PROSPECTUS
Up to 85,000 SHARES
FUNCO, INC.
COMMON STOCK
This prospectus relates to up to 85,000 shares of Common Stock, par
value $.01 per share (the "Common Stock"), of FUNCO, INC. (the "Company") that
may be offered for sale for the account of certain shareholders ("Selling
Shareholders") of the Company as stated herein under the heading "Selling
Shareholders." No period of time has been fixed within which the shares covered
by this prospectus may be offered or sold.
The up to 85,000 shares of Common Stock offered hereby are being sold
by the Selling Shareholders. The Company will not receive any of the proceeds
from the sale of Common Stock. See "Selling Shareholders."
The Common Stock of the Company is quoted on The NASDAQ National Market
System ("NMS") under the symbol FNCO. On November 18, 1996, the last sale price
of the Common Stock as reported by NMS was $8.50.
INVESTORS SHOULD CONSIDER CAREFULLY THE FACTORS SET FORTH UNDER "RISK FACTORS."
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION, NOR ANY STATE SECURITIES
COMMISSION,PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The Selling Shareholders have advised the Company that sales of the
shares of Common Stock offered hereunder by them, or by their pledgees, donees,
transferees or other successors in interest, may be made from time to time on
the NMS, through negotiated transactions or otherwise, at market prices
prevailing at the time of sale or at negotiated prices. See "Plan of
Distribution."
Pursuant to a registration rights agreement with the Company, a portion
of the expenses of registering the shares was paid by certain Selling
Shareholders, and the Company paid the balance. In addition, such agreement
provided for certain other usual and customary terms, including that the Company
and certain Selling Shareholders indemnify each other against certain
liabilities, including liabilities arising under the Securities Act of 1933
("Securities Act"). The Company and such Selling Shareholders have been advised
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. All selling expenses incurred by the Selling
Shareholders in connection with this offering, including any fees and
commissions payable to underwriters, brokers, agents or other persons will be
borne by the Selling Shareholders. See "Selling Shareholders."
No person has been authorized to give any information or to make any
representations not contained or incorporated by reference in this prospectus in
connection with the offer described in this prospectus and, if given or made,
such information and representations must not be relied upon as having been
authorized by the Company or any of the Selling Shareholders. Neither the
delivery of this prospectus nor any sale made under this prospectus shall under
any circumstances create any implication that there has been no change in the
affairs of the Company since the date hereof or since the date of any documents
incorporated herein by reference. This prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any securities other than the
securities to which it relates, or an offer or solicitation in any state to any
person to whom it is unlawful to make such offer in such state.
THE DATE OF THIS PROSPECTUS IS NOVEMBER 19, 1996
TABLE OF CONTENTS
Page
AVAILABLE INFORMATION.................................................. -2-
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................ -2-
PROSPECTUS SUMMARY..................................................... -3-
THE COMPANY............................................................ -3-
RISK FACTORS........................................................... -4-
SELLING SHAREHOLDERS................................................... -7-
USE OF PROCEEDS........................................................ -8-
PLAN OF DISTRIBUTION................................................... -8-
LEGAL MATTERS.......................................................... -8-
EXPERTS................................................................ -9-
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such material can be
inspected and copied at the Public Reference Section of the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices at 75 Park Place, New York, New York 10007 and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material can also be obtained at prescribed rates by writing to
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549.
This prospectus does not contain all of the information set forth in
the registration statement of which this prospectus is a part and which the
Company has filed with the Commission. For further information with respect to
the Company and the securities offered hereby, reference is made to the
registration statement, including the exhibits filed or incorporated as a part
thereof, copies of which can be inspected at, or obtained at prescribed rates
from, the Public Reference Section of the Commission at the address set forth
above. For further information, reference is made to the registration statement
and its exhibits.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated by reference into this prospectus: (1) the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1996 (File No. 0-21876); (2)
the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June
30, 1996; (3) the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 29, 1996; (4) Amendment No. 1 to the Company's registration
statement on Form S-1 filed with the Commission on June 21, 1993 (Reg. No.
33-63782); (5) all other reports filed by the Company pursuant to Sections 13,
14 or 15(d) of the Exchange Act since March 31, 1996; (6) the Company's
registration statement on Form 8-A filed with the Commission on June 3, 1993.
All documents filed by the Company pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this prospectus and prior to
the termination of the offering hereunder shall be deemed to be incorporated by
reference in this prospectus and to be a part hereof from the date of filing of
such documents. Any statement contained herein or in a document, all or any
portion of which is incorporated or deemed to be incorporated by reference
herein, shall be deemed to be modified or superseded for purposes of this
prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this prospectus.
The Company will provide without charge to each person to whom a copy
of this prospectus is delivered, upon the written or oral request of any such
person, a copy of any or all of the documents referred to above or elsewhere
herein which have been incorporated herein by reference (other than certain
exhibits to such documents). Written requests for such copies should be directed
to Robert M. Hiben, Funco, Inc., 10120 West 76th Street, Eden Prairie, Minnesota
55344. Telephone requests should be directed to Mr. Hiben at (612) 946-8883.
PROSPECTUS SUMMARY
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS QUALIFIED IN ITS
ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED
INFORMATION, INCLUDING THE FINANCIAL STATEMENTS AND NOTES THERETO, INCORPORATED
BY REFERENCED IN THIS PROSPECTUS.
THE COMPANY
Funco, Inc. ("Funco" or the "Company"), through its FUNCOLAND stores,
is a leading specialty retailer of new and previously played interactive
entertainment. The Company's products include a wide selection of video games,
related hardware and accessories, with each store offering approximately 3,000
different game titles. While the majority of the Company's merchandise is
previously played and is sold at an average of half the price for which these
products originally sold new, the Company also carries a selection of new
inventory. The FUNCOLAND store concept provides consumers an opportunity to
sell video games that they no longer play and apply that value toward other
new or previously played video games. The Company emphasizes personalized
attention to its customers and provides game sampling areas to assist in
selection of new and previously played games. As of September 29, 1996, the
Company operated 176 retail stores in 12 major metropolitan areas. These
stores are supported by Funco's mail order operation and its publication,
through a wholly-owned subsidiary, Sunrise Publications, Inc., of GAME
INFORMER, a video game magazine with over 100,000 paid subscribers.
The Company was incorporated under the laws of the State of Minnesota
on March 23, 1988. The Company's principal executive offices are located at
10120 West 76th Street, Eden Prairie, Minnesota 55344. Its telephone number is
(612) 946-8883.
SELLING SHAREHOLDERS
This Prospectus relates to the offering of up to 85,000 shares of
Common Stock of the Company by certain selling Shareholders. No shares are
being offered for the account of the Company, and the Company will not receive
any of the proceeds from the sales thereof.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, POTENTIAL
PURCHASERS SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS IN EVALUATING THE
COMPANY, ITS BUSINESS AND THE SHARES OF COMMON STOCK OFFERED HEREBY.
EXPANSION STRATEGY
The Company's future success depends upon the performance of its
existing stores, the Company's ability to open new stores and their resulting
performance. In the first half of fiscal 1997 the Company initiated its
expansion efforts on the West Coast by opening 4 stores in the San Francisco Bay
area, and is planning to open approximately 5 additional stores in that market
during the second half of the year. The Company anticipates increasing its total
store count to approximately 185 during fiscal 1997. Management believes that
the addition of new stores will continue to be a principal component of the
Company's growth for the foreseeable future. The Company's ability to open and
operate new stores profitably will depend on several factors, including, but not
limited to, the Company's ability to finance such expansion, the availability of
suitable store locations, the negotiation of acceptable lease terms, the ability
to attract, train and retain qualified personnel and the ability to control
other operational aspects of its growth. Accordingly, there can be no assurance
that the Company will successfully achieve further expansion on the schedule
currently anticipated or otherwise. In addition, increased national expansion
could subject the Company to greater risks associated with maintaining financial
and operating controls.
DEPENDENCE ON CONTINUING VIABILITY OF VIDEO GAME MARKET AND INVENTORY
AVAILABILITY
Growth of the Company's business depends on the continuing desire of
consumers to purchase video games as a form of interactive home entertainment.
Purchases of video games are discretionary and may be influenced by numerous
factors such as economic conditions that affect disposable income and changes in
consumer preferences related to the expenditure of entertainment dollars.
Earlier generations of video games achieved initial market acceptance, but sales
declined sharply when consumer interest was not sustained. The Company believes
that development of new technologies will help retain existing and attract new
consumers, but there can be no assurance that the popularity of video games will
continue or increase in the future.
TECHNOLOGICAL CHANGES
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 newly introduced include,
but are not limited to, Sega(R) Saturn, Sony(R) PlayStation and Nintendo(R) 64.
Although the Company believes that its concept of creating a secondary market
for previously played games and equipment will apply to each of these new game
systems, there can be no assurance that this new technology or other future
technology will gain market acceptance with consumers.
The interactive entertainment industry was in transition, during the
latter months of fiscal 1995 and throughout fiscal 1996, from the maturing
16-bit video game product category to advanced next generation video games and
software. There can be no assurance as to market acceptance of the new 32 and
64-bit product offerings, if or for how long these products categories will
dominate the market, the timing of future generations of product technology, and
what effect changes in the market may have on the Company's ability to obtain
new or previously played product, or to effectively compete with these new
product offerings.
- --------------------
Nintendo(R) is a registered trademark of Nintendo of America Inc., Sega(R) is a
registered trademark of Kabushiki Kaisha Sega Enterprises d/b/a Sega Enterprises
Limited, and Sony(R) is a registered trademark of the Sony Corporation.
To date, video games and equipment have been distributed primarily
through retail stores. Other distribution channels have included the Sega
Channel, which is a pay cable channel available to a wide audience of cable
equipped households in select markets. The Sega Channel provides consumers the
opportunity to select 16-bit Sega Genesis games on demand from a large catalog
of titles, temporarily download them to their video game systems, and play them
in their homes. Other distribution channels for interactive entertainment would
include on-line services, such as delivered through the Internet. Although the
Company currently believes that these services tend to broaden exposure and
promote interactive entertainment, there can be no assurance that any such means
of distributing games does not and will not reduce sales of interactive video
games and equipment through retail stores. Any such reduction could materially
adversely affect the Company's financial and operating results.
COMPETITION
The interactive home entertainment retailing business is highly
competitive and can generally be divided into two major segments: retailers of
new merchandise and retailers of previously played merchandise. While the
Company anticipates that it will face competition from both segments, both for
customers and with respect to price.
The Company competes with the following categories of retailers of new
interactive entertainment product: mass merchandisers, such as Target, Wal-Mart,
and K-Mart; national department stores, toy stores and consumer electronics
superstores; and national retail chains that specialize in computer software,
such as Electronics Boutique, Babbages and Software Etc. NeoStar Retail Group,
Inc. ("NeoStar"), the parent company of Babbages and Software Etc., filed for
bankruptcy protection in September 1996. Subsequently, on November 11, 1996,
NeoStar announced that it would close all of its stores, which are located
primarily in malls, due to growing competition from computer superstores and
discounters that also carry games and computer software. There can be no
assurance that the Company will not experience increased competition from these
retailers, most of whom have substantially greater market presence and greater
resources than the Company.
In addition, many competitors now feature trade-in opportunities
through which consumers are able to realize value for their previously played
product. There can be no assurance that retailers of new product, most of whom
have substantially greater market presence and greater resources than the
Company, will not move more aggressively into the previously played market and
compete directly with the Company. Also, retailers which discount new
merchandise may cause increased pricing pressure for the Company's previously
played product offerings.
Previously played video game merchandise has primarily been sold
through regional and local companies that buy and sell previously played video
game merchandise. The Company is aware of several smaller companies, including
one with approximately 40 stores, that buy and sell previously played video
games by mail or through retail stores. The Company believes that at least one
of these companies plans to use franchising as a means of expanding its store
base. There can be no assurances that any of these companies will not expand
their activities and compete directly with the Company in more of its existing
or future geographic locations. Such expanded competition could have a material
adverse affect on the Company's results of operations. In addition, in its
current geographic markets, the Company frequently competes with small
operations that buy and sell previously played video game merchandise and with
movie/video rental outlets which may sell games.
The Company anticipates that as it expands into new markets it will
increasingly be required to compete with other providers for sales of
interactive entertainment.
PRODUCT SUPPLY
The Company's success is largely dependent upon its ability to obtain
the game titles sought by its customers. The Company obtains most of its
previously played inventory from its customers, primarily from purchases made in
its retail operations. 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) once each month. 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
seeks to maintain substantial Company-wide control over both its inventory
levels as well as its gross margins on an item-by-item basis. However,
misjudgments by management regarding the popularity of certain video games could
create overstocked or understocked inventories, resulting in decreased margins
or sales declines, either of which could materially adversely affect the
Company's financial and operating results.
The Company purchases new interactive entertainment hardware, software
and accessories from various industry licensees and manufacturers. As the
industry continues the transition from the 16-bit product to advanced 32 and
64-bit product, the Company believes that new product pricing, availability,
acceptance and market penetration will impact its operating results. In
addition, misjudgments by management regarding the popularity of certain new
products could materially adversely affect the Company's financial and operating
results.
DEPENDENCE ON KEY PERSONNEL
The development and operation of the Company have depended and will
continue to depend on the efforts and skills of key management personnel. David
R. Pomije, the Company's founder, has been instrumental to the Company's
development and growth. The loss of his services, for any reason, would have a
material adverse effect on the Company's operations. The Company will be
dependent on the efforts and skills of Mr. Pomije and other key management
personnel as well as its ability to attract and retain other key employees in
the future. The Company has not entered into employment agreements with any
employee, including Mr. Pomije, but all key personnel (including all executive
officers) have signed agreements not to disclose confidential information
regarding the Company's business for a period of five years after termination of
employment or to engage in any business competitive with the Company within any
of the Company's established or identified markets within one year of
termination. The Company currently maintains and is the beneficiary of key
person life insurance policies on Mr. Pomije totaling $3 million.
POSSIBLE NEED FOR ADDITIONAL CAPITAL
The Company believes that cash from operations and funds available
under its revolving credit facility will provide sufficient funds for financing
the planned store openings, working capital needs and other capital expenditures
for at least 12 months. If the expenses of expansion exceed current estimates or
if the stores do not perform at anticipated levels, the Company may need
additional capital to fund its continued growth. There can be no assurance that
any needed additional financing will be available on acceptable terms, if at
all.
SEASONALITY
The Company generates the majority of its net sales during the third
and fourth fiscal quarters, which include the holiday season. As a result of
lower net sales in the first and second fiscal quarters, the Company has
historically had operating losses during this period and expects such losses to
continue to occur in the future. Operating results may also fluctuate from
quarter to quarter as a result of the amount of net sales contributed by new
stores, the timing of and costs associated with new store openings, new product
releases and a variety of other factors.
CONTROL OF THE COMPANY
David R. Pomije, chief executive officer of the Company, owns
approximately 44% of the outstanding Common Stock and may be able to elect the
entire Board of Directors of the Company and continue to direct the affairs of
the Company, including the appointment of officers and determination of
officers' compensation.
POSSIBLE STOCK PRICE VOLATILITY
The market price for shares of the Common Stock may be highly volatile
depending on various factors, including the general economy, competition among
the Company's competitors, stock market conditions, announcements by the
Company, its vendors or competitors, announcements of technological innovations
or products that may affect the Company's business and fluctuations in the
Company's operating results.
SELLING SHAREHOLDERS
This Prospectus relates to the offering of up to 85,000 shares of
Common Stock of the Company by the persons named in the following table (the
"Selling Shareholders"). All shares offered hereby have been or will be issued
pursuant to warrants (collectively, the "Warrants"). The following table sets
forth certain information, as of September 29, 1996, and as adjusted to reflect
the issuance of the shares pursuant to the Warrants and sale of the shares
offered hereby, with respect to the beneficial ownership of the Company's Common
Stock by the Selling Shareholders and any relationships they may have with the
Company. Unless otherwise indicated, the Selling Shareholders possess sole
voting and investment power with respect to the shares shown.
Prior to Offering(1) After Offering(1)
-------------------- -----------------
Number
Number Shares Number of
Name of Shares Percent to be Sold Shares
- ------------------------ --------- ------- ---------- ---------
David B. Johnson(2) 42,500 * 42,500 0
Paul Kuehn(2) 42,500 * 42,500 0
------ - ------ ------
TOTAL 85,000 * 85,000 0
====== = ====== ======
* less than one percent
(1) All of the shares of Common Stock offered hereby have been or will be
issued upon exercise of Warrants. This table assumes that all of the
shares offered hereby by each Selling Shareholder will be sold pursuant
to this Prospectus.
(2) In connection with the initial public offering of the Company's Common
Stock, Miller, Johnson & Kuehn, Incorporated ("MJK") received a five-year
Warrant dated August 17, 1992 to purchase up to 100,000 shares of Common
Stock, exercisable at a price of $6.00 per share. The Warrant was
subsequently assigned to principals of MJK, including David B. Johnson
and Paul Kuehn. Warrants to purchase 15,000 shares of Common Stock were
previously exercised and the shares of Common Stock issued upon such
exercise have been sold. The Warrant also contains a cashless conversion
option based on the market value of the Common Stock at the time of
exercise. For purposes of this table it is assumed that the holders
exercise the Warrant for the maximum number of shares. The Warrant also
provides for certain other usual and customary terms, including that the
Company and holders indemnify each other against certain liabilities,
including liabilities arising under the Securities Act. The Company and
the Selling Shareholders have been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act and is, therefore
unenforceable.
USE OF PROCEEDS
The up to 85,000 shares of Common Stock being offered hereby are being
sold by the Selling Shareholders. The Company will not receive any of the
proceeds from the sale of the Common Stock offered hereby.
PLAN OF DISTRIBUTION
Any or all of the shares of Common Stock offered hereby may be sold
from time to time to purchasers directly by the Selling Shareholders.
Alternatively, the Selling Shareholders may from time to time offer the Common
Stock through underwriters, dealers or agents, who may receive compensation in
the form of discounts, concessions or commissions from the Selling Shareholders
and/or the purchasers of Common Stock for whom they may act or to whom they may
sell as principal, or both (which compensation as to particular underwriter,
broker or agent may be in excess of customary commissions). If applicable, one
or more supplemental prospectuses will be filed pursuant to Rule 424 under the
Securities Act to describe any material arrangements for the sales of shares
offered hereunder when such arrangements are entered into by any of the Selling
Shareholders and any of the underwriters, brokers or agents that participate in
the sale of shares. The Selling Shareholders and any such underwriters, dealers
or agents that participate in the distribution of Common Stock may be deemed to
be underwriters under the Securities Act, and any profit on the sale of the
Common Stock by them and any discounts, commissions or concessions received by
them may be deemed to be underwriting discounts and commissions under the
Securities Act. To the knowledge of the Company as of the date hereof, there are
no special selling arrangements between any underwriters, brokers, agents or
other person and any Selling Shareholder.
At the time a particular offer of Common Stock is made, to the extent
required, a supplement to this prospectus will be distributed which will set
forth the aggregate principal amount of Common Stock being offered and the terms
of the offering, including the name or names of the particular Selling
Shareholders, any underwriters, dealers or agents, any discounts, commissions
and other items constituting compensation from the Selling Shareholders and any
discounts, commissions or concessions allowed or reallowed or paid to dealers,
including the proposed selling price to the public.
The Common Stock may be sold from time to time in one or more
transactions at a fixed offering price, which may be changed, or at varying
prices determined at the time of sale or at negotiated prices. The Company will
not receive any of the proceeds from the sale by the Selling Shareholders of the
Common Stock offered hereby.
The Common Stock offered hereby was originally issued, in transactions
exempt from registration under the Securities Act pursuant to Section 4(2)
thereof, upon exercise of various warrants issued in May 1992, and has been
registered hereby for resale by the Selling Shareholders. See "Selling
Shareholders."
LEGAL MATTERS
Certain matters with respect to the legality of the issuance and sale
of the shares offered hereby will be passed upon for the Company by Mackall,
Crounse & Moore, PLC, Minneapolis, Minnesota. Barry Lazarus, a partner in
Mackall Crounse & Moore, PLC, beneficially owns 2,700 shares of Common Stock.
EXPERTS
The financial statements of Funco, Inc. incorporated by reference in
Funco, Inc.'s Annual Report on Form 10-K for the year ended March 31, 1996, have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon included therein and incorporated herein by reference. Such
financial statements are, and audited financial statements to be included in
subsequently filed documents will be, incorporated herein in reliance upon the
reports of Ernst & Young LLP pertaining to such financial statements (to the
extent covered by consents filed with the Securities and Exchange Commission)
given upon the authority of such firm as experts in accounting and auditing.