UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 27, 1998
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to _______
Commission file number: 0-21876
FUNCO, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1609563
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10120 West 76th Street
Eden Prairie, MN 55344
(Address of principal executive offices)
(612) 946-8883
(Registrant's telephone number, including area code)
Check whether the registrant: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes __X__ No ____
On October 26, 1998, the registrant had 5,945,473 outstanding shares of common
stock, $ .01 par value.
FUNCO, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
ITEM 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income - Quarter and six months
ended September 27, 1998 and September 28, 1997 ........... 3
Consolidated Balance Sheets - September 27, 1998 and March 29,
1998 ...................................................... 4
Consolidated Statements of Cash Flows - Six months ended
September 27, 1998 and September 28, 1997 ................. 5
Notes to Consolidated Financial Statements ..................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................. 7
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk ..... 12
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. Legal Proceedings .............................................. 12
ITEM 4. Submission of Matters to a Vote of Security Holders ............ 13
ITEM 5. Other Information .............................................. 13
ITEM 6. Exhibits and Reports on Form 8-K ............................... 14
SIGNATURES ................................................................ 15
- ----------
2 of 15
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
FUNCO, INC.
Consolidated Statements of Income
(in thousands, except share and per share data)
(Unaudited)
Quarter Ended Six Months Ended
------------------------------- -------------------------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
------------- ------------- ------------- -------------
Net sales .............................. $ 35,299 $ 26,760 $ 68,193 $ 50,761
Cost of sales .......................... 23,037 16,955 44,301 31,544
------------ ------------ ------------ ------------
Gross profit ........................... 12,262 9,805 23,892 19,217
Operating expenses ..................... 8,919 6,884 17,321 13,242
General and administrative expenses .... 2,501 2,125 5,015 4,233
------------ ------------ ------------ ------------
Operating income ....................... 842 796 1,556 1,742
Interest income ........................ 91 66 211 145
------------ ------------ ------------ ------------
Net income before income taxes ......... 933 862 1,767 1,887
Income tax provision ................... 373 327 707 717
------------ ------------ ------------ ------------
Net income ............................. $ 560 $ 535 $ 1,060 $ 1,170
============ ============ ============ ============
Basic Earnings Per Share:
- -------------------------
Basic net income per share ............. $ 0.09 $ 0.09 $ 0.17 $ 0.19
Weighted average number of common
shares ................................. 6,204,179 6,137,470 6,199,815 6,102,755
Diluted Earnings Per Share:
- ---------------------------
Diluted net income per share ........... $ 0.09 $ 0.08 $ 0.16 $ 0.18
Weighted average number of common
and common equivalent shares ........... 6,499,990 6,633,441 6,535,181 6,553,335
SEE ACCOMPANYING NOTES
3 of 15
FUNCO, INC.
Consolidated Balance Sheets
(in thousands, except share data)
September 27, March 29,
1998 1998
------------ -----------
(Unaudited) (Note)
ASSETS
- ------
Current Assets
Cash and cash equivalents .................... $ 1,808 $ 9,295
Short-term investments ....................... 1,077 1,460
Accounts receivable .......................... 1,695 2,127
Inventories .................................. 27,451 21,487
Prepaid expenses ............................. 1,111 1,175
Current deferred tax asset ................... 603 603
----------- -----------
Total current assets ...................... 33,745 36,147
Net property and equipment ..................... 8,940 8,201
Long-term deferred tax asset ................... 1,122 1,122
Other assets ................................... 110 156
----------- -----------
Total assets ................................... $ 43,917 $ 45,626
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Accounts payable ............................. $ 5,264 $ 4,834
Accrued liabilities .......................... 4,326 6,219
Deferred revenue ............................. 668 892
----------- -----------
Total current liabilities ................. 10,258 11,945
Accrued rent ................................... 164 156
Shareholders' Equity
Common stock (issued: 6,140,490 and 6,184,477) 61 62
Additional paid-in capital ................... 18,545 19,634
Retained earnings ............................ 14,889 13,829
----------- -----------
Total shareholders' equity ................ 33,495 33,525
----------- -----------
Total liabilities and shareholders' equity ..... $ 43,917 $ 45,626
=========== ===========
Note: The balance sheet at March 29,1998 has been derived from the audited
financial statements at that date but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
SEE ACCOMPANYING NOTES.
4 of 15
FUNCO, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
--------------------------------
September 27, September 28,
1998 1997
------------- -------------
Operating Activities
Net income .............................................. $ 1,060 $ 1,170
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization ........................ 1,680 1,520
Net loss on disposal of property and equipment ....... 30 14
Changes in operating assets and liabilities:
Accounts receivable ............................... 432 (160)
Inventories ....................................... (5,964) (9,075)
Prepaid expenses .................................. 64 (1,533)
Accounts payable .................................. 430 6,294
Accrued liabilities ............................... (1,885) (1,034)
Deferred revenue .................................. (224) (91)
----------- -----------
Net cash used in operating activities .......... (4,377) (2,895)
Investing Activities
Additions of property and equipment ..................... (2,403) (2,123)
Increase in other assets ................................ -- (53)
Purchase of short-term investments ...................... (1,974) --
Sale of short-term investments .......................... 2,357 --
----------- -----------
Net cash used in investing activities ............. (2,020) (2,176)
Financing Activities
Payments of obligations under capital leases ............ -- (20)
Payments for repurchase of common stock ................. (1,291) --
Net proceeds from issuance of common stock .............. 201 536
----------- -----------
Net cash provided by (used in) financing activities (1,090) 516
Decrease in cash and cash equivalents ...................... (7,487) (4,555)
Cash and cash equivalents at beginning of period ........... 9,295 8,408
----------- -----------
Cash and cash equivalents at end of period ................. $ 1,808 $ 3,853
=========== ===========
SEE ACCOMPANYING NOTES.
5 of 15
FUNCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Company
Funco, Inc. (the Company) was incorporated in March 1988 and is a leading
national specialty retailer of interactive home entertainment, primarily through
the purchase and resale of new and previously played video games along with
related hardware and accessory items through its FUNCOLAND(R) stores. The store
strategy is complemented by the Company's mail order operation, the FUNCOLAND
SUPERSTORE Web site and publication of GAME INFORMER(R), a video game magazine.
The Company operated 270 retail locations at September 27, 1998, compared to 215
retail locations at September 28, 1997.
Note 2. Fiscal Year
The Company's fiscal year ends on a Sunday on or near March 31st which completes
a 52 or 53 week reporting period. All quarters for fiscal 1999 and 1998 consist
of 13 weeks with the following period ending dates:
Ending Date
------------------------------------------
1999 1998
------------------ ------------------
First June 28, 1998 June 29, 1997
Second September 27, 1998 September 28, 1997
Third December 27, 1998 December 28, 1997
Fourth March 28, 1999 March 29, 1998
Note 3. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
solely of normal recurring accruals) considered necessary for a fair
presentation have been included.
Due to the seasonal nature of the Company's business, the operating results for
the quarter ended September 27, 1998 are not necessarily indicative of the
results that may be expected for the year ending March 28, 1999.
For further information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended March
29, 1998.
Note 4. Common Stock
In the second quarter of fiscal 1999, the Board of Directors authorized the
repurchase of up to 400,000 shares of the Company's common stock. During the
quarter ended September 27, 1998, the Company repurchased 101,200 shares at an
aggregate cost of $1,290,850. Subsequent to September 27, 1998, the Company has
repurchased an additional 200,100 shares at an aggregate cost of $2,402,638,
increasing the total number of repurchased shares to 301,300.
6 of 15
Note 5. Net Income per Share
The following table sets forth the computation of basic and diluted net income
per share:
Quarter Ended Six Months Ended
------------------------------- -------------------------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
------------- ------------- ------------- -------------
Numerator:
Net income .......................................... $ 560,000 $ 535,000 $ 1,060,000 $ 1,170,000
============ ============ ============ ============
Denominator:
Denominator for basic net income per
share - weighted average shares ................... 6,204,179 6,137,470 6,199,815 6,102,755
Dilutive securities:
Employee and nonemployee director stock options ..... 295,811 495,971 335,366 450,580
------------ ------------ ------------ ------------
Denominator for diluted earnings per share - adjusted
weighted average shares ........................... 6,499,990 6,633,441 6,535,181 6,553,335
============ ============ ============ ============
Basic earnings per share ............................... $ 0.09 $ 0.09 $ 0.17 $ 0.19
============ ============ ============ ============
Diluted earnings per share ............................. $ 0.09 $ 0.08 $ 0.16 $ 0.18
============ ============ ============ ============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth certain items in the statements of income
expressed as (i) percentage of net sales for the quarter indicated and (ii)
percentage changes from the comparable period prior year.
Percent Percent
Quarter Ended Inc (Dec) Six Months Ended Inc (Dec)
------------------------------ --------- ------------------------------ ---------
September 27, September 28, 1999 over September 27, September 28, 1999 over
1998 1997 1998 1998 1997 1998
------------- ------------- --------- ------------- ------------- ---------
Net sales...................... 100.0% 100.0% 31.9% 100.0% 100.0% 34.3%
Cost of sales.................. 65.3 63.4 35.9 65.0 62.1 40.4
------------- ------------- ------------- -------------
Gross profit................... 34.7 36.6 25.1 35.0 37.9 24.3
Operating expenses............. 25.3 25.7 29.6 25.4 26.1 30.8
General and admin. expenses.... 7.1 7.9 17.7 7.4 8.3 18.5
------------- ------------- ------------- -------------
Operating income............... 2.4 3.0 5.8 2.3 3.4 (10.7)
Interest income................ 0.3 0.2 37.9 0.3 0.3 45.5
------------- ------------- ------------- -------------
Net income before taxes........ 2.6 3.2 8.2 2.6 3.7 (6.4)
Income tax provision........... 1.1 1.2 14.1 1.0 1.4 (1.4)
------------- ------------- ------------- -------------
Net income..................... 1.6% 2.0% 4.7% 1.6% 2.3% (9.4)%
============= ============= ============= =============
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Second Quarter Fiscal 1999 to Second Quarter Fiscal 1998
Net sales for the quarter increased from $26,760,000 in 1998 to $35,299,000 in
1999, an increase of 31.9%. The Company opened 18 new stores during the quarter
and operated a total of 270 locations at the end of the quarter this year
compared to 215 locations at the end of the same period prior year. Comparable
store sales for the quarter increased 13%. The strong sales increase is
primarily due to operating a greater number of stores compared to prior year and
continued growth of the Sony PlayStation and Nintendo 64 product categories.
Cost of sales for the quarter increased from $16,955,000 in 1998 to $23,037,000
in 1999, an increase of 35.9%. The dollar increase in cost of sales is primarily
due to the strong growth in sales. Cost of sales as a percentage of net sales
increased from 63.4% in 1998 to 65.3% in 1999. This increase is primarily due to
sales mix for the quarter reflecting an increased proportion of new product
sales which are sold at lower gross margin percentages than previously played
product.
Operating expenses for the quarter increased from $6,884,000 in 1998 to
$8,919,000 in 1999, an increase of 29.6%. This increase is primarily due to
higher store payroll expense which occurred both as the Company operated a
greater number of stores than in the same period prior year and also to support
the 13% increase in comparable store sales. Operating expenses decreased
favorably as a percentage of net sales from 25.7% in 1998 to 25.3% in 1999, due
to leveraging as net sales increased by 31.9%.
General and administrative expenses for the quarter increased from $2,125,000 in
1998 to $2,501,000 in 1999, an increase of 17.7%. This increase occurred to
support the store base which grew to 270 locations from 215 locations at the end
of the same period in the prior year. General and administrative expenses
decreased favorably as a percentage of net sales from 7.9% in 1998 to 7.1% in
1999, due to leveraging as net sales increased by 31.9%.
The Company generated operating income for the quarter of $842,000 compared to
$796,000 in the same period prior year, an increase of 5.8%.
Interest income for the quarter increased from $66,000 in 1998 to $91,000 in
1999, an increase of 37.9%, primarily as the Company maintained a higher level
of cash and cash equivalents and short-term investments.
The Company generated net income before income taxes for the quarter of $933,000
compared to net income before income taxes of $862,000 in the same period prior
year, an increase of 8.2%. As a result the Company recorded income tax expense
for the quarter of $373,000 compared to income tax expense of $327,000 for the
same period prior year.
Due to the above factors, the Company generated net income for the quarter of
$560,000, or $0.09 per share, compared to net income of $535,000, or $0.08 per
share, for the same period prior year.
Comparison of Six Month Period Fiscal 1999 to Six Month Period Fiscal 1998
Net sales for the six month period increased from $50,761,000 in 1998 to
$68,193,000 in 1999, an increase of 34.3%. The Company opened 21 new stores and
closed one store during the six month period and operated a total of 270
locations at the end of the six month period this year compared to 215 locations
at the end of
8 of 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
the same period prior year. Comparable store sales for the six month period
increased 13%. The strong sales increase is primarily due to operating a greater
number of stores compared to prior year and continued growth of the Sony
PlayStation and Nintendo 64 product categories.
Cost of sales for the six month period increased from $31,544,000 in 1998 to
$44,301,000 in 1999, an increase of 40.4%. The dollar increase in cost of sales
is primarily due to the strong growth in sales. Cost of sales as a percentage of
net sales increased from 62.1% in 1998 to 65.0% in 1999. This increase is
primarily due to sales mix for the six month period reflecting an increased
proportion of new product sales which are sold at lower gross margin percentages
than previously played product.
Operating expenses for the six month period increased from $13,242,000 in 1998
to $17,321,000 in 1999, an increase of 30.8%. This increase is primarily due to
higher store payroll expense which occurred both as the Company operated a
greater number of stores than in the same period prior year and also to support
the 13% increase in comparable store sales. Operating expenses decreased
favorably as a percentage of net sales from 26.1% in 1998 to 25.4% in 1999, due
to leveraging as net sales increased by 34.3%.
General and administrative expenses for the six month period increased from
$4,233,000 in 1998 to $5,015,000 in 1999, an increase of 18.5%. This increase
occurred to support the store base which grew to 270 locations from 215
locations at the end of the same period in the prior year. General and
administrative expenses decreased favorably as a percentage of net sales from
8.3% in 1998 to 7.4% in 1999, due to leveraging as net sales increased by 34.3%.
The Company generated operating income for the six month period of $1,556,000
compared to operating income of $1,742,000 in the same period prior year, a
decrease of 10.7%.
Interest income for the six month period increased from $145,000 in 1998 to
$211,000 in 1999, an increase of 45.5%, primarily as the Company maintained a
higher level of cash and cash equivalents and short-term investments.
The Company generated net income before income taxes for the six month period of
$1,767,000 compared to net income before income taxes of $1,887,000 in the same
period prior year, a decrease of 6.4%. As a result the Company recorded income
tax expense for the six month period of $707,000 compared to income tax expense
of $717,000 for the same period prior year.
Due to the above factors, the Company generated net income for the six month
period of $1,060,000, or $0.16 per share, compared to net income of $1,170,000,
or $0.18 per share, for the same period prior year.
9 of 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Seasonality and Quarterly Fluctuations
The Company's business is seasonal with a majority of net sales generated in the
third and fourth fiscal quarters, which include the holiday selling season. In
addition to sales seasonality, the Company's quarterly results are also impacted
by factors including new product introductions and the number and timing of new
store openings. Growth of the store base may obscure the impact of seasonal
influences. Because of the seasonality of the Company's business and the factors
mentioned above, results for any quarter are not necessarily indicative of the
results that may be achieved for a full fiscal year. The following table sets
forth net sales by quarter and the number of stores operating at each quarter
end for the past ten quarters:
Net Sales (in thousands) Number of Stores Open at Quarter End
- --------------------------------------------- -----------------------------------------
Fiscal Fiscal
Quarter 1999 1998 1997 Quarter 1999 1998 1997
- --------- --------- --------- --------- --------- -------- -------- -------
First $32,894 $24,001 $18,862 First 252 193 173
Second 35,299 26,760 20,415 Second 270 215 176
Third 67,036 46,461 Third 249 188
Fourth 45,519 34,817 Fourth 250 188
Liquidity and Capital Resources
The Company's primary ongoing financing requirements are for new store capital
expenditures and inventory. On an interim basis, the Company's financing
requirements are also impacted by quarterly operating results and seasonal
fluctuations in inventory levels.
During the six months ended September 27, 1998, the Company used $4,377,000 of
cash for operating activities primarily for the purchase of inventory, and used
$2,020,000 of cash in investing activities, primarily for capital expenditures.
The Company also used $1,291,000 of cash for the repurchase of 101,200 shares of
the Company's common stock. For the six months ended September 28, 1997, the
Company used $2,895,000 of cash for operating activities and used $2,176,000 of
cash in investing activities.
The Company has a $10,000,000 unsecured credit facility available, representing
the seasonally adjusted increase to its $3,000,000 revolving credit facility
with a commercial bank. The interest rate on outstanding borrowings under the
facility (8.19% at September 27, 1998) is based upon LIBOR plus 250 basis
points. The facility requires the Company to maintain certain financial ratios
and achieve certain operating results. The Company had no borrowings under this
facility at September 27, 1998 and currently has no borrowings.
During fiscal 1999, the Company plans to incur capital expenditures of
approximately $6,500,000, of which $2,403,000 has been incurred to date, for new
store openings, other store expenditures, enhancements to store and corporate
information systems and general corporate purposes. The Company incurred capital
expenditures of $5,380,000 in fiscal 1998.
The Company believes that cash from operations and funds available under its
revolving credit facility will provide sufficient funds for financing planned
store openings, working capital needs and other capital expenditures for at
least 12 months.
10 of 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Year 2000 Readiness
The Company's year 2000 Readiness plan is primarily directed towards ensuring
that the Company will be able to perform its critical functions: (1) accurately
process sale and purchase transactions through its retail, mail order, and web
site operations, (2) order and receive merchandise from vendors, (3) make
appropriate decisions as to inventory pricing and distribution and (4) assure
integrity of business operations, controls and financial reporting.
The Company is involved in an ongoing assessment of year 2000 compliance and is
undergoing a company-wide program of adapting its computer systems and
applications for the year 2000. Substantially all in-house developed software
has been written to be year 2000 compliant. Older systems, some of which are not
year 2000 compliant, are in the process of being modified or upgraded. These
system upgrades, which include inventory, financial and store point-of-sale
systems are designed to be year 2000 compliant and are being undertaken
primarily to support the Company's growth and to take advantage of advanced
technologies.
The Company plans to begin an assessment of year 2000 issues associated with its
various business partners, including vendors and service providers, and intends
to work with these third parties to identify and mitigate common risks. The
Company also recognizes the potential for year 2000 issues in areas not directly
related to its computer systems such as telephone and communication systems,
distribution processes, utilities, alarm systems and transportation services.
These various third party and non-information technology assessments are
scheduled to commence in the current fiscal quarter.
Costs
Costs associated with year 2000 compliance have not been material to date, and
costs to achieve year 2000 compliance are expected to be less than $500,000.
However, there can be no assurance that costs will not exceed this level. The
Company does not expect to incur material costs associated with the use of
external resources.
Risks
The variety, nature and complexity of year 2000 issues, the dependence on
technical skills and expertise of Company employees and independent contractors
and issues associated with the readiness of third parties are factors which
could result in the Company's efforts toward year 2000 compliance being less
than fully effective.
Failure to properly assess and correct year 2000 issues could result in
materially adverse financial consequences through an inability to adequately
process retail, mail order or web site transactions, or due to the failure of
the Company's systems to provide accurate information for ordering, pricing or
distributing merchandise. Accurate financial reporting is dependent upon year
2000 compliance. Failures caused by vendors not being year 2000 compliant could
lead to costly delays in receiving product shipments. Year 2000 compliance
difficulties on the part of financial institutions could interfere with cash
collections, payments and funding for the Company. In addition to the above, the
Company believes that other significant risks could be associated with failure
of year 2000 compliance by the Company or third parties.
11 of 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Contingency Plans
The Company believes that its program of assessment, correction and testing,
along with selected system upgrades will enable it to successfully meet the year
2000 challenge. The Company has not formalized a contingency plan at this time
and believes that in the event of failures associated with year 2000 compliance,
adequate resources could be focused on correcting isolated internal failures.
However, there can be no assurance that the Company or its business partners
will be year 2000 compliant on a timely basis.
Forward Looking Statements
Forward looking statements contained in this document which directly or
indirectly relate to future sales prospects and expansion plans are subject to
uncertainties from factors including growth of the industry, competitive
environment, general economic conditions, product availability, success of the
Company's existing operations, availability of new store sites and the Company's
ability to finance new store expansion. For further discussion of forward
looking statements and factors which can impact the Company's operating results,
please refer to the Company's report on Form 10-K for the year ended March 29,
1998, and other Company filings with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its Chief Executive Officer were originally named as defendants
in a civil lawsuit filed on August 17, 1995 in the United States District Court,
District of Minnesota, entitled Christopher Cannon v. Funco, Inc. and David R.
Pomije. This was a putative class action in which the named plaintiff in the
Class Action Complaint purported to represent a class of all purchasers of the
Company's common stock during the putative class period of May 18, 1994 through
December 15, 1994. On October 18, 1996 the court dismissed the state common law
claims with prejudice and dismissed the federal securities claims without
prejudice, giving the plaintiff leave to file an Amended Complaint. The
plaintiff filed an Amended Complaint on January 6, 1997.
The Amended Complaint is a similarly styled class action suit and alleges the
Company's share price was artificially inflated, asserting various claims under
the Securities Exchange Act of 1934, as amended. Plaintiff seeks damages in an
unspecified amount plus costs and attorney's fees. The Company and its Chief
Executive Officer filed a motion to dismiss the Amended Class Action Complaint
in its entirety.
The parties have reached an agreement-in-principle to settle this lawsuit,
subject to approval by the Court and members of the class. The proposed
settlement will not have a material impact on the Company including its results
of operations, financial condition and liquidity.
12 of 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Meeting of Shareholders on July 31,
1998.
(b) The Shareholders voted on the election of Directors, each to serve a
one year term. The vote was as follows for each of the nominees:
NAME AFFIRMATIVE AUTHORITY WITHHELD
------------------- ----------- ------------------
David R. Pomije 5,468,327 266,889
Stanley A. Bodine 5,468,077 267,139
Richard T. Guidera 5,468,077 267,139
George E. Mileusnic 5,468,077 267,139
Patrick J. Ferrell 5,468,077 267,139
(c) The Shareholders voted on an amendment to the 1993 Stock Option Plan
to increase the number of shares reserved for issuance under such
plan. The vote was as follows:
AFFIRMATIVE AUTHORITY WITHHELD ABSTENTIONS BROKER NON-VOTE
----------- ------------------ ----------- ---------------
4,751,047 952,421 20,460 11,288
(d) The Shareholders also voted on the appointment of Ernst & Young LLP
as the Company's independent auditors for the 1999 fiscal year. The
vote was as follows:
AFFIRMATIVE AUTHORITY WITHHELD ABSTENTIONS
----------- ------------------ -----------
5,729,477 1,273 4,466
ITEM 5. OTHER INFORMATION
a. Certain Information Regarding Shareholder Proposals
Proxy rules of the Securities and Exchange Commission permit
shareholders of a company, after timely notice to the company, to
present proposals for shareholder consideration for inclusion in the
Company's proxy statement unless said proposals can be omitted by the
Company in accordance with the proxy rules. The Funco, Inc. 1999 Annual
Meeting of Shareholders is expected to be held on or about July 30,
1999, and proxy materials in connection with that annual meeting are
expected to be mailed on or about June 25, 1999. In order to be included
in the Company's proxy materials for the 1999 Annual Meeting,
shareholder proposals prepared in accordance with the proxy rules must
be received by the Company on or before February 26, 1999.
In addition, pursuant to a recent amendment to Commission Rule 14a-4, a
shareholder must give notice to the Company prior to May 11, 1999, of
any proposal which such shareholder intends to raise at the 1999 Annual
Meeting. If the Company receives notice of such proposal after May 11,
1999, the persons named in the proxy solicited by the Company's Board of
Directors for the 1999 Annual Meeting may exercise discretionary voting
power with respect to such proposal.
Further, under the Company's Bylaws, for business to be properly brought
before the 1999 Annual Meeting, a shareholder must give notice in
writing to the Secretary of the Company no later than June 10, 1999. Any
proposal not submitted by such date will not be considered at the 1999
Annual Meeting.
13 of 15
ITEM 5. OTHER INFORMATION - CONTINUED
b. Resignation of Director
Richard T. Guidera has retired from the Board of Directors of the
Company with his resignation effective September 25, 1998. Mr. Guidera
had been a director since 1992.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed with this Form 10-Q:
3.2 Corporate Bylaws as restated and amended July 31, 1998
10.1a Amendment to Credit Agreement effective June 30, 1998, by and
between the Registrant and Marquette Capital Bank, N.A., and
the Amended and Restated Promissory Note
10.2 Amendment to 1992 Employee Incentive Stock Option Plan as
approved by the Board of Directors on July 31, 1998
10.3 Amendment to Stock Option Plan for Nonemployee Directors as
approved by the Board of Directors on July 31, 1998
10.4 1993 Stock Option Plan as restated and amended on July 31,
1998
27 Financial Data Schedule
(b) No report on Form 8-K was filed by the registrant during the quarter
ended September 27, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Funco, Inc.
(Registrant)
Date: October 27, 1998 By: /s/ David R. Pomije
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David R. Pomije
Chief Executive Officer
By: /s/ Robert M. Hiben
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Robert M. Hiben
Chief Financial Officer
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