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 October 2, 1994 to December 31, 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 January 28, 1995
Common Stock 17,166,031
$.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)
December 31, April 2,
1994 1994
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $24,323 $ 25,677
Accounts receivable, net of allowance for doubtful,
accounts of $4,529 and $3,432, respectively 91,983 76,241
Merchandise inventories (Note 2) 168,323 117,106
Prepaid expenses and other current assets 3,429 3,717
Current deferred income taxes (Note 3) 7,077 8,085
Total current assets 295,135 230,826
Property and equipment, net 21,269 19,351
Non-current deferred income taxes (Note 3) 3,320 3,014
Other assets 2,244 2,819
$321,968 $256,010
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks (Note 5) $ - $ -
Accounts payable 149,810 91,055
Accrued liabilities 24,256 19,144
Income taxes payable 605 494
Current portion of capital lease obligations 292 295
Total current liabilities 174,963 110,988
Capital lease obligations, less current portion 153 184
Deferred rent 1,421 1,422
Total liabilities 176,537 112,594
Commitments and contingencies (Note 6)
Shareholders' equity:
Common stock, $.01 par value: 50,000,000 shares
authorized; 17,166,031 and 17,121,438 shares
issued and outstanding, respectively 172 171
Additional paid-in capital 120,572 120,287
Retained earnings 24,687 22,958
Total shareholders' equity 145,431 143,416
$321,968 $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 39 Weeks Ended
(unaudited) (unaudited)
December 31, January 1, December 31, January 1,
1994 1994 1994 1994
Net sales $254,283 $222,560 $642,442 $568,800
Cost of sales, including certain
buying, occupancy, and
distribution costs 222,444 195,276 566,061 491,545
Gross margin 31,839 27,284 76,381 77,255
Selling, general, and
administrative expense 25,210 22,615 68,461 66,863
Depreciation and amortization
expense, net of amounts
included in cost of sales 2,236 2,314 7,000 6,242
Provision for restructuring costs - - - 4,400
Operating income (loss) 4,393 2,355 920 (250)
Theft insurance recovery (Note 7) 1,650 - 1,650 -
Other income (expense):
Interest income 168 143 506 280
Interest expense (16) (12) (27) (66)
Other, net 55 (105) (206) (138)
Income (loss) before income taxes 6,250 2,381 2,843 (174)
Income tax provision (benefit) 2,437 929 1,109 (67)
Net income (loss) $ 3,813 $ 1,452 $ 1,734 $ (107)
Earnings (loss) per
share (Note 4) $0.22 $0.08 $0.10 $(0.01)
Weighted average common shares
and common equivalent
shares outstanding 17,380 17,129 17,231 17,078
See Notes to Consolidated Financial Statements.
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
39 Weeks Ended
(unaudited)
December 31, January 1,
1994 1994
Cash flows from operating activities:
Net income (loss) $ 1,734 $ (107)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 7,806 7,462
Deferred rent (1) 18
Deferred income taxes 702 (290)
Stock issued as compensation - 552
Loss on disposition of assets 235 150
Changes in assets and liabilities:
Accounts receivable, net (15,774) (12,622)
Merchandise inventories (51,222) (24,411)
Prepaid expenses and other current assets 288 (265)
Other assets 257 (2,171)
Accounts payable 58,805 23,352
Accrued liabilities 5,117 7,034
Income taxes payable 111 (795)
Total adjustments 6,324 (1,986)
Net cash provided (used) by operating activities 8,058 (2,093)
Cash flows from investing activities:
Additions to property and equipment (9,491) (7,592)
Proceeds from sale of equipment 34 96
Net cash used by investing activities (9,457) (7,496)
Cash flows from financing activities:
Payments on capital lease obligations (221) (428)
Proceeds from stock issuances 286 488
Net cash provided by financing activities 65 60
Effect of exchange rates on cash (20) (22)
Net decrease in cash (1,354) (9,551)
Cash at beginning of period 25,677 26,386
Cash at end of period $ 24,323 $ 16,835
Supplemental disclosures of cash paid:
Interest $ 27 $ 63
Income taxes $ 198 $ 847
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 39 week
periods ended December 31, 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 third quarter
fiscal 1994 financial information represents the third 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 39
week period ended January 1, 1994, because it was 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 December 31, 1994. There were no
borrowings under these or previous lines of credit during the
first three 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
December 31, 1994, the future minimum rental payments under these
operating leases were as follows (in thousands):
Fiscal Year
1995 (remainder) $ 3,707
1996 12,436
1997 11,160
1998 7,635
1999 4,003
Thereafter 1,075
Total minimum payments $ 40,016
Note 7 Theft Insurance Recovery
Theft insurance recovery of $1.65 million represents settlement of
an insurance claim, net of expenses, for inventory stolen from
numerous retail stores during fiscal years 1991, 1992, and 1993 by
members of a multi-state shoplifting ring.
Note 8 Reclassifications
Certain reclassifications have been made to the fiscal 1994
financial statements to conform to the fiscal 1995 presentation.
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 third quarter and year-to-date fiscal 1994 financial
information represent the third 13 weeks and 39 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
Third Quarter Year to Date
13 Weeks Ended 39 Weeks Ended
Dec. 31, Jan. 1, Dec. 31, Jan. 1,
1994 1994 1994 1994
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, including certain buying,
occupancy, and distribution costs 87.5 87.7 88.1 86.4
Gross margin 12.5 12.3 11.9 13.6
Selling, general, and administrative
expense 9.9 10.2 10.7 11.7
Depreciation and amortization
expense, net of amounts
included in cost of sales 0.9 1.0 1.1 1.1
Provision for restructuring costs - - - 0.8
Operating income (loss) 1.7 1.1 0.1 -
Theft insurance recovery 0.7 - 0.3 -
Other income (expense) 0.1 - 0.1 -
Income (loss) before income taxes 2.5 1.1 0.5 -
Income tax provision (benefit) 1.0 0.4 0.2 -
Net income (loss) 1.5 0.7 0.3 -
Net sales of $254.3 million for the 13 week period ended December 31,
1994, were 14% greater than net sales of $222.6 million for the 13 week
period ended January 1, 1994.
Year-to-date sales of $642.4 million for the 39 week period ended
December 31, 1994 were 13% greater than net sales of $568.8 million for
the 39 week period ended January 1, 1994.
The corporate, government, and education (CGE) group generated 46% of
total net sales during the third quarter of fiscal 1995, with 54%
generated by retail operations. This compares to 47% generated by the
CGE group and 53% generated by retail operations in the third quarter of
fiscal 1994.
Year-to-date fiscal 1995, CGE and retail operations each generated 50%
of total net sales. This compares to 54% for CGE and 46% for retail
year-to-date last year.
Corporate, Government, and Education Sales
CGE sales of $116.4 million in the third quarter of fiscal 1995
increased $11.7 million, or 11%, compared to $104.7 million in the third
quarter of fiscal 1994. During the third quarter of fiscal 1995, the
Company's sales to certain of its large corporate customers and sales in
its Canadian division increased compared to the third quarter a year
ago.
Year-to-date fiscal 1995 CGE sales of $320.6 million increased $15.7
million, or 5%, compared to $304.9 million year-to-date last year.
The increase in third quarter and year-to-date CGE sales compared to the
same periods a year ago were mainly due to increases in the number of
units sold as opposed to increases in prices. Prices for many software
products have continued to decline due to industry-wide pricing
pressure, as discussed in the gross margin section on the following
page.
The Company serves as a designated reseller for volume licensing and
maintenance (VLAM) agreements between certain of its customers and major
publishers of microcomputer software. VLAM agreements typically are
used by large customers seeking to standardize desktop software
applications. For the 13 and 39 week periods ended December 31, 1994,
sales of software through VLAM agreements represented 22% and 17%,
respectively, of total CGE sales.
On December 6, 1994, the Company announced its plans to open a CGE
customer service center in Spokane, Washington on January 23, 1995.
Concurrent with the opening of the new center, the Company consolidated
the operations of ten existing support centers located throughout the
U.S. (The cost of closing the ten existing support centers was reserved
prior to fiscal year 1995.) As discussed in the Company's fiscal year
1994 Form 10-K, management believes its continuing restructuring efforts
in CGE have affected sales.
Retail Sales
Retail sales of $137.9 million in the third quarter of fiscal 1995
increased $20.1 million, or 17%, compared to $117.8 million in the third
quarter of fiscal 1994. Comparable retail store sales increased 23% in
the third quarter this year. The increase in comparable retail store
sales was partially offset by the closure of 17 stores since the end of
the third quarter a year ago.
Year-to-date fiscal 1995 retail sales of $321.8 million increased $57.9
million, or 22%, compared to $263.9 million year-to-date last year.
Year-to-date fiscal 1995 comparable retail store sales increased 24%.
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. These increases from comparable stores and the acquisition of
Mac's Place were partially offset by the closure of 17 stores since the
end of the third quarter a year ago, as noted above.
Sales of hardware and related accessories increased from approximately
20% of total retail sales in the third quarter and year-to-date last
year, to approximately 30% in same periods 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 third quarter a year ago.
Retail Locations
Year-to-date in fiscal 1995, the Company has closed 12 stores, including
two during the third quarter. Since the end of the third quarter last
year, the Company has closed 17 stores. As of the end of the third
quarter of fiscal 1995, the Company operated 177 retail stores, compared
to 194 at the end of the third quarter a year ago. 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 better meet the needs
of its customers.
Gross margin (net sales minus cost of sales, including certain buying,
occupancy, and distribution costs) as a percentage of net sales was
12.5% in the third quarter of fiscal 1995, compared to 12.3% in the
third quarter last year. The improvement in gross margin as a
percentage of sales resulted mainly from decreases in certain costs,
such as retail occupancy costs, while sales increased. The decrease in
occupancy costs resulted mainly from the store closures previously
noted.
This improvement in the third quarter gross margin as a percentage of
sales was partially offset by continued industry-wide pricing pressure
related to both competitors' pricing and vendors' pricing, as discussed
in the Company's fiscal year 1994 Form 10-K.
The third quarter gross margin of 12.5% increased 1.0% compared to 11.5%
in the second quarter of fiscal 1995 due mainly to retail sales making
up a larger percentage of total sales in the third quarter than in the
second quarter. Retail sales, compared to CGE sales, typically have
higher margins and lower volume per transaction.
Year-to-date gross margin as a percentage of sales was 11.9% in fiscal
1995, compared to 13.6% 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. Year-to-date gross
margin as a percentage of sales continues to be affected by the
industry-wide pricing pressure discussed above.
The decreases in year-to-date gross margin as a percentage of sales from
the lowering of prices and industry-wide pricing pressure were partially
offset by decreases in certain costs, such as retail occupancy and
distribution costs, while sales increased.
Selling, general, and administrative (SG&A) expense was 9.9% of net
sales in the third quarter of fiscal 1995, compared to 10.2% in the
third quarter of fiscal 1994. The improvement was mainly due to sales
increasing at a faster rate than expenses.
Year-to-date SG&A expense was 10.7% of net sales in fiscal 1995 compared
to 11.7% in fiscal 1994. The year-to-date improvement was also affected
by sales increasing at a faster rate than expenses, partially offset by
additional expenses from Mac's Place, the Company's mail order
subsidiary purchased at the end of the second quarter of fiscal 1994.
Provision for restructuring costs was $4.4 million, or 0.8% of net
sales, year-to-date in fiscal 1994. During fiscal 1994, the Company
lowered its cost structure to improve its ability to compete.
Operating income (loss), as a result of the foregoing factors, was $4.4
million income in the third quarter of fiscal 1995, compared to $0.9
million income in the third quarter last year. Year-to-date operating
income was $2.4 million income in fiscal 1995, compared to
$0.3 million loss in fiscal 1994.
Theft insurance recovery of $1.65 million in the third quarter and year-
to-date fiscal 1995 represents settlement of an insurance claim, net of
expenses, for inventory stolen from numerous retail stores during fiscal
years 1991, 1992, and 1993 by members of a multi-state shoplifting ring.
Income (loss) before income taxes, was $6.3 million in the third quarter
of fiscal 1995 compared to $2.4 million in the third quarter last year.
Year-to-date income before income taxes was $2.8 million in fiscal 1995
compared to a $0.2 million loss in fiscal 1994.
The third quarter and year-to-date fiscal 1995 results were positively
affected by the theft insurance recovery discussed above. The third
quarter and year-to-date results for fiscal years 1995 and 1994 were
negatively affected by the results of Mac's Place. The fiscal 1994
year-to-date results were negatively affected by the provision for
restructuring costs previously discussed.
FINANCIAL CONDITION
Cash and short-term investments were $24.3 million at the end of the
third quarter of fiscal 1995 compared to $25.7 million at April 2, 1994.
The $1.4 million decrease was mainly due to $9.5 million of capital
expenditures, partially offset by $8.1 million of cash provided by
operating activities as presented in the Consolidated Statement of Cash
Flows for the 39 week periods ended December 31, 1994, and January 1,
1994, on page 3.
Accounts receivable, net increased $15.8 million, from $76.2 million at
April 2, 1994 to $92.0 million at the end of the third quarter of
fiscal 1995. The increase resulted mainly from an increase in CGE sales
near the end of the third quarter of fiscal 1995 compared to the end of
fiscal year 1994.
Merchandise inventories increased $51.2 million, or 44%, from $117.1
million at April 2, 1994, to $168.3 million at December 31, 1994.
During the third quarter of fiscal 1995, the Company added to
existing inventory levels for the Christmas season. Also contributing
to the increase was the introduction of additional hardware products,
such as hard drives and printers, since the end of the third quarter a
year ago.
Property and equipment, net increased from $19.4 million at April 2, 1994
to $21.3 million at the end of the third quarter of fiscal 1995.
The increase was due mainly to the purchase of a building and land for
the new CGE customer service center in Spokane, Washington. This
increase was partially offset by depreciation recorded on the Company's
existing base of property and equipment.
Accounts payable increased from $91.1 million at the end of fiscal 1994,
to $149.8 million at December 31, 1994. The increase is consistent with
the increase in inventory.
Accrued liabilities increased from $19.1 million at the end of fiscal
1994, to $24.3 million at the end of the third quarter of fiscal 1995.
The increase was due mainly to increases in sales tax and payroll
accruals due to the timing of the Company's fiscal quarter-end.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $8.1 million for the 39
weeks ended December 31, 1994, compared to $2.1 million used by
operating activities during the same period a year ago. During the
first three quarters of fiscal 1995, there was a $58.8 million increase
in accounts payable, partially offset by a $51.2 million increase in
inventory. During the first three quarters of fiscal 1994, there was a
$23.4 million increase in accounts payable, offset by a $24.4 million
increase in inventory. For further information, see the Consolidated
Statement of Cash Flows for the 39 week periods ended December 31, 1994,
and January 1, 1994, 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 December 31, 1994.
There was no debt outstanding during the third quarter of fiscal 1995.
The average amount of debt outstanding during the third quarter of
fiscal 1994 was $0.1 million. During the first three 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 was
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
called for a cash payment by the Company of $2.625 million.
Payment was made during the second quarter of fiscal 1995. This
settlement was approved by the United States District Court for
the Western District of Washington on January 12, 1995. 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
10.27 Form of Indemnification Agreement between Egghead, Inc.
and its Directors.
10.28 Form of Indemnification Agreement between DJ&J Software
Corporation and its Directors.
27 Financial Data Schedule.
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: February 2, 1995 /s/ Carolyn J. Tobias
Carolyn J. Tobias
Senior Vice President, Chief
Financial Officer (Principal
Financial and Accounting Officer)