 28, 1999, which included 13 leases under
negotiation. The Company's remaining retail store leases effective as of March
28, 1999 expire as follows:
DURING NUMBER OF
FISCAL YEAR EXPIRING LEASES
----------- ---------------
2000 63
2001 109
2002 76
2003 22
2004 23
Thereafter 6
For information regarding minimum lease payments, see Note 3 of Notes to
Consolidated Financial Statements. The Company believes that the termination of
any particular lease would not have a material adverse effect on its business
and that similar locations on comparable terms would be available within the
same or in a contiguous market area.
In addition to its retail outlets, the Company leases a 50,000 square foot
distribution and office facility in Eden Prairie, Minnesota, where its corporate
headquarters is also located. Subsequent to fiscal year end, the Company has
leased an additional 8,000 square feet for its distribution center and office
facility. This lease expires June 30, 2002. The Company has a three-year renewal
option for this space.
ITEM 3.
LEGAL PROCEEDINGS
The Company and its Chief Executive Officer were 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. The plaintiff purported to represent a class of all purchasers of the
Company's common stock during the putative class period 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, a similarly
styled class action lawsuit, alleging the Company's share price was artificially
inflated, asserting various claims under the Securities Exchange Act of 1934, as
amended, seeking damages in an unspecified amount plus costs and attorney's
fees.
A settlement agreement was negotiated between the parties and was approved
by the court on April 30, 1999. The settlement had no material impact on the
Company's results of operations, financial condition or liquidity.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matter was submitted to a vote of security-holders during the quarter
ended March 28, 1999.
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's common stock was first traded publicly on August 12, 1992.
The stock is listed on the NASDAQ national market system under the symbol FNCO.
The table below presents the high and low closing prices of the Company's common
stock as reported by NASDAQ.
<TABLE>
<CAPTION>
1999 Fiscal Quarter 1998 Fiscal Quarter
------------------------------------ -----------------------------------
High Low High Low
----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
First $19 1/4 $12 5/16 $19 $13 1/4
Second 17 11/16 11 5/16 23 18 1/8
Third 18 1/4 10 3/16 24 13 1/4
Fourth 18 7/8 12 18 7/8 13 1/8
</TABLE>
At June 15, 1999, there were 5,954,181 shares of common stock outstanding,
held by 182 shareholders of record. The Company has not paid any cash dividends
on its common stock and does not anticipate paying cash dividends in the
foreseeable future. Under the Company's current bank credit agreement, the
Company is prohibited from paying dividends.
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<PAGE>
ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except share and per share data and number of stores)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------------------------
MARCH 28, MARCH 29, MARCH 30, MARCH 31, APRIL 2,
1999 1998 1997 1996 1995
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Statements of Operations Data
Net sales ................................ $ 206,673 $ 163,316 $ 120,555 $ 81,382 $ 80,365
Net income (loss) ........................ $ 9,710 $ 8,270 $ 5,350 $ 205 $ (1,275)
Net income (loss) per share, basic ....... $ 1.60 $ 1.35 $ 0.90 $ 0.03 $ (0.22)
Weighted average number of shares,
basic ................................... 6,077,986 6,137,161 5,941,744 5,861,682 5,786,719
Net income (loss) per share, diluted ..... $ 1.53 $ 1.26 $ 0.86 $ 0.03 $ (0.22)
Weighted average number of shares,
diluted ................................. 6,353,311 6,572,365 6,228,630 5,965,769 5,786,719
Stores open at end of year ............... 312 250 188 173 182
Balance Sheet Data
Total assets ............................. $ 55,140 $ 45,626 $ 31,745 $ 25,668 $ 23,160
Long-term obligations .................... $ 213 $ 156 $ 91 $ 115 $ 485
Shareholders' equity ..................... $ 38,836 $ 33,525 $ 24,318 $ 18,071 $ 17,800
</TABLE>
The above selected financial data should be read in conjunction with the
consolidated financial statements and related notes beginning on page 19 of this
report and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing in Item 7 hereof.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company has grown from three retail stores at the end of fiscal 1991 to
312 at the end of fiscal 1999. The Company has 163 stores in the Central Region,
which includes Minneapolis, Dallas, Houston, Chicago, Milwaukee, Detroit, Kansas
City, Columbus, Indianapolis, Louisville, St. Louis, Cincinnati, Cleveland,
Austin/San Antonio, Memphis, Nashville and Pittsburgh; 107 stores in the East
Coast Region, which includes New York, Philadelphia, Baltimore/Washington, D.C.,
Boston and Virginia Beach/Richmond; and 42 stores in the West Coast Region,
which includes San Francisco, Sacramento, Seattle and Los Angeles.
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. 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.
In addition to seasonality, key factors affecting net sales and
profitability include the number of stores in operation and their relative
maturities, new store openings, location of stores and customer demographics,
merchandise selection, new product acceptance, competition and effectiveness of
marketing techniques.
Management believes that most new stores will attain mature store sales
levels in their second full year of operation and thereafter may experience only
modest year-to-year sales growth. No assurance can be given, however, that new
stores will achieve, or that mature stores will sustain, desired operating
9
<PAGE>
results and profitability. In addition, there can be no assurance of maintaining
sales and profitability at the levels achieved during fiscal 1999.
RESULTS OF OPERATIONS
The following table sets forth certain items in the statements of income
expressed as percentages of net sales for the years indicated and percentage
changes from the prior year:
<TABLE>
<CAPTION>
PERCENTAGE
YEAR ENDED INCREASE/DECREASE
------------------------------------- -----------------------
MARCH 28, MARCH 29, MARCH 30, 1999 OVER 1998 OVER
1999 1998 1997 1998 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales .............................. 100.0% 100.0% 100.0% 26.5% 35.5%
Cost of sales .......................... 67.1 65.3 63.1 30.1 40.1
----- ----- -----
Gross profit ........................... 32.9 34.7 36.9 19.9 27.6
Operating expenses ..................... 20.2 20.7 23.4 23.8 19.4
General and administrative expenses..... 5.1 5.8 7.1 11.3 10.7
----- ----- -----
Operating income ....................... 7.5 8.2 6.3 16.2 77.1
Interest expense ....................... - - - (40.0) (35.5)
Interest income ........................ 0.2 0.2 0.2 41.4 42.5
Income tax provision ................... 3.0 3.3 2.0 15.8 125.6
----- ----- -----
Net income ............................. 4.7% 5.1% 4.4% 17.4% 54.6%
===== ===== =====
</TABLE>
COMPARISON OF FISCAL 1999 TO FISCAL 1998
The Company derived 98% of its fiscal 1999 net sales from retail
operations, which include the Company's mail order and Web site operations. The
balance of net sales was attributable to the publication of GAME INFORMER
magazine. Net sales increased from $163,316,000 in fiscal 1998 to $206,673,000
in fiscal 1999, an increase of 26.5%. The Company operated 312 stores at the end
of fiscal 1999 compared to 250 stores at the end of fiscal 1998. During fiscal
1999, the Company opened 64 new stores while closing 2 locations. Comparable
stores sales for fiscal 1999 increased 9%. The strong sales increase is
primarily due to operating a greater number of stores compared to the prior year
and continued growth of Sony PlayStation, Nintendo 64 and Game Boy product
categories.
Cost of sales increased from $106,628,000 in fiscal 1998 to $138,693,000 in
fiscal 1999, an increase of 30.1%. 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 65.3% in 1998 to 67.1% in 1999. This increase is
primarily due to a shift in sales mix from previously played product to lower
margin new product which accounted for 61% of sales in fiscal 1999 compared to
48% in fiscal 1998.
Operating expenses increased from $33,746,000 in fiscal 1998 to $41,792,000
in fiscal 1999, an increase of 23.8%. This increase is primarily due to higher
store payroll and occupancy expense related to the increased number of locations
compared to prior year and also to support the 9% increase in comparable store
sales. Operating expenses decreased favorably as a percentage of net sales from
20.7% in 1998 to 20.2% in 1999, the result of leveraging certain costs over a
larger sales base.
General and administrative expenses increased from $9,512,000 in fiscal
1998 to $10,587,000 in fiscal 1999, an increase of 11.3%. This increase is
primarily due to increased payroll to support corporate functions for a growing
number of stores. General and administrative expenses decreased favorably as a
percentage of net sales from 5.8% in 1998 to 5.1% in 1999, the result of
leveraging certain costs over a larger sales base.
The Company generated operating income of $15,601,000 in fiscal 1999
compared to operating income of $13,430,000 in fiscal 1998, an increase of
16.2%.
Interest expense decreased from $20,000 in fiscal 1998 to $12,000 in fiscal
1999, a decrease of 40.0%, as the Company reduced borrowings on its line of
credit compared to prior year.
10
<PAGE>
Interest income increased from $295,000 in fiscal 1998 to $417,000 in
fiscal 1999, an increase of 41.4%, primarily as the Company maintained a higher
level of cash and cash equivalents and short-term investments throughout most of
fiscal 1999, as compared to fiscal 1998.
The Company generated net income before taxes of $16,006,000 in fiscal 1999
compared to net income before income taxes of $13,705,000 in fiscal 1998, an
increase of 16.8%. As a result, the Company recorded income tax expense of
$6,296,000 in fiscal 1999 compared to income tax expense of $5,435,000 in fiscal
1998.
Due to the above factors, the Company generated net income of $9,710,000 in
fiscal 1999, or $1.53 per share, compared to net income of $8,270,000, or $1.26
per share in fiscal 1998.
COMPARISON OF FISCAL 1998 TO FISCAL 1997
The Company derived approximately 97% of its fiscal 1998 net sales from
retail operations, which include the Company's mail order and Web site
operations. The balance of net sales was attributable to the publication of GAME
INFORMER magazine. Net sales increased from $120,555,000 in fiscal 1997 to
$163,316,000 during fiscal 1998, an increase of 35.5%. The Company operated 250
stores at the end of fiscal 1998 compared to 188 stores at the end of fiscal
1997. During fiscal 1998 the Company opened 65 new stores while closing 3
locations. Comparable store sales for fiscal 1998 increased 17%. The Company
attributes the strong sales to continued growth of Sony PlayStation and Nintendo
64 product categories.
Cost of sales increased from $76,119,000 in fiscal 1997 to $106,628,000
during fiscal 1998, an increase of 40.1%. The dollar increase in cost of sales
was primarily due to the strong growth in sales. Cost of sales as a percentage
of net sales increased from 63.1% in 1997 to 65.3% in 1998. This increase
occurred primarily as sales mix for fiscal 1998 included proportionately higher
sales of 32- and 64-bit products, which are currently sold at higher cost
percentages than earlier generation product offerings.
Operating expenses increased from $28,261,000 in fiscal 1997 to $33,746,000
in fiscal 1998, an increase of 19.4%. This increase was primarily due to higher
store payroll and occupancy expense related to the increased number of locations
compared to prior year. Operating expenses as a percentage of net sales
decreased from 23.4% in fiscal 1997 to 20.7% in fiscal 1998, the result of
improved sales leveraging.
General and administrative expenses increased from $8,592,000 in fiscal
1997 to $9,512,000 in fiscal 1998, an increase of 10.7%. The dollar increase was
primarily due to increased payroll to support corporate functions for a growing
number of stores. General and administrative expenses decreased as a percentage
of net sales from 7.1% in fiscal 1997 to 5.8% in fiscal 1998, the result of
improved sales leveraging.
The Company generated operating income of $13,430,000 in fiscal 1998
compared to $7,583,000 in fiscal 1997, an increase of 77.1%.
Interest expense decreased from $31,000 in fiscal 1997 to $20,000 in fiscal
1998, a decrease of 35.5%, as the Company reduced borrowings on its line of
credit compared to prior year.
Interest income increased from $207,000 in fiscal 1997 to $295,000 in
fiscal 1998, an increase of 42.5%, as the Company maintained higher levels of
cash and cash equivalents throughout most of fiscal 1998 as compared to fiscal
1997.
The Company reported an income tax provision of $5,435,000 in fiscal 1998
compared to $2,409,000 in fiscal 1997, as the Company generated net income
before taxes of $13,705,000 in fiscal 1998 compared to $7,759,000 in fiscal
1997. The effective tax rate increased primarily as the Company had reversed a
significant valuation allowance in fiscal 1997, which had favorably impacted the
fiscal 1997 tax provision.
As a result of the above factors, the Company generated net income of
$8,270,000, or $1.26 per share in fiscal 1998 compared to $5,350,000, or $0.86
per share in fiscal 1997.
SEASONALITY AND QUARTERLY RESULTS
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. For the 248 stores operating the full 12 months in fiscal 1999, 36% of
net sales occurred in the first half of the year with 64% in the second half of
the
11
<PAGE>
year. Accordingly, annual profitability is heavily dependent on third and fourth
quarter net sales. 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 factors mentioned above, results for any quarter are not
necessarily indicative of the results that may be achieved for a full fiscal
year.
Net sales, gross profit, operating income, net income and basic and diluted
income per share for the past eight fiscal quarters, together with the number of
stores open at the end of each quarter, are presented in the following table:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF STORES)
FISCAL 1999 FISCAL 1998
---------------------------------------- ----------------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales .......................... $32,894 $35,299 $82,889 $55,591 $24,001 $26,760 $67,036 $45,519
Gross profit ....................... $11,630 $12,262 $24,840 $19,248 $ 9,412 $ 9,805 $20,623 $16,848
Operating income ................... $ 714 $ 842 $ 8,843 $ 5,202 $ 946 $ 796 $ 6,675 $ 5,013
Net income ......................... $ 500 $ 560 $ 5,395 $ 3,255 $ 635 $ 535 $ 4,155 $ 2,945
Basic income per share ............. $ 0.08 $ 0.09 $ 0.90 $ 0.55 $ 0.10 $ 0.09 $ 0.67 $ 0.48
Diluted income per share ........... $ 0.08 $ 0.09 $ 0.87 $ 0.53 $ 0.10 $ 0.08 $ 0.63 $ 0.45
Stores open at quarter end ......... 252 270 310 312 193 215 249 250
</TABLE>
Although the results presented above may not be indicative of future trends
or performance, the Company anticipates that quarterly net sales and operating
results will continue to be significantly impacted by seasonality patterns.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary ongoing financing requirements are for new store
expansion and inventory. During fiscal 1999, 1998 and 1997, the Company had net
cash provided by operating activities of $9,043,000, $6,904,000 and $3,451,000,
respectively. During fiscal 1999, the operating items which most significantly
impacted cash were net income, depreciation expense and an increase in inventory
offset by an increase in accounts payable.
In fiscal 1999, the Company used $5,220,000 of cash to repurchase 414,800
shares of the Company's common stock. In addition, the Company issued 124,583
shares of stock through the exercise of stock options at prices ranging from
$1.33 to $15.92 per share, generating net proceeds, including tax benefits, of
$821,000.
The Company invested $6,838,000 in capital expenditures in fiscal 1999,
primarily for new store openings and the Company's point-of-sale register
conversion. During fiscal 2000, the Company plans to incur capital expenditures
of approximately $7,650,000 for new store openings, other store expenditures,
enhancements to store and corporate information systems and general corporate
purposes.
The Company has a $3,000,000 unsecured revolving credit facility with a
commercial bank, seasonally increasing to $10,000,000. The interest rate on
outstanding borrowings under the credit facility is based upon LIBOR plus 250
basis points (7.45% for the month ended March 28, 1999). The credit facility
requires the Company to maintain certain financial ratios and achieve certain
operating results. There were no borrowings outstanding under the credit
facility at March 28, 1999 or March 29, 1998.
YEAR 2000
READINESS PLAN
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.
12
<PAGE>
The Company is involved in an ongoing assessment of its year 2000 readiness
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. Recently completed upgrades of
important applications, including inventory management, transfer management,
merchandise information and financial systems were designed to be year 2000
compliant. Several less critical in-house applications and third party packages
require year 2000 modification. All of the Company's systems and applications
are included in the Company's ongoing year 2000 readiness efforts.
The Company is also in the process of assessing year 2000 issues associated
with its various business partners, including vendors and service providers, and
is actively working with these third parties to identify and mitigate common
risks. The Company is also engaged in the assessment of year 2000 issues
affecting its telephone and communication systems, distribution processes,
utilities, alarm systems and transportation services.
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 delays in receiving product shipments, and to a resulting loss of sales.
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 unidentified risks could
be associated with failure of year 2000 compliance by the Company or third
parties.
READINESS PROGRESS
A summary of the Company's critical systems and progress toward year 2000
readiness is as follows:
Store systems include software applications and hardware that process
transactions in the retail stores and enable communication of information
between stores and the Company's corporate offices. These systems include a new
third party software package which was installed in FUNCOLAND store locations
between August 1998 and April 1999. Each store's hardware configuration includes
a new server installed at the same time as the new software, and generally
includes earlier installed hardware components. Although the new software and
new hardware are believed to be year 2000 compliant, full testing is currently
in process. Year 2000 readiness of the Company's store systems is approximately
50% complete.
Financial systems primarily consist of a series of third party software
modules installed between March 1998 and August 1998. These systems are used for
accounting, control and financial reporting. The systems are currently being
tested to recognize transactions over a wide range of critical dates. Year 2000
readiness of the Company's financial systems is approximately 80% complete.
Corporate systems encompass in-house developed software applications and
recently upgraded systems performing functions including inventory management,
transfer management and merchandise information. These in-house developed
software applications were designed for year 2000 readiness, but are undergoing
comprehensive evaluation and testing. Year 2000 readiness of the Company's
corporate systems is approximately 30% complete.
CONTINGENCY PLANS
Based on progress and efforts to date, the Company believes that its
program of assessment, testing and correcting, along with selected system
upgrades, will enable it to successfully meet the year 2000 challenge. The
Company is in the process of completing a formal contingency plan and, in the
event of failures associated with year 2000 readiness, believes that adequate
resources could rapidly be directed
13
<PAGE>
toward correcting isolated internal failures. The plan includes supplementing
those systems and processes which are year 2000 ready with alternate means of
data collection, storage and retrieval. It also includes alternative means of
communication between the Company's corporate office, distribution center, store
locations, vendors and customers. The plan's objective is to assure continuity
in performing critical functions, but includes risks associated with third party
service providers.
COSTS
As of March 28, 1999, the Company had incurred costs of less than $100,000
related to year 2000 readiness, including testing, analysis and purchase of
software upgrades. Total costs associated with year 2000 readiness 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.
FORWARD LOOKING STATEMENTS
Statements in this document with respect to future sales prospects and
expansion plans are forward looking statements and are subject to uncertainties
from factors including growth of the industry, the competitive environment,
success of the Company's existing operations, availability of new store sites
and the Company's ability to finance new store expansion.
Future financial performance greatly depends upon the Company's ability to
effectively manage a base of profitable stores. The Company plans further
significant expansion, including accelerated growth of approximately 90 new
stores in fiscal 2000, and believes that the addition of new stores will
continue to be a primary component of the Company's ongoing growth. Although the
Company believes that it has effectively managed its growth in the past, there
can be no assurance that the Company will successfully continue its planned
expansion, that new stores will perform as anticipated or that existing stores
will continue to operate at profitable levels. The Company's ability to open and
operate new stores profitably will depend upon a number of factors including,
but not limited to, availability of suitable locations, negotiation of
acceptable lease terms, ability to attract, train and retain qualified personnel
and the ability to control other operational aspects of the Company's growth. In
addition to site selection and lease negotiation, lease renewals are another
factor that may impact the Company's performance. The Company believes that the
termination of any particular lease would not have a material adverse effect on
its business because similar locations on comparable terms would be available
within the same or in a contiguous market area. However, the Company's results
of operations and financial condition could be adversely impacted should the
Company be unable to either renew leases or relocate a material number of store
locations.
The ability of the Company to expand and operate stores profitably can also
be dependent upon the ability of the Company to obtain requisite financing.
There can be no assurance that such financing will be available to the Company
at terms acceptable to the Company, or at any terms. The ability of the Company
to obtain any future financing through additional issuance of stock to the
public would be highly dependent upon the market price for the Company's
securities. The market price for shares of the Company's Common Stock may be
highly volatile depending on various factors such as the general economy, stock
market conditions, announcements by the Company, its vendors or competitors,
announcements of technological innovations or products that may affect the
Company's business, fluctuations in the Company's operating results and
performance of the Company compared to market expectations.
The interactive entertainment retailing business is highly competitive and
subject to rapid changes in consumer preferences, pricing and technology. As the
Company offers both previously played and new product, it competes with other
sellers of previously played product and with retailers of new interactive
entertainment, many of which are large nationally recognized retail chains. (See
Item 1. Business -- Competition.) There can be no assurance that the Company can
continue to compete successfully in the sale of either new or previously played
product. Increased competition, in addition to adversely impacting sales, could
also negatively impact product margins, materially impacting operating profits.
In addition, new distribution channels for interactive entertainment, such as
on-line retailing, Internet gaming or other alternate delivery systems may
adversely impact future sales of product through retail
14
<PAGE>
stores such as the Company's. Video games also compete for the consumers' dollar
with many other forms of entertainment such as sporting events, movies, music
and books. Any decrease in video game popularity or shift to other such forms of
entertainment would adversely impact the Company's results of operations and
financial condition.
Although the Company attempts to maintain product mix and inventory levels
that will meet consumer demand, it may not be successful in anticipating and
responding to changing consumer preferences. The ability to offer the proper
merchandise assortment is important to the Company's future financial
performance. Overstocked, understocked or unbalanced inventories can occur due
to factors including misjudgments by the Company in assessing product demand or
establishing prices, vendor allocations, logistical difficulties or potential
limitations of the Company's management information systems.
The interactive entertainment industry periodically undergoes technological
advances and developments. Failure to appropriately respond to changing
technological developments could materially adversely impact the Company's
results of operations and financial condition. Introduction of new hardware
systems, or the anticipated introduction of such systems, may affect consumer
demand for existing games, hardware and accessories. Further, new games must
continually be developed for the new hardware. Neither the development of new
hardware or games nor the timing of release of new products is within the
control of the Company. The continued successful release of new interactive
entertainment product that is accepted by consumers is very important to the
Company's business, both for increasing sales and encouraging consumers to visit
the stores to buy and sell product. Changes in hardware systems may impact the
Company's business both for previously played product and for new product as
consumers determine whether to move to new systems or to continue purchasing
games for existing systems. Also, delays in the introduction of new product may
adversely affect consumer interest in the overall interactive entertainment
product category. (See Item 1. Business -- Industry Overview.)
The Company's business is highly seasonal with the majority of net sales
and net income being generated in the third and fourth fiscal quarters which
includes the holiday selling season. Accordingly, events, factors or trends
which impact those quarters could materially impact full year results. General
economic conditions such as high unemployment, high inflation or a falling stock
market could lead consumers to reduce expenditures and impact the results of
operations and financial conditions. Seasonal patterns can also intensify the
impact of factors such as a shortage of qualified employees or adverse weather
conditions. Although important in every quarter, failure by the Company to
adequately obtain new or previously played inventory or failure by manufacturers
to deliver key product either to the marketplace or to the Company would be
magnified should those events occur during the fiscal third or fourth quarters.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's operations are not currently subject to market risks relating
to interest rates, foreign currency exchange rates, commodity prices or other
market price risks of a material nature.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements required by this item can be found beginning on page
19 of this Form 10-K and are deemed incorporated herein by reference.
Supplementary data required by this item can be found on page 12 of this Form
10-K and are deemed incorporated herein by reference.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
15
<PAGE>
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is incorporated by reference from
the Proxy Statement sections entitled "Election of Directors," "Other Executive
Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference from
the Proxy Statement sections entitled "Election of Directors-Directors'
Compensation", "Report of the Compensation Committee" and "Executive
Compensation."
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference from
the Proxy Statement section entitled "Ownership of Common Stock."
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
16
<PAGE>
ITEM 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
The financial statements and schedule filed as part of this Annual
Report on Form 10-K are described in the Index to Consolidated
Financial Statements and Schedule on page 19. All other schedules
for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not
required under the related instructions or are not applicable and
therefore have been omitted.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
(c) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------------------------------------------------------------
3.1 Articles of Incorporation, as amended and restated to date (Note 1)
3.2 Bylaws as Amended and Restated to Date
10.1a Credit Agreement effective June 20, 1995 by and between the
Registrant and Marquette Capital Bank, including Revolving Credit
Note and Security Agreement (Note 2)
10.1b Amendment to Credit Agreement dated June 30, 1998 (Note 3)
*10.3 Stock Option Plan for Nonemployee Directors (Note 1)
*10.3a Amendment to Stock Option Plan for Nonemployee Directors effective
July 31, 1998 (Note 3)
*10.4 Employee Incentive Stock Option Plan (Note 1)
*10.4a Amendment to Employee Incentive Stock Option Plan effective July
31, 1998 (Note 3)
*10.5a 1993 Stock Option Plan as Amended and Restated to Date (Note 3)
*10.5b Form of agreement for nonqualified options granted under 1993 Plan
(Note 4)
10.7a Lease for corporate headquarters in Eden Prairie, Minnesota (Note
5)
10.7b Amendment to lease for corporate headquarters in Eden Prairie,
Minnesota
23 Consent of Independent Auditors
27 Financial Data Schedule
- -------
Note 1. Filed as an exhibit to Registration Statement on Form S-18 (SEC No.
33-49102C) ("Form S-18") filed on June 30, 1992, and incorporated
herein by reference.
Note 2. Filed as an exhibit to Form 10-K for fiscal year 1995, filed on
July 3, 1995, and incorporated herein by reference.
Note 3. Filed as an exhibit to Form 10-Q for second quarter fiscal 1999,
filed on October 28, 1998, and incorporated herein by reference.
Note 4. Filed as an exhibit to Amendment No. 1 on Form S-1, filed June 21,
1993, and incorporated herein by reference.
Note 5. Filed as an exhibit to Amendment No. 1 to Form S-18, filed on July
27, 1992, and incorporated herein by reference.
* Denotes management contract or compensation plan required to be
filed as an exhibit to this form.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized.
FUNCO, INC.
by: /s/ DAVID R. POMIJE
------------------------------------
David R. Pomije
Chairman of the Board of Directors
and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant, and in
the capacities indicated, on June 28, 1999.
NAME TITLE
- ---- -----
/s/ DAVID R. POMIJE Chairman of the Board of Directors
- ------------------------------------- and Chief Executive Officer
David R. Pomije
/s/ ROBERT M. HIBEN Chief Financial Officer and Secretary
- -------------------------------------
Robert M. Hiben
/s/ STANLEY A. BODINE Director
- -------------------------------------
Stanley A. Bodine
/s/ GEORGE E. MILEUSNIC Director
- -------------------------------------
George E. Mileusnic
/s/ PATRICK J. FERRELL Director
- -------------------------------------
Patrick J. Ferrell
18
<PAGE>
FUNCO, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Management ..................................................... 20
Report of Ernst & Young LLP, Independent Auditors ........................ 21
Consolidated Statements of Income for the fiscal years ended March 28,
1999, March 29, 1998 and March 30, 1997 ................................. 22
Consolidated Balance Sheets as of March 28, 1999 and March 29, 1998 ...... 23
Consolidated Statements of Cash Flows for the fiscal years ended
March 28, 1999, March 29, 1998 and March 30, 1997 ....................... 24
Consolidated Statement of Shareholders' Equity for the fiscal years
ended March 28, 1999, March 29, 1998 and March 30, 1997 ................. 25
Notes to Consolidated Financial Statements ............................... 26-31
SCHEDULE:
Schedule II -- Valuation and Qualifying Accounts ......................... 32
19
<PAGE>
REPORT OF MANAGEMENT
The management of Funco, Inc. is responsible for the preparation, integrity
and objectivity of the accompanying consolidated financial statements. The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include amounts which are based
upon estimates and informed judgments of management.
In fulfilling its responsibility for the integrity of financial
information, management has established a system of internal controls which
provides reasonable assurance that transactions are executed in accordance with
management's intention and authorization, that assets are properly safeguarded
and accounted for and that financial statements are prepared in accordance with
generally accepted accounting principles. The concept of reasonable assurance is
based on the recognition that there are inherent limitations in all systems of
internal control, and that the cost of such systems should not exceed the
benefits derived. These systems are periodically reviewed and modified in
response to changing conditions.
The management of Funco, Inc. also recognizes its responsibility for
fostering a strong ethical climate so that the Company's affairs are conducted
according to the highest standards of personal and business conduct.
The adequacy of the Company's internal accounting controls, accounting
principles employed, scope of audit work and quality of financial reporting are
reviewed by the Audit Committee of the Board of Directors, consisting solely of
outside directors. The independent auditors meet with the Audit Committee to
discuss auditing and financial reporting issues with or without management
present.
20
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Funco, Inc.
We have audited the accompanying consolidated balance sheets of Funco, Inc.
as of March 28, 1999 and March 29, 1998, and the related consolidated statements
of income, shareholders' equity and cash flows for each of the three years in
the period ended March 28, 1999. Our audit also included the financial statement
schedule listed in Item 14(a). These consolidated financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Funco, Inc. at
March 28, 1999 and March 29, 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 28, 1999, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
May 10, 1999
21
<PAGE>
FUNCO, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
MARCH 28, MARCH 29, MARCH 30,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales ........................................ $ 206,673 $ 163,316 $ 120,555
Cost of sales .................................... 138,693 106,628 76,119
---------- ---------- ----------
Gross profit ..................................... 67,980 56,688 44,436
Operating expenses ............................... 41,792 33,746 28,261
General and administrative expenses .............. 10,587 9,512 8,592
---------- ---------- ----------
Operating income ................................. 15,601 13,430 7,583
Interest expense ................................. (12) (20) (31)
Interest income .................................. 417 295 207
---------- ---------- ----------
Net income before income taxes ................... 16,006 13,705 7,759
Income tax provision ............................. 6,296 5,435 2,409
---------- ---------- ----------
Net income ....................................... $ 9,710 $ 8,270 $ 5,350
========== ========== ==========
Basic Net Income Per Share:
- ---------------------------
Basic net income per share ....................... $ 1.60 $ 1.35 $ 0.90
Weighted average number of common shares ......... 6,077,986 6,137,161 5,941,744
Diluted Net Income Per Share:
- -----------------------------
Diluted net income per share ..................... $ 1.53 $ 1.26 $ 0.86
Weighted average number of common and common
equivalent shares ............................... 6,353,311 6,572,365 6,228,630
</TABLE>
See accompanying notes.
22
<PAGE>
FUNCO, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
MARCH 28, MARCH 29,
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
------
Current Assets
Cash and cash equivalents ...................................... $ 8,550 $ 9,295
Short-term investments ......................................... - 1,460
Accounts receivable ............................................ 2,020 2,127
Inventories .................................................... 28,485 21,487
Prepaid expenses ............................................... 2,948 1,175
Current deferred tax asset ..................................... 640 603
------- -------
Total current assets ......................................... 42,643 36,147
Net property and equipment ...................................... 11,334 8,201
Long-term deferred tax asset .................................... 1,064 1,122
Other assets .................................................... 99 156
------- -------
Total assets .................................................... $55,140 $45,626
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities
Accounts payable ............................................... $ 9,831 $ 4,834
Accrued liabilities ............................................ 5,266 6,219
Deferred revenue ............................................... 994 892
------- -------
Total current liabilities .................................... 16,091 11,945
Accrued rent .................................................... 213 156
Shareholders' Equity
Common stock, $0.01 par value (issued and outstanding for
1999 and 1998, respectively: 5,894,760 and 6,184,477) ......... 59 62
Additional paid-in capital ..................................... 15,238 19,634
Retained earnings .............................................. 23,539 13,829
------- -------
Total shareholders' equity ................................... 38,836 33,525
------- -------
Total liabilities and shareholders' equity ...................... $55,140 $45,626
======= =======
</TABLE>
See accompanying notes.
23
<PAGE>
FUNCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
MARCH 28, MARCH 29, MARCH 30,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Operating Activities
Net income ....................................................... $ 9,710 $ 8,270 $ 5,350
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................................. 3,650 3,126 3,283
Deferred tax asset ............................................. 21 (209) (964)
Net loss on disposal of property and equipment ................. 123 105 133
Changes in operating assets and liabilities:
Accounts receivable ........................................... 107 (1,033) (473)
Inventories ................................................... (6,998) (7,656) (4,056)
Prepaid expenses .............................................. (1,773) (393) 334
Accounts payable .............................................. 4,997 3,447 (1,808)
Accrued liabilities ........................................... (896) 1,102 1,527
Deferred revenue .............................................. 102 145 125
-------- -------- --------
Net cash provided by operating activities ................... 9,043 6,904 3,451
Investing Activities
Additions of property and equipment .............................. (6,838) (5,380) (1,548)
Increase in other assets ......................................... (11) (110) (98)
Purchases of short-term investments .............................. (3,075) (1,460) -
Sales of short-term investments .................................. 4,535 - -
Proceeds from sales of property and equipment .................... - 16 3
-------- -------- --------
Net cash used in investing activities ....................... (5,389) (6,934) (1,643)
Financing Activities
Payments of obligations under capital leases ..................... - (20) (80)
Payments for repurchase of common stock .......................... (5,220) - -
Net proceeds from issuance of common stock ....................... 821 937 897
-------- -------- --------
Net cash provided by (used in) financing activities ......... (4,399) 917 817
-------- -------- --------
Increase (decrease) in cash and cash equivalents .................. (745) 887 2,625
Cash and cash equivalents at beginning of year .................... 9,295 8,408 5,783
-------- -------- --------
Cash and cash equivalents at end of year .......................... $ 8,550 $ 9,295 $ 8,408
======== ======== ========
</TABLE>
See accompanying notes.
24
<PAGE>
FUNCO, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL SHARE-
----------------- PAID-IN RETAINED HOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1996 ................. 5,878 $59 $ 17,803 $ 209 $ 18,071
Common stock issued, net of costs ......... 179 2 799 - 801
Tax benefits of stock options ............. - - 96 - 96
Net income ................................ - - - 5,350 5,350
------ ------ -------- ------- --------
Balance at March 30, 1997 ................. 6,057 61 18,698 5,559 24,318
Common stock issued, net of costs ......... 127 1 634 - 635
Tax benefits of stock options ............. - - 302 - 302
Net income ................................ - - - 8,270 8,270
------ ------ -------- ------- --------
Balance at March 29, 1998 ................. 6,184 62 19,634 13,829 33,525
Common stock issued, net of costs ......... 125 1 560 - 561
Tax benefits of stock options ............. - - 260 - 260
Repurchase of common stock ................ (414) (4) (5,216) - (5,220)
Net income ................................ - - - 9,710 9,710
------ ------ -------- ------- --------
Balance at March 28, 1999 ................. 5,895 $59 $ 15,238 $23,539 $ 38,836
====== ====== ======== ======= ========
</TABLE>
See accompanying notes.
25
<PAGE>
FUNCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 1999
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS -- Funco, Inc. operates a single business segment,
providing interactive home entertainment primarily through the purchase and
resale of new and previously played video games, related hardware and accessory
items through its FUNCOLAND stores, mail order operation and FUNCOLAND
SUPERSTORE Web site. Accordingly, additional disclosures under Statement of
Financial Accounting Standards No. 131 (SFAS No. 131), "Disclosures About
Segments of an Enterprise and Related Information," are not required. Funco,
Inc. also publishes a video game magazine, GAME INFORMER. The Company was
incorporated in Minnesota in March 1988.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary. All
intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION -- Revenue from retail sales of the Company's products
is recognized at the time of sale. Deferred revenue represents amounts received
for subscriptions to a specified number of future video game magazine issues.
Subscription revenue is recognized on a straight-line basis as magazine issues
are delivered.
ADVERTISING COSTS -- Advertising costs, included in operating expenses, are
expensed as incurred and were $2,769,000, $2,309,000 and $2,898,000 for the
years 1999, 1998 and 1997, respectively.
FISCAL YEAR -- The Company's fiscal year ends on a Sunday on or near March
31st. The fiscal years ended March 28, 1999, March 29, 1998 and March 30, 1997
consisted of 52 weeks each. Unless otherwise stated, references to years in this
report relate to fiscal years rather than calendar years.
CASH EQUIVALENTS -- Cash equivalents represent investments with a maturity
of three months or less at the time of purchase. Cash equivalents are recorded
at cost, which approximates market.
SHORT-TERM INVESTMENTS -- Short-term investments represent investments with
a maturity of greater than three months at the time of purchase. Realized gains
and losses and declines in value judged to be other-than-temporary on short-term
investments are included in interest income. Short-term investments are recorded
at cost, which approximates market.
INVENTORIES -- Inventories consist of new and previously played video
games, hardware and accessories and are valued at the lower of cost, determined
using the first-in, first-out (FIFO) method, or market.
PROPERTY AND EQUIPMENT -- Property and equipment are recorded at cost. The
Company uses the straight-line method of computing depreciation based on the
assets' estimated useful lives, which range from three to five years.
IMPAIRMENT OF LONG-LIVED ASSETS -- The Company records impairment losses of
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amounts.
INTERNAL-USE SOFTWARE -- During fiscal 1999, the Company adopted Statement
of Position No. 98-1 (SOP No. 98-1), "Internal Use Software." Under SOP No.
98-1, companies are required to capitalize certain development costs related to
internal-use software. The Company is amortizing these costs over five years.
Total capitalized costs for fiscal 1999 were $279,000. The Company historically
expensed these costs.
PRE-OPENING COSTS -- During fiscal 1999, the Company adopted Statement of
Position No. 98-5 (SOP No. 98-5) "Reporting on the Cost of Start-Up
Activities." Under SOP No. 98-5, companies are required to expense the costs of
start-up activities, including store opening costs, in the period incurred.
Fiscal 1999 results were not materially impacted by the adoption.
26
<PAGE>
FUNCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK OPTIONS -- The Company has elected to recognize compensation cost
for its stock-based compensation plans in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly,
no compensation expense is recognized for stock options with exercise prices
equal to, or in excess of, the market value of the underlying shares of stock
at the date of grant. The Company follows the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting
for Stock-Based Compensation."
NET INCOME PER SHARE -- Basic net income per share is computed based on the
weighted average number of common shares outstanding during each period. Diluted
net income per share includes the incremental shares assumed issued on the
exercise of stock options. Unless otherwise stated, all references to income per
share are calculated using the diluted method.
USE OF ESTIMATES -- Preparing financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reporting amounts in the financial statements and
accompanying notes. Actual results could differ from these estimates.
2. FINANCING ARRANGEMENTS
The Company has a $3,000,000 unsecured revolving credit facility with a
commercial bank, seasonally increasing to $10,000,000. The interest rate on
outstanding borrowings under the credit facility is based upon LIBOR plus 250
basis points (7.45% for the month ended March 28, 1999). The credit facility
requires the Company to maintain certain financial ratios and achieve certain
operating results. There were no borrowings outstanding under the credit
facility at March 28, 1999 or March 29, 1998.
Total interest paid approximates interest expense for the years 1999, 1998
and 1997.
3. LEASES
The Company has rental commitments for office space, retail space, office
equipment and vehicles under non-cancelable operating leases. Most of these
leases contain provisions for renewal options and require the Company to pay
other lease related costs.
Future minimum lease payments under non-cancelable operating leases consist
of the following:
(IN THOUSANDS)
--------------------------------
2000 $ 8,167
2001 5,686
2002 3,063
2003 1,334
2004 639
Thereafter 56
--------------------------------
Total $18,945
================================
Rent expense was $7,904,000, $6,254,000, and $5,008,000 for the years 1999,
1998 and 1997, respectively.
27
<PAGE>
FUNCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NET PROPERTY AND EQUIPMENT CONSIST OF THE FOLLOWING:
(IN THOUSANDS) 1999 1998
----------------------------------------------------------------
Furniture and fixtures $ 7,474 $ 5,914
Equipment 10,528 8,025
Leasehold improvements 9,497 7,341
Other 64 64
----------------------------------------------------------------
Gross property and equipment 27,563 21,344
Less accumulated depreciation (16,229) (13,143)
----------------------------------------------------------------
Net property and equipment $ 11,334 $ 8,201
================================================================
5. ACCRUED LIABILITIES CONSIST OF THE FOLLOWING:
(IN THOUSANDS) 1999 1998
----------------------------------------------------------------
Purchase credit memos payable $1,848 $1,682
Employee compensation and related taxes 1,338 1,432
Sales tax payable 940 790
Income tax payable 664 1,692
Other accrued liabilities 476 623
----------------------------------------------------------------
Total accrued liabilities $5,266 $6,219
================================================================
6. STOCK OPTIONS
Under the terms of the Company's various stock option plans, a maximum of
1,450,000 shares of common stock has been reserved for issuance to directors,
officers and employees, upon the exercise of stock options. Annually, on May
1st, the Company reserves an additional 1% of the total number of Common Stock
shares outstanding at fiscal year end. Subsequent to March 28, 1999, the Company
has reserved an additional 58,948 shares for use in its stock option plan. The
stock options are exercisable over periods up to ten years from date of grant
and include incentive stock options and non-qualified stock options.
At March 28, 1999, there were 1,038,145 options outstanding. Options
exercisable at the end of years 1999, 1998, and 1997 were 544,056, 442,961, and
335,120, respectively. A summary of stock option transactions is as follows:
WEIGHTED AVERAGE
EXERCISE PRICE
SHARES PER SHARE
--------------------------------------------------------------------
Outstanding March 31, 1996 666,509 $ 6.25
Granted 286,501 8.03
Exercised (94,405) 3.13
Canceled (58,972) 7.61
--------------------------------------------------------------------
Outstanding March 30, 1997 799,633 7.16
Granted 286,936 15.37
Exercised (124,771) 5.11
Canceled (22,905) 10.90
--------------------------------------------------------------------
Outstanding March 29, 1998 938,893 9.85
Granted 270,434 13.34
Exercised (124,583) 4.57
Canceled (46,599) 13.40
--------------------------------------------------------------------
Outstanding March 28, 1999 1,038,145 $ 11.24
====================================================================
28
<PAGE>
FUNCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTIONS (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options:
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- --------------------------------------------------------------------------------
$ 0 - $ 4 23,692 6.55 $ 3.31 23,692 $ 3.31
$ 4 - $ 8 227,360 5.39 5.76 206,741 5.64
$ 8 - $12 205,669 5.78 9.32 154,113 9.51
$12 - $16 543,424 7.81 14.17 145,344 14.86
$16 - $20 38,000 4.18 17.31 14,166 17.95
- -------------------------------------------------------------------------------
$ 0 - $20 1,038,145 6.72 $11.24 544,056 $ 9.42
===============================================================================
In fiscal 1999, the Company's Board of Directors authorized the repurchase
of up to 700,000 shares of the Company's common stock. During fiscal 1999,
Company repurchased 414,800 shares of common stock at an aggregate price of
$5,220,000. In addition, the Company issued 124,583 shares of stock through the
exercise of stock options at prices ranging from $1.33 to $15.92 per share,
generating net proceeds, including tax benefits, of $821,000.
The Company follows the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation." The Company has elected to continue to account for
stock-based compensation plans in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," making the pro forma
disclosures of net earnings and earnings per share as if the fair value-based
method had been applied. Accordingly, no compensation expense is recognized for
stock options with exercise prices equal to, or in excess of, the market value
of the underlying shares of stock at the date of grant. Had compensation expense
been recognized based on the fair value at the date of grant following
provisions of SFAS No. 123, the Company's pro forma net income and net income
per share would have been as follows:
(IN THOUSANDS EXCEPT PER SHARE DATA) 1999 1998 1997
-------------------------------------------------------------------
Net income:
As reported $9,710 $8,270 $5,350
Pro forma 8,794 7,594 5,038
-------------------------------------------------------------------
Income per common share -- basic:
As reported $ 1.60 $ 1.35 $ 0.90
Pro forma 1.48 1.26 0.86
-------------------------------------------------------------------
Income per common share -- diluted:
As reported $ 1.53 $ 1.26 $ 0.86
Pro forma 1.42 1.17 0.82
-------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
1999 1998 1997
-------------------------------------------------------------------
Expected volatility 80.5% 70.1% 74.4%
Risk-free interest rate 5.7% 6.0% 6.0%
Expected dividend yield 0.0% 0.0% 0.0%
Expected life of options 3 Years 3 Years 3 Years
-------------------------------------------------------------------
29
<PAGE>
FUNCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTIONS (CONTINUED)
The pro forma effect on net income and net income per share does not take
into consideration pro forma compensation expense related to grants made prior
to fiscal 1996.
The weighted average fair value for options with an exercise price equal to
market price granted during years 1999, 1998 and 1997 is $6.70, $7.65, and $4.14
per share, respectively. The weighted average fair value for options with an
exercise price greater than market price granted during years 1998 and 1997 is
$7.03 and $4.30, respectively. No options with an exercise price greater than
market price were granted in fiscal 1999.
7. NET INCOME PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128
"Earnings Per Share," the following table presents a reconciliation of the
numerators and denominators of basic and diluted net income per common share for
the years 1999, 1998 and 1997:
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) 1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Net income $ 9,710 $ 8,270 $ 5,350
========================================================================================
Denominator:
Denominator for basic net income per share --
weighted average shares 6,077,986 6,137,161 5,941,744
Dilutive securities:
Employee stock options 275,325 435,204 286,886
- ----------------------------------------------------------------------------------------
Denominator for diluted net income per share --
adjusted weighted average shares 6,353,311 6,572,365 6,228,630
========================================================================================
Basic net income per share $ 1.60 $ 1.35 $ 0.90
========================================================================================
Diluted net income per share $ 1.53 $ 1.26 $ 0.86
========================================================================================
</TABLE>
8. INCOME TAXES
Significant components of the provision for income taxes for the years
1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998 1997
---------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $4,957 $4,346 $2,749
State 1,318 1,298 624
---------------------------------------------------------------------
Current tax expense 6,275 5,644 3,373
Deferred
Federal 17 (159) (786)
State 4 (50) (178)
---------------------------------------------------------------------
Deferred tax expense 21 (209) (964)
---------------------------------------------------------------------
Net income tax provision $6,296 $5,435 $2,409
=====================================================================
</TABLE>
30
<PAGE>
FUNCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Deferred income taxes are due to temporary differences between carrying
values of certain assets and liabilities for financial reporting and income tax
purposes. Significant components of deferred taxes at March 28, 1999 and March
29, 1998, are as follows:
(IN THOUSANDS) 1999 1998
----------------------------------------------------------------------
Accrued rent $ 222 $ 191
Inventories 474 431
Depreciation 1,212 1,297
Other (204) (194)
----------------------------------------------------------------------
Net deferred tax asset $1,704 $1,725
======================================================================
Income taxes of $7,017,000, $4,518,000 and $2,890,000 were paid in the
years 1999, 1998 and 1997, respectively.
Reconciliation of the Company's tax rate is as follows:
(IN THOUSANDS) 1999 1998 1997
----------------------------------------------------------------------
Expected tax expense $5,442 $4,701 $2,638
State income tax, net of
federal benefit 870 820 294
Change in valuation allowance - - (644)
Other (16) (86) 121
----------------------------------------------------------------------
Net income tax provision $6,296 $5,435 $2,409
======================================================================
Effective tax rate 39% 40% 31%
======================================================================
31
<PAGE>
FUNCO, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ----------------------------------- ------------ ------------ ---------- ---------
ADDITIONS DEDUCTIONS
------------ ----------
BALANCE CHARGED TO BALANCE
AT BEGINNING COSTS AT END
DESCRIPTION OF PERIOD AND EXPENSES DESCRIBE OF PERIOD
- ----------------------------------- ------------ ------------ ---------- ---------
<S> <C> <C> <C> <C>
Year ended March 28, 1999:
Deducted from asset accounts
Allowance for doubtful accounts $ 29 $ - $ - $ 29
Inventory reserve 354 - 4(1) 350
------------ ------------ ---------- ---------
Total $383 $ - $ 4 $379
============ ============ ========== =========
Year ended March 29, 1998:
Deducted from asset accounts
Allowance for doubtful accounts $ 40 $ - $ 11(2) $ 29
Inventory reserve 624 - 270(1) 354
------------ ------------ ---------- ---------
Total $664 $ - $281 $383
============ ============ ========== =========
Year ended March 30, 1997:
Deducted from asset accounts
Allowance for doubtful accounts $ 17 $ 25 $ 2(2) $ 40
Inventory reserve 402 222 - 624
------------ ------------ ---------- ---------
Total $419 $247 $ 2 $664
============ ============ ========== =========
</TABLE>
- ------------------
(1) Inventory previously written off was recovered.
(2) Uncollectible accounts written off, net of recoveries.
32
Exhibit 3.2
AMENDED AND RESTATED BYLAWS OF
FUNCO, INC.
THROUGH FEBRUARY 18, 1999
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.......................... 8
Section 3.4. Electronic Communications........................... 8
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......................................... 9
Section 3.10. Committees.......................................... 9
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............................ 10
Section 3.15. Compensation of Directors........................... 10
Section 3.16. Limitation of Directors' Liabilities................ 10
ARTICLE IV: OFFICERS.................................................. 10
Section 4.1. Number and Designation.............................. 10
Section 4.2. Chief Executive Officer............................. 10
1
<PAGE>
Section 4.3. Chief Financial Officer............................. 10
Section 4.4. Chairman of the Board............................... 11
Section 4.5. President........................................... 11
Section 4.6. Vice Presidents..................................... 11
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............... 12
Section 4.13. Salaries............................................ 12
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.................................. 13
Section 5.4. Lost, Destroyed, or Stolen Certificates............. 13
Section 5.5. Transfer Agent and Registrar........................ 13
Section 5.6. Facsimile Signature................................. 13
Section 5.7. Closing of Transfer Books; Record Date.............. 13
Section 5.8. Registered Shareholders............................. 13
ARTICLE VI: INDEMNIFICATION........................................... 14
Section 6.1. Indemnification..................................... 14
Section 6.2. Insurance........................................... 14
ARTICLE VII: GENERAL CORPORATE MATTERS................................. 14
Section 7.1. Distributions....................................... 14
Section 7.2. Reserves............................................ 14
Section 7.3. Deposits............................................ 14
Section 7.4. Loans............................................... 14
Section 7.5. Advances............................................ 15
ARTICLE VIII: BOOKS OF RECORD; AUDIT; FISCAL YEAR....................... 15
Section 8.1. Share Register...................................... 15
Section 8.2. Books, Records, and Other Documents................. 15
Section 8.3. Financial Statements................................ 15
Section 8.4. Audit............................................... 16
Section 8.5. Fiscal Year......................................... 16
ARTICLE IX: AMENDMENTS................................................ 16
Section 9.1. Amendments.......................................... 16
2
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AMENDED AND RESTATED BYLAWS OF
FUNCO, INC.
THROUGH FEBRUARY 18, 1999
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.
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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 (11)
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
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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 of nominations to be made at an annual meeting of shareholders must be
delivered to the Secretary of the Corporation, or mailed and received at the
principal executive offices of the Corporation, not less than 90 days before the
first anniversary of the date of the preceding year's annual meeting of
shareholders. If, however, the date of the annual meeting of shareholders is
more than 30 days before or after such anniversary date, notice by a shareholder
shall be timely only if so delivered or so mailed and received not less than 90
days before such annual meeting or, if later, within 10 days after the first
public announcement of the date of such annual meeting. If a special meeting of
the shareholders of the Corporation is called in accordance with Section 2.3 or
2.4 for the purpose of electing one or more directors to the Board of Directors
or if a regular meeting other than an annual meeting is held, for a
shareholder's notice of nominations to be timely it must be delivered to the
Secretary of the Corporation, or mailed or received at the principal executive
office of the Corporation, not less than 90 days before such special meeting or
such regular meeting or, if later, within 10 days after the first public
announcement of the date of such special meeting or such regular meeting. Except
to the extent otherwise required by law, the adjournment of a regular or special
meeting of shareholders shall not commence a new time period for the giving of a
shareholder's notice as described above. 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 shall, if the facts warrant, determine 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 of any such business to be conducted at an annual meeting must be
delivered to the Secretary of the Corporation, or mailed and received at
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the principal executive office of the Corporation, not less than 90 days before
the first anniversary of the date of the preceding year's annual meeting of
shareholders. If, however, the date of the annual meeting of shareholders is
more than 30 days before or after such anniversary date, notice by a shareholder
shall be timely only if so delivered or so mailed and received not less than 90
days before such annual meeting or, if later, within 10 days after the first
public announcement of the date of such annual meeting. If a special meeting of
shareholders of the Corporation is called in accordance with Section 2.3 or 2.4
for any purpose other than electing directors to the Board of Directors or if a
regular meeting other than an annual meeting is held, for a shareholder's notice
of any such business to be timely it must be delivered to the Secretary of the
Corporation, or mailed and received at the principal executive office of the
Corporation, not less than 90 days before such special meeting or such regular
meeting or, if later, within 10 days after the first public announcement of the
date of such special meeting or such regular meeting. Except to the extent
otherwise required by law, the adjournment of a regular or special meeting of
shareholders shall not commence a new time period for the giving of a
shareholder's notice as required above. 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 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 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.
For purposes of this Section 2.13, "public announcement" means
disclosure (i) when made in a press release reported by the Dow Jones News
Service, Associated Press, or comparable news service, (ii) when filed in a
document publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Section 13, 14, or 15(d) of the Securities Exchange Act
of 1934, as amended, or (iii) when mailed as the notice of the meeting pursuant
to Section 2.5 of these Bylaws.
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 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.
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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.
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
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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.
(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.
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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 shareholders 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.
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 Financial 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
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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 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 in 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
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<PAGE>
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, or 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.
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.
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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, 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,
13
<PAGE>
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, in 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 of 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 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
14
<PAGE>
(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;
(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
15
<PAGE>
(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.
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 February 18, 1999, the Bylaws have been amended to incorporate
revisions to Section 2.13.
16
Exhibit 10.7b
SIXTH AMENDMENT TO LEASE AGREEMENT
TO THE LEASE dated January 24, 1992 and amended July 30, 1992, July 21, 1993,
October 8, 1993, July 27, 1994 and May 23, 1997, by and between MIG Kappa III
Companies and then under receivership by order of the court, Eberhardt Property
Management Company and now assigned to First Industrial, L.P. (a Delaware
Limited Partnership) as Landlord and Funco, Inc. as Tenant.
THIS AMENDMENT TO LEASE, entered into and made as of the 5th day of February
1999 by and between First Industrial, L.P. as Landlord, and Funco, Inc. as
Tenant.
WITNESSETH:
WHEREAS, Landlord's predecessors in interest and Tenant have heretofore entered
into a certain Lease dated January 24, 1992 , as amended, (the "Lease") covering
that certain space at 10120 West 76th Street, Eden Prairie, MN (the "Demised
Premises"), upon terms and conditions described in said Lease; and
WHEREAS, effective June 1, 1999, Landlord and Tenant desire to extend and
further amend said Lease as described below:
1. PREMISES: Effective June 1, 1999, Tenant shall occupy an additional 8,119
square feet of space to bring the total occupied area to 57,798 square feet
as shown on Exhibit A attached hereto.
2. BASE RENT: Effective June 1, 1999, Monthly Base Rent shall be as follows:
June 1, 1999 - June 30, 1999 $20,337.32 per month
July 1, 1999 - June 30, 2002 $24,082.50 per month
3. OPERATING Costs: Effective June 1, 1999, Tenant's Pro Rata Share of
operating expenses and real estate taxes as referenced in Paragraph 1.8 of
the Lease shall be 100%.
4. TERMINATION: Section 14.19 of the Lease shall be deleted and the following
shall be inserted in lieu thereof: "Tenant shall have the right, at
Tenant's sole discretion, to terminate this Lease by giving Landlord eight
(8) months written notice prior to July 1, 2000 or July 1, 2001. If Tenant
elects to terminate this Lease effective July 1, 2000, Tenant must pay to
Landlord as liquidated damages. Ten Thousand and 00/100 Dollars
($10,000.00) on or before October 31, 1999. If Tenant elects to terminate
this Lease effective July 1, 2001, Tenant shall not be required to pay any
liquidated damages. Tenant must vacate the Premises on or before June 30,
2000 or June 30, 2001, respectively, upon which vacating, the Lease shall
terminate and neither party shall have any further obligations under the
terms of the Lease."
<PAGE>
5. TENANT IMPROVEMENT ALLOWANCE: The Premises is leased to Tenant in "as-is"
condition. All tenant improvements made to the Premises and contracted by
the Tenant shall be paid for in full by the Tenant. Tenant shall provide
Landlord with copies of Certificates of Insurance from contractors and
shall hold the Landlord harmless for claims made for such work. All work
performed shall meet building code requirements and Tenant shall obtain all
necessary permits and licenses with the City of Eden Prairie prior to
commencing construction. In consideration for the improvements constructed
by Tenant in the expanded area, the Landlord will issue a Twenty Thousand
and 00/100 Dollars ($20,000.00) to the Tenant within 30 days upon receipt
of construction invoices.
6. HVAC REPAIRS: Effective July 1, 1999 through June 30, 2000, the tenant
shall pay an amount not to exceed $500.00 per occurrence for any related
HVAC repair serving the Tenant"s expansion area (8,119 SF). Effective July
1, 2000, Tenant will be responsible for all related HVAC repairs for the
entire premises. Landlord shall service and repair all existing mechanical
equipment serving the expansion area to ensure proper working order upon
occupancy.
7. BROKERAGE: Landlord and Tenant warrant to each other that no broker was
involved in the negotiation of this Agreement.
8. OPTION TO RENEW: Section 14.18 will be deleted and the following shall be
inserted in lieu thereof: Assuming the Tenant is not in default of this
Lease, Landlord, hereby grants the right to the Tenant to renew this Lease
for an additional three (3) year term at a Base Rent based on a four
percent (4%) increase per year of the extended term, under the same terms
and conditions of the existing Lease. Should Tenant elect to exercise its
renewal option, notice must be received in writing no later than January 1,
2002. This option to renew is not assignable to any sub-tenant and is only
valid for Funco, Inc.
9. Except as herein above set forth, all terms, provisions and covenants set
forth in the Lease shall remain unchanged and in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the
date and year first above written.
LANDLORD: FIRST INDUSTRIAL, L.P. TENANT: FUNCO, INC.
a Delaware Limited Partnership a Minnesota Corporation
By: First Industrial Realty Trust, Inc., a
Maryland Corporation, its general partner
By: /s/ Duane Lund By: /s/ Stanley A. Bodine
Its: Senior Regional Director Its: President
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-66218 and 333-60643) pertaining to the 1992 Employee Incentive
Stock Option Plan, 1992 Stock Option Plan for Nonemployee Directors and 1993
Stock Option Plan of Funco, Inc. of our report dated May 10, 1999, with respect
to the consolidated financial statements and schedule of Funco, Inc. included in
this Annual Report (Form 10-K) for the year ended March 28, 1999.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
June 23, 1999
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<FISCAL-YEAR-END> MAR-28-1999
<PERIOD-START> MAR-29-1998
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