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 April 2, 1995 to July 1, 1995
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 _x_
Indicate the number of shares outstanding of each of the issuer's
classes of common stock:
Outstanding at
Class July 29, 1995
Common Stock 17,483,797
$.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)
July 1, April 1,
1995 1995
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 68,823 $ 42,592
Accounts receivable, net of allowance
for doubtful, accounts of $4,323
and $4,354, respectively 75,175 84,514
Merchandise inventories (Note 2) 103,175 102,918
Prepaid expenses and other current
assets 5,241 4,045
Current deferred income taxes (Note 3) 6,760 6,964
Total current assets 259,174 241,033
Property and equipment, net 24,089 23,365
Non-current deferred income taxes (Note 3) 2,918 3,051
Other assets 2,363 2,692
$288,544 $270,141
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks (Note 5) $ - $ -
Accounts payable 122,354 104,425
Accrued liabilities 19,226 17,303
Income taxes payable - 325
Current portion of capital lease
obligations 412 252
Total current liabilities 141,992 122,305
Capital lease obligations,
less current portion 491 106
Deferred rent 1,292 1,314
Total liabilities 143,775 123,725
Commitments and contingencies (Note 6)
Shareholders' equity:
Common stock, $.01 par value:
50,000,000 shares
authorized; 17,324,977 and
17,166,031 shares issued and
outstanding, respectively 173 172
Additional paid-in capital 122,024 120,572
Retained earnings 22,572 25,672
Total shareholders' equity 144,769 146,416
$288,544 $270,141
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 1, July 2,
1995 1994
Net sales $174,634 $193,848
Cost of sales, including certain
buying, occupancy, and
distribution costs 155,398 171,656
Gross margin 19,236 22,192
Selling, general, and
administrative expense 22,515 21,757
Depreciation and amortization
expense, net of amounts 2,406 2,412
included in cost of sales
Operating loss (5,685) (1,977)
Other (expense) income:
Interest income 697 185
Interest expense (21) (6)
Other, net (175) (2)
Loss before income taxes (5,184) (1,800)
Income tax benefit 2,022 702
Net loss $ (3,162) $ (1,098)
Loss per share (Note 4) $ (0.18) $ (0.06)
Weighted average common shares and
common equivalent shares outstanding 17,172 17,122
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
13 Weeks Ended
(unaudited)
July 1, July 2,
1995 1994
Cash flows from operating activities:
Net loss $ (3,162) $ (1,098)
Adjustments to reconcile net
income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 2,717 2,689
Deferred rent (22) (17)
Deferred income taxes 337 179
(Gain) loss on disposition of assets (42) 12
Changes in assets and liabilities:
Accounts receivable, net 9,605 (1,354)
Merchandise inventories (244) (7,001)
Prepaid expenses and other
current assets (1,194) (145)
Other assets 225 293
Accounts payable 17,694 9,401
Accrued liabilities 1,905 2,710
Income taxes payable (325) (494)
Total adjustments 30,656 6,273
Net cash provided by operating
activities 27,494 5,175
Cash flows from investing activities:
Additions to property and equipment (2,613) (1,793)
Proceeds from sale of equipment 29 24
Net cash used by investing activities (2,584) (1,769)
Cash flows from financing activities:
Payments on capital lease obligations (159) (73)
Proceeds from stock issuances 1,453 258
Net cash provided by financing activities 1,294 185
Effect of exchange rates on cash 27 (6)
Net decrease in cash 26,231 3,585
Cash at beginning of period 42,592 25,677
Cash at end of period $ 68,823 $ 29,262
Supplemental disclosures of cash paid:
Interest $ 20 $ 6
Income taxes $ 110 $ 145
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 1, 1995, 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 weeks ended July 1, 1995, 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. Each fiscal quarter
consists of 13 weeks.
Note 2 Merchandise Inventories
Merchandise inventories are accounted for using the moving
weighted average cost method and 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
Net 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 week
periods ended July 1, 1995, and July 2, 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 July 1, 1995.
There were no borrowings under these or previous lines of
credit during the first quarter of fiscal 1996.
Note 6 Leases
The Company leases all its retail stores, its 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 remaining terms
ranging from one to five years. As of July 1, 1995, the
future minimum rental payments under these operating leases
were as follows (in thousands):
Fiscal Year
1996 (remainder) $10,718
1997 11,336
1998 8,077
1999 4,485
2000 1,436
Thereafter 52
Total minimum payments $36,104
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. Each fiscal quarter consists of 13
weeks.
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 1, July 2,
1995 1994
Net sales 100.0% 100.0%
Cost of sales, including certain buying,
occupancy, and distribution costs 89.0 88.6
Gross margin 11.0 11.4
Selling, general, and administrative expense 12.9 11.2
Depreciation and amortization expense,
net of amounts included in cost of sales 1.4 1.2
Operating loss (3.3) (1.0)
Other income 0.3 0.1
Loss before income taxes (3.0) (0.9)
Income tax benefit 1.2 0.3
Net loss (1.8)% (0.6)%
Net sales of $174.6 million for the 13 week period ended July 1,
1995, were $19.2 million, or 10% less than net sales of $193.8
million for the 13 week period ended July 2, 1994.
The corporate, government, and education (CGE) group generated 52%
of total net sales during the first quarter of fiscal 1996, with
48% generated by retail operations. This compares to 53%
generated by the CGE group and 47% generated by retail operations
in the first quarter of fiscal 1995.
Corporate, Government, and Education Sales
CGE sales of $89.9 million in the first quarter of fiscal 1996
decreased $12.7 million, or 12%, compared to $102.6 million in the
first quarter of fiscal 1995.
Most of the decrease was due to price reductions, with the
remainder due to a decrease in the number of units sold. Prices
for many software products have continued to decline due to
industry-wide pricing pressure related to both competitors' and
vendors' pricing.
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 week period ended July
1, 1995, sales of software through VLAM agreements represented
28%, of total CGE sales, compared to 12% in the first quarter a
year ago.
During the first quarter of fiscal 1996, the Company consolidated
the operations of its CGE customer service center in Issaquah,
Washington to its customer service center in Spokane, Washington.
Inside sales representatives and support personnel work out of the
customer service center. The Company now operates one customer
service center in the U.S. and two smaller centers in Canada.
During the second quarter of fiscal 1996, the two centers in
Canada will be consolidated to Spokane. Outside sales
representatives continue to work throughout the U.S. and Canada.
Retail Sales
Retail sales of $84.7 million in the first quarter of fiscal 1996
decreased $6.5 million, or 7%, compared to $91.2 million in the
first quarter of fiscal 1995. Comparable retail store sales
increased 2%, which was offset by operating 18 fewer stores at the
end of the first quarter this year than the same time a year ago.
The first quarter sales decrease consisted of a decrease in the
number of units sold, partially offset by an increase in the
average selling price per unit.
Sales of hardware and related accessories increased from
approximately 25% of total retail sales in the first quarter last
year to approximately 33% in first quarter this year.
Retail Locations
During the first quarter of fiscal 1996, the Company opened one
store, closed four stores, and operated a total of 166 at July 1,
1995. This compares to 184 at the end of the first quarter a year
ago. The Company introduced its new prototype store in the
beginning of the second quarter of fiscal 1996.
Gross margin as a percentage of net sales was 11.0% in the first
quarter of fiscal 1996, compared to 11.4% in the first quarter
last year. The decrease was due mainly to a decrease in incentive
funds from a major vendor.
Selling, general, and administrative (SG&A) expense was 12.9% of
net sales in the first quarter of fiscal 1996, compared to 11.2%
in the first quarter of fiscal 1995. The increase in SG&A expense
as a percentage of sales was primarily attributable to on-going
SG&A expenses remaining relatively constant while sales decreased,
as well as costs associated with consolidating certain of the
Company's operations to its customer service center in Spokane.
On May 1, 1995, the Company announced plans to consolidate its
direct response operation, formerly located in Kalispell, Montana,
and the remainder of its CGE customer service operations and its
credit operations, formerly located in Issaquah, Washington, to
its customer service center in Spokane, Washington. The changes
were planned to improve customer service and reduce costs. During
the first quarter of fiscal 1996, most of this consolidation was
completed. The related relocation, severance, and other costs
totaled $1.1 million, or 0.6% of net sales.
On July 12, 1995, the Company announced plans to consolidate its
remaining administrative operations in Issaquah to its customer
service center in Spokane. Relocation, severance, and related
costs, which are estimated at approximately $3.0 million, will be
included in the Company's results throughout the remainder of
fiscal 1996. The Company expects that these changes will result
in net expense in fiscal 1996, and net savings in future years due
to lower labor rates and occupancy costs.
FINANCIAL CONDITION
Cash and short-term investments were $68.8 million at the end of
the first quarter of fiscal 1996 compared to $42.6 million at
April 1, 1995. The $26.2 million increase was mainly due to a
$17.7 million increase in accounts payable and a $9.6 million
decrease in accounts receivable as presented in the Consolidated
Statement of Cash Flows for the 13 week periods ended July 1,
1995, and July 2, 1994, on page 3.
Accounts receivable, net decreased from $84.5 million at April 1,
1995 to $75.2 million at the end of the first quarter of fiscal
1996. The decrease resulted mainly from a decrease in CGE sales
near the end of the first quarter of fiscal 1996 compared to the
end of the fourth quarter of fiscal 1995.
Merchandise inventories of $103.2M at July 1, 1995, remained
relatively constant compared to $102.9M at the end of fiscal 1996.
Accounts payable increased to $122.4 million at the end of the
first quarter of fiscal 1996, from $104.4 million at April 1,
1995, due partly to a system conversion which delayed payments to
some vendors near the end of the first quarter.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $27.5 million for
the 13 weeks ended July 1, 1995, compared to $5.2 million during
the same period a year ago. During the first quarter of fiscal
1996, there was a $17.7 million increase in accounts payable and a
$9.6 million decrease in accounts receivable. For further
information, see the Consolidated Statement of Cash Flows for the
13 week periods ended July 1, 1995, and July 2, 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 July
1, 1995.
There was no debt outstanding during the first quarter of fiscal
1996 or fiscal 1995. During the first quarter of fiscal 1996,
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
None.
ITEM 4. Submission of Matters to a Vote of Security
Holders
None.
ITEM 6. Exhibits and Reports On Form 8-K
a. Exhibits
23 Report of Independent Public Accountants.
27 Financial Data Schedule.
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 3, 1995
Brian W. Bender
Vice President, Chief Financial
Officer (Principal Financial
and Accounting Officer)