SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 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 from July 3, 1994 to October 1, 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 _X_ NO ____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock:
Outstanding at
Class October 29, 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 LLP, independent public accountants.
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
October 1, April 2,
1994 1994
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $28,595 $ 25,677
Accounts receivable, net of allowance
for doubtful,accounts of $3,932 and
$3,432, respectively 74,127 76,241
Merchandise inventories (Note 2) 131,124 117,106
Prepaid expenses and other current assets 4,560 3,717
Current deferred income taxes (Note 3) 7,727 8,085
Total current assets 246,133 230,826
Property and equipment, net 16,596 19,351
Non-current deferred income taxes (Note 3) 3,072 3,014
Other assets 2,291 2,819
$268,092 $256,010
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks (Note 5) $ - $ -
Accounts payable 106,774 91,055
Accrued liabilities 18,002 19,144
Income taxes payable - 494
Current portion of capital lease obligations 257 295
Total current liabilities 125,033 110,988
Capital lease obligations, less current portion 76 184
Deferred rent 1,415 1,422
Total liabilities 126,524 112,594
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 20,850 22,958
Total shareholders' equity 141,568 143,416
$268,092 $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 26 Weeks Ended
(unaudited) (unaudited
October 1, October 2, October 1, October 2,
1994 1993 1994 1993
Net sales $194,311 $165,405 $388,159 $346,240
Cost of sales, including certain
buying, occupancy, and
distribution costs 171,961 142,264 343,617 296,269
Gross margin 22,350 23,141 44,542 49,971
Selling, general, and
administrative expense 21,494 20,611 43,251 44,248
Depreciation and amortization
expense, net of amounts
included in cost of sales 2,352 2,041 4,764 3,928
Provision for restructuring costs - - - 4,400
Operating income (loss) (1,496) 489 (3,473) (2,605)
Other (expense) income:
Interest income 153 28 338 137
Interest expense (5) (32) (11) (54)
Other, net (259) (65) (261) (33)
Income (loss) before income taxes (1,607) 420 (3,407) (2,555)
Income tax benefit (provision) 626 (164) 1,328 996
Net income (loss) $ (981) $ 25 $(2,079) $(1,559)
Earnings (loss) per share (Note 4) $(0.06) $0.02 $(0.12) $(0.09)
Weighted average common shares
and common equivalent
shares outstanding 17,163 17,125 17,143 17,055
See Notes to Consolidated Financial Statements.
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
26 Weeks Ended
(unaudited)
October 1, October 2,
1994 1993
Cash flows from operating activities:
Net loss $ (2,079) $ (1,559)
Adjustments to reconcile net loss to
net cash provided (used) by
operating activities:
Depreciation and amortization 5,303 4,770
Deferred rent (7) 39
Deferred income taxes 300 (432)
Stock issued as compensation - 552
Loss on disposition of assets 286 50
Changes in assets and liabilities:
Accounts receivable, net 2,185 2,554
Merchandise inventories (14,006) 25,229
Prepaid expenses and other current assets (843) (1,976)
Other assets 316 (2,101)
Accounts payable 15,594 (38,359)
Accrued liabilities (1,144) 729
Income taxes payable (494) (795)
Total adjustments 7,490 (9,740)
Net cash provided (used) by
operating activities 5,411 (11,299)
Cash flows from investing activities:
Additions to property and equipment (2,645) (4,867)
Proceeds from sale of equipment 33 24
Net cash used by investing activities (2,612) (4,843)
Cash flows from financing activities:
Payments on capital lease obligations (146) (382)
Proceeds from stock issuances 258 488
Net cash provided by financing activities 112 106
Effect of exchange rates on cash 7 (6)
Net increase (decrease) in cash 2,918 (16,042)
Cash at beginning of period 25,677 26,386
Cash at end of period $ 28,595 $ 10,344
Supplemental disclosures of cash paid:
Interest $ 11 $ 54
Income taxes $ 213 $ 866
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 and 26 week
periods ended October 1, 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 second quarter
fiscal 1994 financial information represents the second 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
Earnings (loss) 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
and 26 week periods ended October 1, 1994, and the 26 week period
ended October 2, 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, 1994, the Company entered into a revolving
loan agreement with two banks providing for unsecured borrowings
of up to $50,000,000 through September 30, 1995. 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 October 1, 1994. There were no
borrowings under these or previous lines of credit during the
first two quarters 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 October
1, 1994, the future minimum rental payments under these operating
leases were as follows (in thousands):
Fiscal Year
1995 (remainder) $ 6,715
1996 12,330
1997 11,106
1998 7,675
1999 3,987
Thereafter 1,055
Total minimum payments $ 42,868
ITEM 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
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 second quarter and year-to-date fiscal 1994 financial
information represent the second 13 weeks and 26 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
Second Quarter Year to Date
13 Weeks Ended 26 Weeks Ended
October 1, October 2, October 1, October 2,
1994 1993 1994 1993
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, including
certain buying, occupancy,
and distribution costs 88.5 86.0 88.5 85.6
Gross margin 11.5 14.0 11.5 14.4
Selling, general, and
administrative expense 11.1 12.5 11.2 12.8
Depreciation and amortization
expense, net of amounts
included in cost of sales 1.2 1.2 1.2 1.1
Provision for restructuring
costs - - - 1.3
Operating income (loss) (0.8) 0.3 (0.9) (0.8)
Income (loss) before
income taxes (0.8) 0.3 (0.9) (0.8)
Income tax benefit (provision) 0.3 (0.1) 0.4 0.3
Net income (loss) (0.5) 0.2 (0.5) (0.5)
Net sales of $194.3 million for the 13 week period ended October 1,
1994, were 17% greater than net sales of $165.4 million for the 13 week
period ended October 2, 1993.
Year-to-date sales of $388.2 million for the 26 week period ended
October 1, 1994 were 12% greater than net sales of $346.2 million for
the 26 week period ended October 2, 1993.
The corporate, government, and education (CGE) group generated 52% of
total net sales during the second quarter of fiscal 1995, with 48%
generated by retail operations. This compares to 59% generated by the
CGE group and 41% generated by retail operations in the second quarter
of fiscal 1994.
Year-to-date fiscal 1995, CGE generated 53% of total net sales with the
remaining 47% generated by retail operations. This compares to 58% for
CGE and 42% for retail year-to-date last year.
Corporate, Government, and Education Sales
CGE sales of $101.6 million in the second quarter of fiscal 1995
increased $3.8 million, or 4%, compared to $97.8 million in the second
quarter of fiscal 1995.
Year-to-date fiscal 1995 CGE sales of $204.2 million increased $4.1
million, or 2%, compared to $200.1 million year-to-date last year. As
discussed in the Company's fiscal year 1994 Form 10-K, management
believes its restructuring initiative in CGE has affected sales.
Retail Sales
Retail sales of $92.7 million in the second quarter of fiscal 1995
increased $25.1 million, or 37%, compared to $67.6 million in the second
quarter of fiscal 1994. Year-to-date fiscal 1995 retail sales of $184.0
million increased $37.9 million, or 26%, compared to $146.1 million
year-to-date last year. Second quarter and year-to-date comparable
retail store sales increased 36% and 24%, respectively.
In addition to the comparable store sales growth, there was an increase
in mail order sales due mainly to the acquisition of a mail order
subsidiary, Mac's Place, at the end of the second quarter of fiscal
1994.
Sales of hardware and related accessories increased from approximately
14% of total retail sales year-to-date last year to approximately 30%
year-to-date this year. The increase was due partly to the introduction
of additional hardware products, such as hard drives and printers, since
the end of the second quarter a year ago.
Retail Locations
Year-to-date in fiscal 1995, the Company has closed 10 stores, including
five during the second quarter. Since the end of the second quarter
last year, the Company has closed 16 stores. As of the end of the
second quarter of fiscal 1995, the Company operated 179 retail stores,
compared to 195 at the end of the second quarter a year ago.
Gross margin (net sales minus cost of sales, including certain buying,
occupancy, and distribution costs) as a percentage of net sales was
11.5% in the second quarter of fiscal 1995, compared to 14.0% in the
second quarter last year. Year-to-date gross margin as a percentage of
sales was 11.5% in fiscal 1995, compared to 14.4% in fiscal 1994.
During the second quarter of fiscal 1994, the Company lowered prices in
both its CGE and Retail businesses to improve its competitive position.
As discussed in the Company's fiscal year 1994 Form 10-K, gross margin
as a percentage of sales continues to be affected by industry-wide
pricing pressure related to both competitors' pricing and vendors'
pricing.
The decrease in gross margin as a percentage of sales resulting from the
lower prices was partially offset by retail sales making up a larger
percentage of total sales in the second quarter and year-to-date fiscal
1995 than during the same periods a year ago. Retail sales, compared to
CGE sales, typically have higher margins and lower volume per
transaction.
In addition, retail occupancy costs decreased in the second quarter and
year-to-date this year compared to the same periods last year while
sales increased. The decrease in occupancy costs resulted mainly from
the store closures noted above.
Selling, general, and administrative (SG&A) expense was 11.1% of net
sales in the second quarter of fiscal 1995, compared to 12.5% in the
second quarter of fiscal 1994. Year-to-date SG&A expense was 11.2% of
net sales in fiscal 1995 compared to 12.8% in fiscal 1994. Savings
associated with previous restructuring actions, as discussed on the
following page, were offset by additional expenses from Mac's Place, the
Company's new mail order subsidiary.
Provision for restructuring costs was $4.4 million, or 1.3% of net
sales, year-to-date in fiscal 1994. During fiscal 1994, the Company
lowered its cost structure to improve its ability to compete.
Income (loss) before income taxes, as a result of the foregoing factors,
was a $1.6 million loss for the second quarter of fiscal 1995 compared
to $0.4 million income in the second quarter last year. Year-to-date
the loss before income tax benefit was $3.4 million in fiscal 1995
compared to $2.6 million in fiscal 1994.
As discussed in the Company's Form 10-K for the fiscal year ended April
2, 1994, the Company is examining its retail store format in order to
meet the needs of its customers. It is also beginning to provide value
added customer support services, such as work flow development, through
its Corporate, Government, and Education group.
FINANCIAL CONDITION
Cash and short-term investments increased from $25.7 million at April 2,
1994, to $28.6 million at the end of the second quarter of fiscal 1995.
The $2.9 million increase was mainly due to $5.4 million of cash
provided by operating activities, partially offset by $2.6 million
capital expenditures, as presented in the Consolidated Statement of Cash
Flows for the 26 week periods ended October 1, 1994, and October 2,
1993, on page 3.
Merchandise inventories increased $14.0 million, or 12%, from $117.1
million at April 2, 1994, to $131.1 million at October 1, 1994. The
increase was partly due to the introduction of additional hardware
products, such as hard drives and printers, since the end of the second
quarter a year ago.
Accounts payable increased from $91.1 million at the end of fiscal 1994,
to $106.8 million at October 1, 1994. The $15.7 million increase is
consistent with the increase in inventory.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $5.4 million for the 26
weeks ended October 1, 1994, compared to $11.3 million used by operating
activities during the same period a year ago. During the first two
quarters of fiscal 1995, there was a $15.6 million increase in accounts
payable, partially offset by a $14.0 million increase in inventory.
During the first two quarters of fiscal 1994, there was a $38.4 million
decrease in accounts payable, partially offset by a $25.2 million
decrease in inventory. For further information, see the Consolidated
Statement of Cash Flows for the 26 week periods ended October 1, 1994,
and October 2, 1993, on page 3.
Effective October 1, 1994, the Company entered into a revolving loan
agreement with two banks providing for unsecured borrowings up to $50
million through September 30, 1995. 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 all financial covenants and had no
outstanding borrowings on October 1, 1994.
There was no debt outstanding during the second quarter of fiscal 1995.
The average amount of debt outstanding during the second quarter of
fiscal 1994 was $1.0 million. During the first two quarters of fiscal
1995, working capital requirements and capital expenditures were
financed from operations.
The Company expects that working capital 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 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
The Company held its annual Meeting of Shareholders on September
8, 1994. Paul E. Allen and George P. Orban were elected as Class
II directors, whose terms expire in 1996. The number of votes
cast for election of the above Board of Directors was as follows:
Nominee In Favor Withheld
Paul E. Allen 13,620,750 87,032
George P. Orban 13,619,274 88,508
Part II. OTHER INFORMATION (con't)
ITEM 6. Exhibits and Reports On Form 8-K
a. Exhibits
*10.10 Microsoft 1994/1995 Channel Agreement dated July 1, 1994.
*10.11 Addendum to Microsoft 1994/1995 Channel Agreement dated
July 1, 1994.
*10.11a Follow up letter dated August 2, 1994, from Microsoft
regarding Microsoft 1994/1995 Channel Agreement dated
July 1, 1994.
10.18 Lease Termination and Rent Payment Agreement between
Sammamish Park Place II Limited Partnership as Landlord
and DJ&J Software Corporation as Tenant regarding the
Company's administrative headquarters.
10.18a First Amendment to Lease Termination and Rent Payment
Agreement between Sammamish Park Place II Limited
Partnership as Landlord and DJ&J Software Corporation as
Tenant.
10.18b Second Amendment to Lease Termination and Rent Payment
Agreement between Sammamish Park Place II Limited
Partnership as Landlord and DJ&J Software Corporation as
Tenant.
*10.29 Revolving Loan Agreement dated September 30, 1994, among
Security Pacific Bank Washington, N.A. and U.S. Bank of
Washington, National Association, Egghead, Inc., and DJ&J
Software Corporation.
**10.31a Separation agreement between Egghead, Inc. and DJ&J
Software Corporation (collectively, the "Company") and
Ronald P. Erickson dated August 1, 1994.
27 Financial Data Schedule.
28 Report of Independent Public Accountants.
b. Reports on Form 8-K
None.
* Confidential portions of this exhibit have been omitted and filed
separately with the Commission pursuant to an Application for
Confidential Treatment under Rule 24b-2 under the Securities
Exchange Act of 1934. Each exhibit has been marked to identify
the confidential portions that are omitted.
** Designates management contract of compensatory plan or
arrangement.
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: November 4, 1994 /s/ Carolyn J. Tobias
Carolyn J. Tobias
Senior Vice President, Chief Financial
Officer (Principal Financial and
Accounting Officer)