SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-Q
[_] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period from April 3, 1994 to July 2, 1994
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 0-16930
EGGHEAD, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1296187
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
22011 S.E. 51st
Issaquah, Washington 98027
(Address of principal executive offices) (Zip Code)
(206) 391-0800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has 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 ___ NO ____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock:
Outstanding at
Class July 30, 1994
Common Stock 17,163,406
$.01 par value shares
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements and Supplementary Data
Refer to Exhibit 28 for the results of the limited review performed by
Arthur Andersen & Co., independent public accountants.
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
July 2, April 2,
1994 1994
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $29,262 $25,677
Accounts receivable, net of allowance
for doubtful accounts of $3,729
and $3,432, respectively 77,622 76,241
Merchandise inventories (Note 2) 124,109 117,106
Prepaid expenses and other current assets 3,862 3,717
Current deferred income taxes (Note 3) 7,890 8,085
Total current assets 242,745 230,826
Property and equipment, net 18,526 19,351
Non-current deferred income taxes (Note 3) 3,030 3,014
Other assets 2,420 2,819
$266,721 $256,010
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks (Note 5) $ - $ -
Accounts payable 100,486 91,055
Accrued liabilities 21,854 19,144
Income taxes payable - 494
Current portion of capital lease obligations 296 295
Total current liabilities 122,636 110,988
Capital lease obligations, less current portion 110 184
Deferred rent 1,405 1,422
Total liabilities 124,151 112,594
Commitments and contingencies (Note 6)
Shareholders' equity:
Common stock, $.01 par value:
50,000,000 shares authorized;
17,163,406 and 17,121,438 shares
issued and outstanding, respectively 172 171
Additional paid-in capital 120,546 120,287
Retained earnings 21,852 22,958
Total shareholders' equity 142,570 143,416
$266,721 $256,010
See Notes to Consolidated Financial Statements.
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
13 Weeks Ended
(unaudited)
July 2, July 3,
1994 1993
Net sales $193,848 $180,835
Cost of sales, including certain buying,
occupancy, and distribution costs 171,656 154,005
Gross margin 22,192 26,830
Selling, general, and administrative expense 21,757 23,637
Depreciation and amortization expense, net of
amounts included in cost of sales 2,412 1,887
Provision for restructuring costs - 4,400
Operating loss (1,977) (3,094)
Other (expense) income:
Interest income 185 109
Interest expense (6) (22)
Other, net (2) 32
Loss before income taxes (1,800) (2,975)
Income tax benefit 702 1,160
Net loss $(1,098) $(1,815)
Loss per share (Note 4) $(0.06) $(0.11)
Weighted average common shares and common
equivalent shares outstanding 17,122 16,989
See Notes to Consolidated Financial Statements.
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
13 Weeks Ended
(unaudited)
July 2, July 3,
1994 1993
Cash flows from operating activities:
Net loss $(1,098) $(1,815)
Adjustments to reconcile net loss to
net cash provided (used) by
operating activities:
Depreciation and amortization 2,689 2,308
Deferred rent (17) (19)
Deferred income taxes 179 (442)
Stock issued as compensation - 552
(Gain) loss on disposition of assets 12 (13)
Changes in assets and liabilities:
Accounts receivable, net (1,354) (3,551)
Merchandise inventories (7,001) (4,621)
Prepaid expenses and other current assets (145) (1,209)
Other assets 293 (2)
Accounts payable 9,401 (15,509)
Accrued liabilities 2,710 3,804
Income taxes payable (494) (519)
Total adjustments 6,273 (19,221)
Net cash provided (used) by
operating activities 5,175 (21,036)
Cash flows from investing activities:
Additions to property and equipment (1,793) (1,027)
Proceeds from sale of equipment 24 35
Net cash used by investing activities (1,769) (992)
Cash flows from financing activities:
Payments on capital lease obligations (73) (166)
Proceeds from stock issuances 258 488
Net cash provided by financing activities 185 322
Effect of exchange rates on cash (6) 2
Net increase (decrease) in cash 3,585 (21,704)
Cash at beginning of period 25,677 26,386
Cash at end of period $29,262 $4,682
Supplemental disclosures of cash paid:
Interest $6 $24
Income taxes $145 $722
See Notes to Consolidated Financial Statements.
EGGHEAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 Basis of Presentation
The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for
interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. While
these statements reflect the adjustments which are, in the opinion
of management, necessary to fairly state the results of the
interim periods, they do not include all the information and
footnotes required by generally accepted accounting principles for
complete financial statements. These adjustments are of a normal
and recurring nature. For further information, refer to the
annual financial statements and footnotes thereto, for the 52 week
period ended April 2, 1994, contained in the Company's Form 10-K,
filed pursuant to the Securities Exchange Act of 1934. The reader
is further cautioned that operating results for the 13 week period
ended 2, 1994, are not necessarily indicative of the results that
may be expected for the full year.
The Company uses a 52/53 week fiscal year, ending on the Saturday
nearest March 31 of each year. Effective the beginning of fiscal
1995, the Company changed it's fiscal quarters such that each
quarter consists of 13 weeks. Previously, fiscal quarters were
such that the first quarter consisted of 16 weeks, the second and
third quarters were each 12 weeks, and the fourth quarter
consisted of the remaining 12 or 13 weeks. The first quarter
fiscal 1994 financial information represents the first 13 weeks of
the fiscal year.
Note 2 Merchandise Inventories
The majority of merchandise inventories are accounted for using
the moving weighted average cost method. The remainder are
accounted for using the first-in first-out cost method. All
inventories are stated at the lower of cost or market.
Note 3 Income Taxes
Deferred income taxes result from temporary differences in certain
items for income tax and financial reporting purposes.
Note 4 Earnings (Loss) Per Share
Primary earnings per share amounts are computed using the weighted
average number of common shares and dilutive common equivalent
shares outstanding during each period using the treasury stock
method. Common equivalent shares result from the assumed exercise
of stock options and from the conversion of cash related to the
employee stock purchase plan into common shares based upon the
terms of the plan. The effect of common equivalent shares was not
included in computation of the loss per share amount for the 13
week periods ended July 2, 1994, and July 3, 1993, because they
were anti-dilutive.
EGGHEAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Note 5 Notes Payable to Banks
Effective October 1, 1993, the Company entered into a revolving
loan agreement with two banks providing for unsecured borrowings
of up to $50,000,000 through September 30, 1994. Each bank
provides a $25,000,000 line of credit and one bank serves as agent
for the agreement. The Company may elect interest rates on the
notes based on the participating banks' rates on overnight funds,
or on the agent bank's rate on certificates of deposit, LIBOR, or
prime rate. The agreement contains a number of covenants,
including a restriction on the payment of dividends and certain
financial ratio requirements. The Company was in compliance with
the financial covenants as of July 2, 1994. There were no
borrowings under the lines of credit during the first quarter of
fiscal 1995.
Note 6 Leases
The Company leases all its retail stores, corporate, government,
and education sales offices, it's distribution facilities in
Lancaster, Pennsylvania and Sacramento, California, and it's
headquarter facilities in Issaquah, Washington, under operating
leases with terms ranging from one to eleven years. As of
July 2, 1994, the future minimum rental payments under these
operating leases were as follows (in thousands):
Fiscal Year
1995 (remainder) $10,445
1996 12,813
1997 11,350
1998 7,755
1999 3,994
Thereafter 1,057
Total minimum payments $47,414
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The Company uses a 52/53 week fiscal year, ending on the Saturday
nearest March 31 of each year. Effective the beginning of fiscal 1995,
the Company changed it's fiscal quarters such that each quarter consists
of 13 weeks. Previously, fiscal quarters were such that the first
quarter consisted of 16 weeks, the second and third quarters were each
12 weeks, and the fourth quarter consisted of the remaining 12 or 13
weeks. The first quarter fiscal 1994 financial information represents
the first 13 weeks of the fiscal year.
RESULTS OF OPERATIONS
The following table shows the relationship of certain items included in
the Company's Consolidated Statements of Operations expressed as a
percentage of net sales:
Percentage of Net Sales
First Quarter
13 Weeks Ended
July 2, July 3,
1994 1993
Net sales 100.0% 100.0%
Cost of sales, including certain buying,
occupancy, and distribution costs 88.6 85.2
Gross margin 11.4 14.8
Selling, general, and administrative expense 11.2 13.1
Provision for restructuring costs - 2.4
Depreciation and amortization expense,
net of amounts included in cost of sales 1.2 1.0
Operating loss (1.0) (1.7)
Other income 0.1 0.1
Loss before income taxes (0.9) (1.6)
Income tax benefit 0.3 0.6
Net loss (0.6)% (1.0)%
Net sales of $193.8 million for the 13 week period ended July 2, 1994,
were 7% greater than net sales of $180.8 million for the 13 week period
ended July 3, 1993.
The corporate, government, and education (CGE) group generated 53% of
net sales during the first quarter of fiscal 1995, with 47% generated by
retail operations. This compares to 57% generated by the CGE group and
43% generated by retail operations in the first quarter of fiscal 1994.
Corporate, Government, and Education
CGE sales were $102.6 million in the first quarter of fiscal 1995
compared to $102.3 million in the first quarter last year.
Retail
Retail sales of $91.2 million in the first quarter of fiscal 1995,
increased $12.7 million, or 16%, compared to $78.5 million in the first
quarter of fiscal 1994. Comparable retail store sales increased 14%.
In addition, there was an increase in mail order sales due mainly to the
acquisition of a mail order subsidiary, Rocky Mountain Computer
Outfitters (Computer Outfitters) at the end of the second quarter of
fiscal 1994. These increases in sales were partially offset by the net
reduction of 16 stores since the end of the first quarter a year ago.
During the first quarter of fiscal 1995, the Company closed five stores.
Since the end of the first quarter last year, the Company has opened two
stores and closed 18. As of the end of the first quarter of fiscal
1995, the Company operated 184 retail stores compared to 200 at
July 3, 1993. The Company will continue to evaluate individual store
performance and make changes in the ordinary course of business.
Gross margin as a percentage of net sales was 11.4% in the first quarter
of fiscal 1995, compared to 14.8% in the first quarter last year.
During the second quarter of fiscal 1994, the Company lowered prices in
both its CGE and retail businesses to improve its competitive position.
This decrease in gross margin as a percentage of sales was partially
offset by retail sales making up a larger percentage of total sales in
the first quarter of fiscal 1995 than in the first quarter a year ago.
Retail sales, compared to CGE sales, typically have higher margins and
lower volume per transaction.
Selling, general, and administrative expense was 11.2% of net sales
in the first quarter of fiscal 1995, compared to 13.1% in the first
quarter of fiscal 1994. Savings associated with previous restructuring
actions, as discussed below, were partially offset by additional
expenses from Computer Outfitters, the Company's new mail order
subsidiary.
Provision for restructuring costs was $4.4 million, or 2.4% of net
sales, in the first quarter of fiscal 1994. During fiscal 1994, the
Company lowered its cost structure to improve its ability to compete.
The $4.4 million included employee severance costs and early lease
termination costs.
FINANCIAL CONDITION
Cash and short-term investments increased from $25.7 million at
April 2, 1994, to $29.3 million at the end of the first quarter of
fiscal 1995. The $3.6 million increase was mainly due to increases in
accounts payable and accrued liabilities, partially offset by an
increase in inventory and additions to property and equipment, as
presented in the Consolidated Statement of Cash Flows for the 13 weeks
ended July 2, 1994, on page 3.
Merchandise inventories increased $7.0 million, or 6%, from $117.1
million at April 2, 1994 to $124.1 million at July 2, 1994. The
increase was partly due to the addition of a limited selection of
computer hardware and printers in the retail stores.
Accounts payable increased $9.4 million, from $91.1 million at the end
of fiscal 1994, to $100.5 million at July 2, 1994. As a percentage of
total inventory, accounts payable (leveraging) increased from 78% at the
end of fiscal 1994 to 81% at the end of the first quarter of fiscal
1995.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $5.2 million for the 13
weeks ended July 2, 1994, compared to $21.0 million used by operating
activities during the same period a year ago. The increase was mainly
due to a $9.4 million increase in accounts payable during the first
quarter of fiscal 1995, compared to a $15.5 million reduction during the
same quarter a year ago. For further information, see the Consolidated
Statement of Cash Flows for the 13 weeks ended July 2, 1994, on page 3.
Effective October 1, 1993, the Company entered into a revolving loan
agreement with two banks providing for unsecured borrowings up to $50
million through September 30, 1994. Each bank provides a $25 million
line of credit and one bank serves as agent for the agreement. The
agreement contains a number of covenants, including a restriction on the
payment of dividends and certain financial ratio requirements. The
Company was in compliance with the financial covenants and had no
outstanding borrowings as of July 2, 1994.
There was no debt outstanding during the first quarter of fiscal 1995.
The average amount of debt outstanding during the first 13 weeks of
fiscal 1994 was $16,000. During the first quarter of fiscal 1995,
working capital requirements and capital expenditures were financed from
operations.
The Company expects that cash requirements in the foreseeable future
will be satisfied by cash flow from operations and borrowings under
these lines of credit. Depending on its rate of growth, the Company may
in future years require additional financing, including bank borrowings
and further issuances of debt and/or equity securities.
Part II. OTHER INFORMATION
ITEM 1. Legal Proceedings
On June 9, 1994, the Company announced that it had settled a
shareholders' lawsuit originally filed against the Company, a
current officer, and two former officers who were also directors.
The current officer had recently been dismissed from the suit.
The action, originally entitled Finucan v. Egghead, et al., was
filed in federal court in Seattle in September 1993 and is alleged
to be brought on behalf of all purchasers of the Company's common
stock between February 11, 1992, and November 18, 1992, (other
than the individual defendants and other individuals and entities
otherwise affiliated with the Company). The settlement, which is
subject to approval of the court, calls for a cash payment by the
Company of $2.625 million. Net of expected insurance recovery,
the settlement and related attorneys' fees resulted in a pretax
charge of $1.2 million in fiscal year 1994 ($0.04 per share, net
of income tax impact).
ITEM 4. Submission of Matters to a Vote of Security
Holders
None.
ITEM 6. Exhibits and Reports On Form 8-K
a. Exhibits
10.18 Lease termination and rent payment agreement dated June 14,
1994, between Sammamish Park Place II Limited Partnership as
Landlord and DJ&J Software Corporation as Tenant regarding
the Company's administrative headquarters.
28. Report of Independent Public Accountants
b. Reports on Form 8-K
None.
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.
EGGHEAD, INC.
(Registrant)
Date: August 4, 1994 /s/Carolyn J. Tobias
Carolyn J. Tobias
Senior Vice President, Chief
Financial Officer (Principal
Financial and Accounting
Officer)
Exhibit 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Egghead, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet
of Egghead, Inc. (a Washington corporation) and subsidiaries as of July
2, 1994, and the related condensed consolidated statements of operations
and cash flows for the 13-week periods ended July 2, 1994, and
July 3, 1993. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
/s/ Arthur Andersen & Co.
Seattle, Washington,
July 28, 1994.