SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
THIS DOCUMENT IS A COPY OF THE REGISTRANT'S FORM 10-K
FOR FISCAL YEAR ENDED MARCH 30, 1996 FILED ON JUNE 28, 1996
PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION.
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- - ---
EXCHANGE ACT OF 1934 For the fiscal year ended March 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- - ---
EXCHANGE ACT OF 1934 For the transition period from to
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Commission file number 0-16930
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EGGHEAD, INC.
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(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 No.)
EAST 22705 MISSION
LIBERTY LAKE, WASHINGTON 99019
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (509) 922-7031
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Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to
Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE
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(Title of Class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K
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To the best of Egghead, Inc.'s knowledge, the aggregate market value of the
voting stock held by non-affiliates of the registrant at April 29, 1996 was
$116,838,370.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS APRIL 29, 1996
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Common Stock, $.01 par value 17,548,606 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to the
Company's 1996 Annual Meeting of Shareholders are incorporated by reference into
Part III of this Form 10-K.
PAGE 1 OF [ ] PAGES
EXHIBIT INDEX APPEARS ON PAGE 42
EGGHEAD, INC.
TABLE OF CONTENTS
Page
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PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . 11
PART II
Item 5. Market for the Registrant's Common Equity and Related Share-
holder Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . 16
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. . . . . . . . . . . . . . . . . . . . . 40
PART III
Item 10. Directors and Executive Officers of the Registrant. . . . . . . . 41
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . 41
Item 12. Security Ownership of Certain Beneficial Owners and
Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Item 13. Certain Relationships and Related Transactions. . . . . . . . . . 41
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
2
PART I
ITEM 1. BUSINESS
GENERAL
Egghead, Inc. (Egghead or the Company), a reseller of personal computer
(PC) software, hardware, and related products, serves small businesses and
individuals through retail outlets and mail order. As of March 30, 1996,
the Company operated 164 retail stores, a direct response group, and Elekom
Corporation (ELEKOM), all of which are included in continuing operations.
The Company has also historically served corporate, governmental, and
educational customers through its corporate, government, and education
(CGE) division. On March 25, 1996, the Company announced the sale of the
CGE Division to Software Spectrum, Inc. (SSI), a Texas corporation, for
$45.0 million in cash which did not include the CGE division's receivables
and inventory that Egghead is liquidating in an orderly manner, all of
which are expected to result in total gross cash proceeds of approximately
$90.0 million. The sale, which was effective, May 13, 1996 included a
Fulfillment Agreement relating to the provision by Egghead to SSI of
certain support services for a period not to exceed 120 days and a Call
Center Lease detailing the lease for a period of three years of a portion
of Egghead's Spokane facility to SSI. (Exhibits on Form 8-K filed May 23).
Information contained in this filing excludes, unless otherwise stated, any
data relative to the discontinued operations of the CGE division.
Egghead, a Washington corporation, was incorporated in 1988 and is the
successor to a corporation which was incorporated in Washington in 1984.
Egghead is the parent company of DJ&J Software Corporation, Eggspert
Software, Ltd. (Eggspert), EH Direct, Inc., Egghead International, Inc.
(Egghead International) and ELEKOM. Eggspert and Egghead International
became inactive subsidiaries on May 13, 1996 following the sale of the CGE
division to SSI. Unless the context indicates otherwise, references to
"the Company" and "Egghead" include Egghead and its subsidiaries.
Operating results of Eggspert and Egghead International are included in
discontinued operations. See Note 8 of Notes to the Consolidated Financial
Statements.
Egghead's retail stores offer a broad in-store selection of products at
competitive prices, as well as special order capabilities for additional
products. The Company employs a knowledgeable sales force to assist
customers in selecting software, hardware, and related products. At fiscal
year end, the Company was operating 19 of its retail stores under a new
merchandising format which is approximately twice the size of original
stores and is arranged in a more user-friendly format. The performance of
these new stores has been mixed and management continues to evaluate
results while refining the format. While assessing the overall
contribution of the new merchandising format, management intends to open
six new stores. Pending such evaluation and refinement of the new format,
the Company does not intend to open more than the six new stores.
3
In December 1995, Egghead formed ELEKOM, a new subsidiary. ELEKOM was
formed to develop electronic commerce applications and services which link
customers and their suppliers. EleTrade, a product being developed by
ELEKOM, uses Lotus Notes and other notes networks to provide large
organizations an easy-to-use, cost-effective, secure and reliable product
ordering and order management system for non-production goods and services.
EleTrade allows companies to create customized electronic catalogs with
multi-media product information and customer-specific pricing. ELEKOM is
also developing additional enhancements which will automate the internal
requisition and approval process and which may create better
asset/inventory management and allow electronic software distribution.
ELEKOM, a development stage company, incurred selling, general and
administrative costs of approximately $1.1 million in fiscal 1996 and is
not expected to make significant sales or distribution of products in
fiscal year 1997.
MARKET OVERVIEW
The software industry is undergoing a noticeable degree of consolidation as
large software publishers acquire either other software publishers or
complete software product lines. Smaller software publishers are attempting
to concentrate on specialized products in limited markets. Software
resellers are also merging with or acquiring other software resellers.
Both businesses and individual consumers have shown an increasing
preference for integrated software packages which combine word processing,
spreadsheet, presentation, and database software. These integrated
packages are appealing to the consumer for several reasons. The purchase
cost of an integrated software package is lower than the individual
components purchased separately. In addition, integration reduces some of
the complexity and learning time involved in using software. Integrated
software packages also help standardize the computing environment for local
area networks, which are becoming more common in the business world. This
shift toward integration and standardization is viewed by many companies as
a way to significantly reduce the cost of supporting PC applications in
their organizations.
Prices of microprocessor chips continue to fall due to increased
competition among computer chip manufacturers, and the introduction of
newer, faster microprocessor chips. The decrease in microprocessor chip
prices has forced PC prices down, resulting in increased sales of PCs to
businesses and individual consumers. Sales of home computers, especially
those equipped for multimedia, have increased dramatically as consumers
begin to use PCs for a variety of uses such as telecommuting, home
productivity, entertainment, communications, and education.
Price performance improvements in microcomputer hardware and the
availability of CD-ROM technology have a dramatic impact on the retail
segment of the market. Sales of PC hardware accessories, such as hard
drives and modems, have increased as consumers enhance their PCs.
Multimedia capability has enabled home users to more effectively use
microcomputers for educational and entertainment purposes.
Access to electronic communication networks, such as the Internet and
commercially available on-line services, has become increasingly important
to both businesses and individual consumers. These electronic
communication networks have grown at a tremendous pace over the last year.
The networks are expected to provide substantial opportunities both now and
in the future for communications, commerce, and the exchange of data.
Software publishers have recognized the significance of this trend, and
have begun to integrate interfaces for these electronic communications
networks into their operating systems and workgroup software.
4
PRODUCTS AND SERVICES
Egghead resells PC software, hardware and related products, computer-
related magazines and books, tutorials, and selected peripheral devices and
accessories. Egghead has approximately 2,000 software products (including
both IBM-Registered Trademark--compatible and Apple-Registered Trademark-
Macintosh-Registered Trademark- software) and other products in its retail
stores, and thousands more available through 1-800-EGGHEAD's special order
service.
The Company offers a broad array of customer support services to assist
customers in the selection and administration of their software purchases,
including the following:
CUSTOM UPDATES AND EGGSTRAS (CUE-SM-) PROGRAM - a preferred customer
membership program providing discounts and other benefits in the
retail stores and direct response. CUE-SM- also provides the Company
with a valuable database of customers, their PC equipment profiles,
and a history of their software purchases.
COMPUTER SELECT - a CD-ROM-based system updated monthly with
information on most software and hardware products. Articles can be
obtained from all major personal computer publications and sent to
customers as requested.
INTERNET SITE - Egghead now maintains a site on the internet for
information, customer support, and product sales. Egghead's page can
be found at http://www.egghead.com. The site allows Egghead to reach
customers through a new medium as an expanding consumer base purchases
hardware and/or software that allows Internet access. The site uses
the new merchandising format to display SKUs in a manner similar to
the new format Egghead retail stores. Egghead plans to begin offering
electronic delivery of software in the second quarter of 1997.
1-800-EGGHEAD - Egghead maintains a direct response unit which
processes all telephone and mail orders. These orders are solicited
through catalog distribution. Catalogs have been redesigned to use
the merchandising format found in Egghead's new retail stores. 1-800-
EGGHEAD also provides customer service for the 164 stores, as well as
store referral to callers who would like to try a product. 1-800-
EGGHEAD also allows customers access to products not available through
retail outlets by offering a special order service.
MARKETING, ADVERTISING, AND PROMOTION
Egghead's marketing philosophy is to position itself as the reseller of
choice by providing the customer with the best value in terms of
competitive prices, selection, service, and convenience. In addition,
Egghead strives to create primary demand for the products it sells. The
Company's strategy to meet these objectives is to use aggressive
advertising and marketing efforts.
The Company's advertising campaign emphasizes a broad selection of
available merchandise and competitive prices. Advertising is also used to
promote major new product launches.
5
Egghead's primary advertising medium is direct mail, which is used to
target the highly identifiable segment of the population which owns and/or
uses computers. In addition to a database of more than 3 million of its
CUE customers, Egghead sends regular direct mail product promotions to
purchased lists of computer owners. The Company also uses both local and
national newspapers. Catalogs are designed to reflect the same layout as
customers will find in Egghead's new format retail stores. These catalogs
are updated and distributed throughout the year.
Egghead has entered into cooperative advertising and other promotional and
market development fund agreements with numerous manufacturers and
distributors. The funds obtained through these agreements assist the
Company in achieving high visibility in the marketplace.
CUSTOMERS
Egghead has a diverse customer base comprised primarily of individuals and
small businesses and uses specific marketing strategies to target different
customer segments.
RETAIL OPERATIONS
Egghead's retail stores are designed to provide a pleasant shopping
environment for walk-in customers, primarily individuals, who purchase PC
software and hardware products for their personal use and/or for use in a
small business. A knowledgeable sales force offers solutions-oriented
assistance to customers selecting software, hardware, and related products.
Egghead's retail stores offer customers competitive prices, a wide
selection of products, excellent service, and convenient store locations.
In addition to stocking approximately 2,000 SKUs in the retail stores,
Egghead customers have access to thousands more through 1-800-EGGHEAD's
special order service. The Company also stocks selected PC hardware
products, computer-related magazines and books, tutorials, and selected
peripheral devices and accessories. Egghead also provides installation
services in most of its stores.
During fiscal 1996, the Company introduced 19 stores based on a new
merchandising format which is approximately twice the size of older format
stores and is arranged in a more user-friendly environment. The
performance of these new stores has been mixed and management continues to
evaluate results while refining the format. While assessing the overall
contribution of the new merchandising format, management intends to open
six new stores. Pending such evaluation and refinement of the new format,
the Company does not intend to open more than the six new stores. The
balance of the Egghead stores contain approximately 2,500 square feet of
retail selling space. Most stores are located in strip shopping centers.
Store locations are researched and chosen to be in areas with high
distribution of personal computers, high population density, and high mean
income levels. Egghead provides in-store demonstration of software, with
most stores having personal computers available for use by customers in
evaluating software in the stores.
MERCHANDISING
Egghead purchases most of its products through a central merchandise buying
department. Inventory levels and product mix are based upon rates of sale,
seasonality, and store demographics and size. The Company also special
orders non-inventoried software products to satisfy customers' special
needs.
6
Egghead's decision to buy merchandise directly from manufacturers or
through distributors is determined on a transaction-by-transaction basis
depending on cost, availability, and potential product obsolescence. For
certain products, Egghead has sufficient sales volume to purchase directly
from manufacturers at volume discounts. The Company purchases software and
other products directly from more than 250 manufacturers. Egghead
minimizes the administrative overhead associated with buying products from
hundreds of smaller manufacturers by using a limited number of
distributors.
Egghead conducts business with major vendors including Microsoft and
Western Digital. In fiscal years 1996 and 1995, sales derived from
software programs supplied by Microsoft, Egghead's largest vendor,
represented approximately 18% and 15% of total net sales, respectively.
Egghead has certain exchange and return privileges with many of its
vendors, which typically include time, volume, and other limitations.
These exchange and return privileges allow the Company to reduce the risk
of loss resulting from obsolete and defective merchandise.
SUPPLY AND DEMAND FOR COMPUTER SOFTWARE, HARDWARE AND RELATED SUPPLIES
Sales by Egghead and other similar resellers are dependent upon the
continued purchase and expanded use of home and home office personal
computers, as well as the continued development of personal computer
software. A long-term decline in the purchase or use of home or home
office personal computers, or an interruption in the continued development
of personal computer software, would have a material adverse effect on the
Company's results of operations and financial position.
DISTRIBUTION
Most inventory that Egghead purchases is received in one of the Company's
distribution facilities before it is sent to a customer or to a retail
store. Some products are sent directly from vendors or distributors to
stores or customers. The Company's distribution facilities also process
most returned merchandise. The Company leases a 138,000 square foot
facility in Sacramento, California and a 125,000 square foot facility in
Lancaster, Pennsylvania.
The manner in which microcomputer software products are sold and
distributed is changing rapidly. Other methods of distribution, such as
electronic software distribution could have an impact on how the Company
distributes products in the future.
COMPETITION
The business of selling microcomputer software and hardware is intensely
competitive. The Company currently competes with other "direct sales"
organizations, other software retailers, computer and office superstores,
consumer electronic superstores, mass merchandisers, direct response
companies, computer manufacturers, and software publishers that sell
directly to end-users through traditional and electronic methods of
distribution.
Other software retail competitors include mall-based stores such as
Electronics Boutique, Babbages, and Software Etc.
7
Computer and office superstores, such as CompUSA, Computer City, Micro
Center, and Office Depot provide significant competition for Egghead's
retail stores in the markets in which they are located. These stores are
very price competitive. Computer superstores typically offer a wide
product selection, while office superstores have a more limited selection.
Large computer superstores, like Computer City, offer on-site installation
of software and hardware upgrades. Some superstores also offer training
and technical services.
Consumer electronic superstores, such as Best Buy, Future Shop, and Circuit
City, are a growing source of competition for the Company's retail stores
in the markets in which they operate.
Mass merchandisers, such as Wal-Mart, Incredible Universe, and Sears, and
warehouse clubs such as SAM's and Price/Costco, generally concentrate on
basic software products and carry relatively few titles.
Direct response businesses, such as MicroWarehouse, Programmers Paradise,
and PC Connection, are another important channel for software sales.
MicroWarehouse sells their products internationally, and has experienced
significant growth in international markets.
Many superstores and computer manufacturers sell PCs to consumers with
custom-installed hardware and pre-loaded software. This bundling of
products is very convenient for the consumer, and eliminates many of the
technical difficulties involved with the installation of software or
hardware.
Software publishers continue to directly market and sell to end-users. It
is also becoming more common for software publishers to distribute software
over electronic communications networks. Such networks provide the
convenience of allowing the customer to purchase software products directly
from their home or office. However, distribution directly by a publisher
does not provide the customer with a broad selection, personal assistance
from the sales force, or a full demonstration of the product prior to
purchase. There has also been a continuing trend of software publishers
offering new software products at deeply discounted introductory prices.
Because the microcomputer software market is very competitive, software
resellers typically have low gross margins and operating income as a
percentage of sales. Therefore, the Company's profitability is highly
dependent upon effective internal operating and cost control and the
ability to adapt quickly and efficiently to changes in industry trends.
EMPLOYEES
At March 30, 1996, Egghead had approximately 2,300 employees, (including
temporary employees) consisting of approximately 1,800 retail personnel
(including direct response), 200 distribution center employees, and 300
headquarters personnel. Employees are not represented by a collective
bargaining unit.
8
TRADEMARKS AND TRADENAMES
"EGGHEAD-Registered Trademark-", "EGGHEAD DISCOUNT SOFTWARE-Registered
Trademark-", "EGG CARTON-Registered Trademark-", "EGGSPERT-Registered
Trademark-", the "PROFESSOR EGGHEAD-Registered Trademark-" design, and
"EGGCESSORIES-Registered Trademark-", are registered in the United States
Patent and Trademark Office as service marks or trademarks of the Company.
The Company also does business under the trade names "Egghead Software",
"Egghead Discount Software", and "Mac's Place at Egghead." In addition,
the Company is the owner of a number of common law trademarks and service
marks, including "SOFTWARE ASSET MANAGEMENT-SM-", "SAM-SM-", "CUE-SM-",
"EGGHEAD-Registered Trademark- EXPRESS-TM-", "ELEKOM-TM-", "EleTrade-TM-",
and certain "EGG" combination words, "MAC'S PLACE-SM-," and "MAC'S PLACE AT
EGGHEAD-SM-." The Company believes the strength of its trademarks and
service marks benefits its business and intends to continue to protect and
promote its registered and common law trademarks and service marks.
ENVIRONMENTAL LAWS
Compliance with federal, state, and local laws enacted for protection of
the environment has had no material effect upon Egghead's capital
expenditures, earnings, or competitive position. The Company does not
anticipate any material adverse effects in the future based on the nature
of its operations and the current focus of such laws.
9
ITEM 2. PROPERTIES
At March 30, 1996, Egghead operated 164 retail stores in 30 states and the
District of Columbia. Most of the Company's stores are located in strip
shopping centers to provide customers convenient access. The Company has
not opened, nor does it intend to open, retail stores on a franchise basis.
As of March 30, 1996, the Company's retail stores were located as follows:
Number of
Retail
Location Outlets
-------- -------
Arizona 3
California 42
Colorado 4
Connecticut 2
District of Columbia 3
Florida 3
Georgia 1
Idaho 1
Illinois 15
Indiana 2
Kansas 1
Maryland 6
Massachusetts 8
Michigan 5
Minnesota 4
Missouri 2
New Jersey 7
New Mexico 1
New York 10
Nevada 2
North Carolina 4
Ohio 4
Oklahoma 1
Oregon 4
Pennsylvania 5
Tennessee 1
Texas 4
Utah 1
Virginia 7
Washington 9
Wisconsin 2
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Total 164
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The Company leases 163 of its retail stores under leases expiring from
fiscal 1997 to fiscal 2001. The Company expects those leases with terms
expiring during fiscal year 1997 could be renewed under substantially
similar terms. Substantially all of the Company's leases provide for a
minimum monthly rent that is either constant or adjusts periodically
throughout the lease term, including renewal periods.
10
The Company leases its distribution facilities in Lancaster, Pennsylvania
and Sacramento, California; and an additional storage facility in Kent,
Washington. The Company has a lease for a distribution facility in
Wilmington, Ohio. The distribution from this facility will be discontinued
following the CGE sale and management will attempt to sublease the
facility. The lease terms on the Company's distribution facilities expire
from fiscal 1998 to fiscal 2000, with renewal options available.
The Company owns its administrative headquarters building in Spokane,
Washington, its retail store in Issaquah, Washington and an office building
in Kalispell, Montana. Approximately 51% of the Spokane facility is being
leased to SSI pursuant to the Call Center Lease agreement entered into by
Egghead and SSI in connection with the sale of the CGE division. The lease
has a three year term with an option for renewal. The Company's direct
response operation, 1-800-EGGHEAD is located in the Spokane, Washington
building. The Company plans to sell or lease the building in Kalispell.
See Note 4 of Notes to Consolidated Financial Statements for additional
information about the Company's leases.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders in the fourth
quarter of fiscal 1996.
11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
MARKET AND MARKET PRICE FOR COMMON STOCK
Egghead's common stock, $0.01 par value, is traded over the counter under
the symbol EGGS and is quoted as part of the Nasdaq National Market System.
The closing market prices per share of the Company's common stock during
the fiscal years ended April 1, 1995, and March 30, 1996 are set forth
below. The prices reflect last sale prices as reported by Nasdaq National
Market System.
High Low
---- ---
Quarter ended July 2, 1994 $8.76 $6.81
Quarter ended October 1, 1994 7.63 6.19
Quarter ended December 31, 1994 11.81 7.00
Quarter ended April 1, 1995 11.75 8.50
Quarter ended July 1, 1995 $13.38 $8.88
Quarter ended September 30, 1995 13.75 7.88
Quarter ended December 30, 1995 8.75 5.88
Quarter ended March 30, 1996 10.69 5.13
HOLDERS
The approximate number of holders of record of Egghead's common stock as
recorded on the books of Egghead's Registrar and Transfer Agent as of April
29, 1996, was 1,227.
DIVIDENDS
The Company has never paid cash dividends on its capital stock and does not
plan to pay cash dividends in the foreseeable future.
12
ITEM 6. SELECTED FINANCIAL DATA
Statement of Operations Data (1):
Fiscal Year
-----------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(Dollars in thousands,
except per share data)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Net sales $ 403,841 $ 434,021 $ 373,510 $ 321,566 $ 288,385
Cost of sales, including certain
buying, occupancy, and
distribution costs 357,373 380,428 322,210 270,266 230,724
--------- --------- --------- --------- ---------
Gross margin 46,468 53,593 51,300 51,300 57,661
Selling, general, and
administrative expense 59,639 53,895 56,096 48,249 51,071
Depreciation and amortization
expense, net of amounts
included in cost of sales 7,449 7,363 7,603 6,089 4,545
Provision for restructuring costs - - - 858 16
Provision for shareholder litigation - - 1,200 - -
--------- --------- --------- --------- ---------
Operating income (loss) (20,620) (7,665) (13,599) (3,896) 2,029
Theft insurance recovery - 1,650 - - -
Other (expense) income:
Interest expense (77) (39) (82) (248) (342)
Interest income 2,232 761 353 290 515
Other, net 314 (104) (372) (531) (110)
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations before
income taxes (18,151) (5,397) (13,700) (4,385) 2,092
Income tax benefit/(provision) 7,030 2,106 5,343 1,711 (795)
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations (11,121) (3,291) (8,357) (2,674) 1,297
Income from discontinued
operations, net of tax 376 5,959 7,843 9,604 14,416
--------- --------- --------- --------- ---------
Net income (loss) $ (10,745) $ 2,668 $ (514) $ 6,930 $ 15,713
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings (loss) per share:
Continuing operations $ (0.64) $ (0.19) $ (0.49) $ (0.15) $ 0.07
Discontinued operations $ 0.02 $ 0.34 $ 0.46 $ 0.56 $ 0.83
--------- --------- --------- --------- ---------
Net income (loss) per share $ (0.62) $ 0.15 $ (0.03) $ 0.41 $ 0.90
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
(1) All amounts reflect the CGE activities as discontinued operations.
NOTE: Fiscal year 1993 had 53 weeks. All other fiscal years presented had
52 weeks.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
13
Fiscal Year
-----------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(Dollars in thousands)
OPERATING DATA:
Number of retail stores:
Open at end of period 164 169 189 205 182
Opened during period 10 - 3 33 5
Closed during period 15 20 19 10 10
Weighted average number open
during period (1) 166 178 197 195 182
BALANCE SHEET DATA:
Total assets 281,555 270,141 256,010 263,216 235,349
Bank loans - - - - -
Long-term debt - - - - -
Shareholders' equity 139,269 146,416 143,416 142,990 135,233
(1) Calculated by dividing the total number of store months open during
the period by 12.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
14
Selected financial data for each quarter of fiscal years 1996 and 1995 follows
(in millions, except per share data). Each quarter consists of 13 weeks
CONTINUING OPERATIONS
First Quarter Second Quarter Third Quarter Fourth Quarter
---------------- ---------------- ---------------- ----------------
1996 1995 1996 1995 1996 1995 1996 1995
------ ------ ------ ------ ------ ------ ------ ------
Net sales $ 84.7 $ 91.3 $100.6 $ 92.7 $121.7 $137.8 $96.8 $112.2
Gross margin 10.0 9.9 11.2 10.9 14.5 18.9 10.8 13.9
Selling, general, and
administrative expense 14.3 13.0 15.3 12.5 14.9 15.4 15.2 13.0
Operating income (loss) (6.1) (5.2) (5.9) (3.6) (2.2) 1.8 (6.4) (0.7)
Theft insurance recovery - - - - - 1.7 - -
Income (loss) from
continuing operations
before income taxes (5.4) (5.0) (5.0) (3.8) (1.8) 3.8 (6.0) (0.4)
Income (loss) from
continuing
operations (3.3) (3.1) (3.0) (2.3) (1.1) 2.3 (3.7) (0.2)
Earnings (loss) per share
from continuing
operations $(0.19) $(0.18) $(0.17) $(0.13) $(0.06) $0.13 $(0.21) $(0.01)
DISCONTINUED OPERATIONS
Financial data for the CGE division for each quarter follows. This division was
sold May 13, 1996 and is reported as discontinued operations in the consolidated
financial statements included in this filing.
First Quarter Second Quarter Third Quarter Fourth Quarter
---------------- ---------------- ---------------- ----------------
1996 1995 1996 1995 1996 1995 1996 1995
------ ------ ------ ------ ------ ------ ------ ------
Net sales $ 90.0 $ 102.6 $90.6 $101.6 $ 94.7 $116.4 $88.0 $107.9
Gross margin 9.3 12.3 8.6 11.5 8.8 12.9 10.1 11.8
Selling, general, and
administrative expense 8.2 8.7 8.6 9.0 8.0 9.8 8.6 9.3
Operating income (loss) 0.4 3.2 (0.6) 2.1 0.2 (0.1) 0.9 1.9
Income (loss) before income
taxes 0.2 3.2 (0.8) 2.2 0.3 2.6 0.9 1.9
Income (loss) from
discontinued operations,
net of tax 0.1 2.0 (0.5) 1.3 0.2 1.5 0.6 1.2
Earnings (loss) per share
from discontinued
operations 0.01 0.12 (0.03) 0.08 0.01 0.09 0.03 0.07
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Egghead, Inc. (Egghead or the Company), a reseller of personal computer
(PC) software, hardware, and related products, serves small businesses and
individuals through retail outlets and mail order. Egghead's retail stores
offer a broad in-store selection of products at competitive prices, as well
as special order capabilities for additional products. On March 30, 1996,
the Company operated 164 stores located throughout the United States. The
Company employs a knowledgeable sales force to assist customers in
selecting software, hardware, and related products. At the end of fiscal
1996 the Company was operating 19 of its retail stores under a new
merchandising format which is approximately twice the size of predecessor
stores and is arranged in a more user-friendly format. The performance of
these new stores has been mixed and management continues to evaluate
results while refining the format. While assessing the overall
contribution of the new merchandising format, management intends to open
six new stores. Pending such evaluation and refinement of the new format,
the Company does not intend to open more than six new stores.
Egghead continues to implement changes to restructure the Company. The
Company has historically served corporate, governmental and educational
customers through its corporate, government and education sales (CGE)
division. On March 25, 1996, the Company announced the sale of the CGE
division to Software Spectrum, Inc. (SSI), a Texas corporation, for $45.0
million in cash which did not include CGE division's receivables and
inventory that Egghead is liquidating in an orderly manner, all of which
are expected to result in total gross cash proceeds of approximately $90.0
million. The sale, which was effective May 13, 1996, included a
Fulfillment Agreement relating to the provision by Egghead to SSI of
certain support services for a period not to exceed 120 days and a Call
Center Lease detailing the lease for a period of three years of a portion
of Egghead's Spokane facility to SSI. Information contained in this filing
excludes, unless otherwise stated, any data relative to the discontinued
operations of the CGE division. The sales and gross margin performance of
the Company's CGE division had declined and selling, general and
administrative expenses as a percentage of sales had increased in the
months prior to the sale. The sale of the CGE division will allow
management to focus on the Company's retail business. See "--Results of
Operations--DISCONTINUED OPERATIONS."
In December 1995, Egghead formed Elekom Corporation (ELEKOM), a new
subsidiary. ELEKOM was formed to develop electronic commerce applications
and services which link customers and their suppliers. EleTrade, a product
being developed by ELEKOM, uses Lotus Notes and other notes networks to
give large organizations an easy-to-use, cost-effective, secure and
reliable product ordering and order management system for non-production
goods and services. EleTrade allows companies to create customized
electronic catalogs with multi-media product information and customer-
specific pricing. ELEKOM is also developing additional enhancements which
will automate the internal requisition and approval process and which may
create better asset/inventory management and allow electronic software
distribution. ELEKOM, a development stage company, incurred selling,
general and administrative costs of approximately $1.1 million in fiscal
1996 and is not expected to have significant sales or distribute products
in fiscal year 1997.
16
Over the past twelve months, Egghead consolidated into a new corporate
headquarters location in Spokane, Washington its direct response
operations, formerly in Kalispell, Montana, and its administrative
operations, previously located in Issaquah, Washington. The relocation,
severance and related costs of approximately $4.6 million are included in
the fiscal 1996 operating results. The Company implemented these changes
to improve customer service and reduce future operating costs.
The Company uses a 52/53 week fiscal year, ending on the Saturday nearest
March 31 of each year. Fiscal years 1996, 1995, and 1994 each had 52
weeks. All references herein to fiscal 1996, 1995, and 1994 relate to the
fiscal years ended March 30, 1996, April 1, 1995, and April 2, 1994
respectively.
CERTAIN RISK FACTORS
In addition to other information contained in this filing, the following
factors could affect the Company's actual results and could cause such
results to differ materially from those achieved in the past or expressed
in the Company's forward-looking statements. When used in this filing, the
words "expects," "believes," "anticipates," and similar expressions are
intended to identify forward-looking statements.
Competition - The personal computer software, hardware and other related
products retailing industry is highly competitive. Egghead competes with
other software specialty stores located in malls and in other locations, as
well as with computer and office superstores, consumer electronic
superstores, mass merchandisers, direct response businesses and software
publishers. In addition, there can be no assurance that other methods of
distribution will not emerge in the future which would result in increased
competition for Egghead. Increased competition may lead to reduced profit
margins on personal computer software, hardware and related products, which
could have an adverse effect on Egghead's results of operations. Certain
of Egghead's competitors have substantially greater financial and other
resources than Egghead, which may give them certain competitive advantages.
See "Business - Competition."
Seasonality and Quarterly Fluctuations - As is the case with many
retailers, a significant portion of Egghead's sales will be generated in
the fiscal quarter which includes the Christmas selling season. As a
result, the annual earnings of Egghead will be heavily dependent on the
results of that quarter. Egghead's quarterly results of operations may
also fluctuate as a result of the amount of sales contributed by new
stores, the timing of costs associated with the construction and opening of
these stores, the timing of the closing of any stores, the timing of
product releases and a variety of other factors.
Dependence on Suppliers - Egghead expects to purchase a significant number
of its products from Microsoft and Western Digital. During fiscal 1996 and
1995, sales derived from products supplied by Microsoft and Western Digital
accounted for 23.7% and 22.9%, respectively, of Egghead's total net sales.
The Company believes the loss of Microsoft or Western Digital as a supplier
could have a material adverse effect on Egghead's business and financial
results. In addition, Egghead's financial performance is in a large part
dependent on the terms it obtains from its suppliers. Such terms include
unit prices, unsold product return policies, advertising and market
development allowances, freight charges and payment terms. If Egghead is
unable to maintain favorable terms with its suppliers, its results of
operations could be materially adversely affected. See "Business -
Merchandising."
17
New Merchandising Store Format - Egghead's ability to open and operate new
stores profitably will depend upon the success of the recently opened new
merchandising format stores, the availability of suitable store locations,
the negotiation of acceptable lease terms, its financial resources and its
ability to control the operational aspects of its growth. While assessing
the overall contribution of the new merchandising format, management
intends to open six new stores. Pending such evaluation and refinement of
the new format, the Company does not intend to open more than the six new
stores. See "Business - Retail Operations."
Dependence on Purchase and Use of Personal Computers and Software - Sales
by Egghead of personal computer software, hardware and related products
will be dependent upon the continued purchase and expanded use of home and
home office personal computers, as well as the continued development of
personal computer software. A long-term decline in the purchase or use of
home or home office personal computers, or an interruption in the continued
development of personal computer software, would have a material adverse
effect on the Company's results of operations and financial position.
Dependence on Key Personnel - The success of Egghead will also be dependent
upon its ability to attract, motivate and retain key management personnel
involved in store operations, merchandising, marketing and administration.
The loss of services of key personnel could have a material adverse effect
on Egghead's business and financial results. As of June 28, 1996, the
Company did not have employment agreements with any officers or directors.
Development Stage Subsidiary - In December 1995, the Company formed ELEKOM,
a subsidiary, which is developing electronic commerce applications and
services which link customers and their suppliers. Selling, general and
administrative costs of approximately $1.1 million and $407,000 were
incurred by ELEKOM in fiscal 1996 and 1995, respectively. ELEKOM is
expected to continue to incur costs in development of these products and is
not expected to make significant sales or distribution of products in
fiscal 1997. There can be no assurance that ELEKOM will complete
development of these products, or if completed, that the products will have
a market or that another similar product will not be already be introduced
by a competitor. See "Business - General
Readers are cautioned not to place undue reliance on the Company's forward-
looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any revisions to
such forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
18
RESULTS OF OPERATIONS
OVERVIEW
Egghead reported a total net loss for continuing and discontinued
operations of $10.7 million for fiscal 1996 compared to net income of $2.7
million and a net loss of $514,000 for fiscal years 1995 and 1994,
respectively. The net loss during fiscal 1996 was due primarily to a
decrease in sales due to a reduction in the average number of stores in
full operation during the year, one-time costs of approximately $4.6
million associated with the relocation of the corporate headquarters, costs
of rolling out the new format retail stores, and investments of
approximately $1.1 million in ELEKOM. Fiscal year 1995 net income included
a one-time theft insurance recovery of $1.65 million, pre-tax, related to
inventory stolen from retail stores in prior years. Earnings (loss) per
share for the fiscal years 1996, 1995, and 1994 was $(0.62), $0.15, and
$(0.03), respectively.
CONTINUING OPERATIONS
Income (loss) from continuing operations includes the results of the
Company's retail division, direct response divisions, and ELEKOM as well as
selling, general, and administrative expenses related to these operations.
The following table shows the relationship of certain items relating to
continuing operations included in the Company's Consolidated Statements of
Operations expressed as a percentage of net sales:
1996 1995 1994
-------- -------- --------
Net sales 100.0% 100.0% 100.0%
Cost of sales, including certain buying,
occupancy and distribution costs 88.5 87.7 86.3
-------- -------- --------
Gross margin 11.5 12.3 13.7
Selling, general, and administrative expense 14.8 12.4 15.0
Depreciation and amortization expense, net
of amounts included in cost of sales 1.8 1.7 2.0
Provision for shareholder litigation - - 0.3
-------- -------- --------
Operating income (loss) (5.1) (1.8) (3.6)
Theft insurance recovery - 0.4 -
Other income/(expense), net 0.6 0.1 -
-------- -------- --------
Loss before income taxes (4.5) (1.3) (3.6)
Income tax benefit 1.7 0.5 1.4
-------- -------- --------
Loss from continuing operations (2.8)% (0.8)% (2.2)%
-------- -------- --------
-------- -------- --------
19
NET SALES in fiscal 1996 were $403.8 million, a decrease of $30.2 million
or 7% from fiscal 1995 net sales of $434.0 million. Fiscal 1995 sales
increased $60.5 million or 16% from fiscal 1994 sales of $373.5 million.
Fiscal 1996 sales decreases were affected by a reduction in the average
number of stores in full operation, which was 166 during fiscal 1996,
compared to 178 stores during the previous year. Comparable retail store
sales increased 0.1% in fiscal 1996 compared to fiscal 1995. Comparable
store sales for the third and fourth quarters of fiscal 1996 decreased 6.6%
and 12.5%, respectively, as compared to the fiscal 1995 third and fourth
quarters. Comparable store sales performance in the fiscal 1997 months of
April and May have continued this trend with decreases of 7.4% and 6.1%
over the same periods in fiscal 1996. In fiscal 1995, comparable retail
store sales increased 21% compared to fiscal 1994. Comparable store sales
measure sales for stores which were open in both periods being evaluated.
Because new format stores were opened during fiscal 1996, their sales will
not impact comparable store sales statistics until they have been active
during all periods evaluated.
During fiscal 1996, the Company opened 10 stores, remodeled 10 stores, and
closed 15 stores, operating a total of 164 stores at March 30, 1996. This
compares to the 169 stores open at fiscal year end 1995 and 189 stores open
at fiscal year end 1994. At the end of fiscal 1996, the Company was
operating 19 of its retail stores under a new merchandising format which is
approximately twice the size of older format stores and is arranged in a
more user-friendly format. The performance of these new stores has been
mixed and management continues to evaluate results while refining the
format. While assessing the overall contribution of the new merchandising
format, management intends to open six new stores. Pending such evaluation
and refinement of the new format, the Company does not intend to open more
than the six new stores.
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 fiscal 1996, compared to 12.3% and 13.7% in fiscal years 1995 and 1994,
respectively. During 1996, gross margins were negatively affected by the
Company's promotion of Microsoft Windows 95 and a clearance sale during the
last quarter of the fiscal year. Gross margin as a percentage of sales
continues to be affected by industry-wide pricing pressure related to both
competitors' pricing and vendors' pricing.
SELLING, GENERAL, AND ADMINISTRATIVE (SG&A) EXPENSE as a percentage of net
sales was 14.8% in fiscal 1996, compared to 12.4%, and 15.0% in fiscal
years 1995 and 1994, respectively. The increased expenses in fiscal 1996
include $4.6 million incurred in connection with the relocation of the
corporate offices to Spokane and $1.1 million related to development of
products by ELEKOM. SG&A expense as a percentage of net sales not
including relocation expense or ELEKOM would be 13.3% in fiscal 1996 and
12.3% in fiscal 1995. The improvement in the fiscal 1995 SG&A expense as a
percentage of sales compared to fiscal 1994 was due mainly to sales
increasing at a faster rate than expenses.
DEPRECIATION AND AMORTIZATION EXPENSE, NET OF AMOUNTS INCLUDED IN COST OF
SALES, of $7.4 million in fiscal 1996, compared to $7.4 million and $7.6
million in fiscal years 1995 and 1994, respectively has remained constant.
PROVISION FOR SHAREHOLDER LITIGATION of $1.2 million in fiscal 1994
represents a charge for the settlement and related attorneys' fees, net of
an insurance recovery, of a shareholders' lawsuit. See note 10 of Notes to
Consolidated Financial Statements.
20
THEFT INSURANCE RECOVERY of $1.65 million in fiscal 1995 represents
settlement of an insurance claim, net of expenses, for inventory stolen by
members of a multi-state shoplifting ring from numerous retail stores
during fiscal years 1991, 1992, and 1993.
DISCONTINUED OPERATIONS
Due to the subsequent sale of the CGE division, all results for the
operations of the CGE division are reported as a discontinued operation.
Certain general, administrative and distribution areas have traditionally
supported all of the Company's business lines. The expenses reflected in
the discontinued operations results reflect only those activities directly
related to the CGE business.
NET SALES for the discontinued operations of CGE declined $65.2 million, or
15.2% from $428.5 million to $363.3 million in fiscal 1996. Fiscal 1995
net sales were $23.7 million, or 5.9% greater than net sales of $404.8
million in fiscal 1994.
GROSS MARGIN for CGE (net sales minus cost of sales, including certain
buying, occupancy, and distribution costs) as a percentage of net sales was
10.1% in fiscal 1996, compared to 11.3% and 12.8% in fiscal years 1995 and
1994, respectively
SELLING, GENERAL, AND ADMINISTRATIVE (SG&A) EXPENSE as a percentage of net
sales was 9.2% in fiscal 1996, compared to 8.6%, and 8.3% in fiscal years
1995 and 1994, respectively.
DEPRECIATION AND AMORTIZATION EXPENSE, NET OF AMOUNTS INCLUDED IN COST OF
SALES, was $2.3 million in fiscal 1996, compared to $2.0 million and $1.1
million in fiscal years 1995 and 1994, respectively.
OPERATING INCOME, as a result of the foregoing factors, was $0.9 million in
fiscal 1996, compared to $7.1 million and $12.8 million in fiscal years
1995 and 1994, respectively
INCOME BEFORE INCOME TAXES, was $0.6 million in fiscal 1996 compared to
$9.8 million and $12.9 million in fiscal years 1995 and 1994, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $7.0 million from $42.6 million at the
end of fiscal 1995, to $49.6 million at the end of fiscal 1996. The
increase was due principally to a $13.8 million decrease in inventory, a
$14.9 million increase in accounts payable, all of which were partially
offset by $16.2 million of additions to property and equipment. In
addition, the Company had cash losses of $1.2 million in fiscal 1996,
compared to cash income of $14.3 million in fiscal 1995.
Net accounts receivable increased $3.6 million from $20.5 million at April
1, 1995, to $24.1 million at March 30, 1996. The increase is due primarily
to an increase of approximately $2.6 million in amounts due from vendors.
Merchandise inventories decreased $13.8 million, or 11%, from $98.5 million
at the end of fiscal 1995, to $84.7 million at the end of fiscal 1996. The
decrease is consistent with current sales declines and management's efforts
to reduce inventory levels.
21
Assets of discontinued operations include all of the current assets of CGE
as of March 30, 1996 and April 1, 1995, respectively. These amounts are
primarily trade accounts receivable. See Note 8 of Notes to the
Consolidated Financial Statements.
Current and non-current deferred income taxes totaling $9.1 million and
$8.4 million at March 30, 1996, and April 1, 1995, respectively, resulted
from taxes paid on temporary differences which caused taxable income to
exceed financial reporting income.
Net property and equipment increased $7.6 million, from $21.9 million at
the end of fiscal 1995, to $29.5 million at March 30, 1996. The increase
is principally due to the addition or remodel of 19 new format stores as
well as improvements to the corporate headquarters building in Spokane.
Accounts payable increased $14.9 million, from $104.4 million at April 1,
1995, to $119.3 million at March 30, 1996. The increase in accounts
payable is primarily attributable to merchandise purchases near the fiscal
year end and outstanding vendor payables to be offset by product returns.
During fiscal 1996, the Company financed its working capital requirements
and capital expenditures with cash provided by operations. Effective
December 8, 1995, the Company entered into a revolving loan agreement with
two banks providing for unsecured borrowings of up to $35 million through
April 30, 1996. Each bank provided a $17.5 million line of credit and one
bank served as agent for the agreement. The Company could elect interest
rates on the notes based on the participating banks' rates on certificates
of deposit, LIBOR, or prime rate. The agreement contained a number of
covenants, including a restriction on the payment of dividends and
compliance with certain financial ratios. The Company was not in
compliance with the net worth covenant at March 30, 1996. The Company had
no outstanding borrowings under the revolving loan agreement at March 30,
1996. The line was not renewed at expiration.
Capital expenditures in fiscal 1996 totaled approximately $16.2 million.
Capital expenditures included leasehold improvements, fixtures, computer
hardware, software and communications equipment, principally due to the
remodel or addition of 19 new format stores and the relocation of the
corporate headquarters. Capital expenditures in fiscal 1995 totaled
approximately $14.7 million. Capital expenditures included land and a
building in Spokane, Washington for the corporate headquarters. Other
expenditures included computer software and communications equipment.
Cash and cash equivalents at March 30, 1996 were $49.6 million. On May 13,
1996, the Company also received $45.0 million of gross cash proceeds from
the sale of CGE to SSI, which did not include the CGE division's
receivables and inventory that Egghead is liquidating in an orderly manner,
all of which are expected to result in total gross cash proceeds of
approximately $90.0 million. The Company expects these balances will be
adequate to meet future cash requirements for operations.
22
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. This new standard requires long-
lived assets and certain identifiable intangible assets be evaluated to
determine whether the carrying amount is recoverable based on estimated
future cash flows expected from the use of the assets and/or cash to be
received upon disposal of the assets. The Company will adopt this standard
in the first quarter of fiscal year 1997 and anticipates the effect of the
adjustment, primarily from goodwill associated with direct response to be a
charge of approximately $1.3 million before income taxes.
In October 1995, the FASB issued Statement No. 123, Accounting for Stock-
Based Compensation. This new standard requires entities to choose either a
fair valued based method or an intrinsic value based method of accounting
for all employee stock compensation plans. The Company currently uses and
plans to continue to use the intrinsic value based method which requires no
compensation cost to be recognized at the date of the stock compensation
grant if the option is granted at the current market price. The Company
will adopt this new standard during fiscal 1997 at which time additional
footnote disclosure will be required.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Egghead, Inc.:
We have audited the accompanying consolidated balance sheets of Egghead, Inc. (a
Washington corporation) and subsidiaries as of March 30, 1996 and April 1, 1995,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three fiscal years in the period ended March 30,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Egghead, Inc. and subsidiaries
as of March 30, 1996 and April 1, 1995, and the results of their operations
and their cash flows for each of the three fiscal years in the period ended
March 30, 1996, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Seattle, Washington,
May 29, 1996
24
EGGHEAD, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Consolidated Balance Sheets
(DOLLARS IN THOUSANDS)
ASSETS
March 30, April 1,
1996 1995
---------- ----------
Current assets:
Cash and cash equivalents $ 49,590 $ 42,592
Non-trade accounts receivables, net of allowance for
doubtful accounts of $2,098 and $2,169, respectively 24,079 20,494
Merchandise inventories, net 84,712 98,543
Prepaid expenses and other current assets 9,455 4,045
Current deferred income taxes (Note 4) 4,859 5,300
Discontinued operations - net current assets (Note 8) 71,796 70,059
---------- ----------
Total current assets 244,491 241,033
---------- ----------
Property and equipment, net (Note 2) 29,495 21,925
Non-current deferred income taxes (Note 4) 4,221 3,051
Other assets 1,621 2,172
Discontinued operations - net long-term assets (Note 8) 1,727 1,960
---------- ----------
$ 281,555 $ 270,141
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks (Note 3) $ - $ -
Accounts payable 119,341 104,425
Accrued liabilities 15,817 16,395
Income taxes payable (Note 4) - 325
Current portion of capital lease obligations 295 252
Discontinued operations - current liabilities (Note 8) 5,650 908
---------- ----------
Total current liabilities 141,103 122,305
---------- ----------
Capital lease obligations, less current portion (Note 7) 280 106
Deferred rent 903 1,314
---------- ----------
Total liabilities 142,286 123,725
---------- ----------
Commitments and contingencies (Note 7) - -
Shareholders' equity (Note 5):
Common stock, $.01 par value:
50,000,000 shares authorized; 17,546,548 and
17,166,031 shares issued and outstanding, respectively 176 172
Additional paid-in capital 124,104 120,572
Retained earnings 14,989 25,672
---------- ----------
Total shareholders' equity 139,269 146,416
---------- ----------
$281,555 $270,141
---------- ----------
---------- ----------
SEE NOTES TO CONSODOLIDATED FINANCIAL STATEMENTS.
25
EGGHEAD, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Consolidated Statements of Operations
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994
-------- -------- --------
Net sales $403,841 $434,021 $373,510
Cost of sales, including certain buying, occupancy
and distribution costs 357,373 380,428 322,210
-------- -------- --------
Gross margin 46,468 53,593 51,300
Selling, general and administrative expense 59,639 53,895 56,096
Depreciation and amortization expense, net of
amounts included in cost of sales 7,449 7,363 7,603
Provision for shareholder litigation (Note 10) - - 1,200
-------- -------- --------
Operating loss (20,620) (7,665) (13,599)
Theft insurance recovery (Note 9) - 1,650 -
Other (expense) income:
Interest expense (77) (39) (82)
Interest income 2,232 761 352
Other, net 314 (104) (371)
-------- -------- --------
Loss from continuing operations
before income taxes (18,151) (5,397) (13,700)
Income tax benefit (Note 4) 7,030 2,106 5,343
-------- -------- --------
Net loss from continuing operations (11,121) (3,291) (8,357)
Income from discontinued
operations, net of tax (Note 8) 376 5,959 7,843
-------- -------- --------
Net income (loss) $(10,745) $ 2,668 $ (514)
-------- -------- --------
-------- -------- --------
Earnings (loss) per share:
Continuing operations $ (0.64) $ (0.19) $ (0.49)
Discontinued operations 0.02 0.34 0.46
-------- -------- --------
Earnings (loss) per share $ (0.62) $ 0.15 $ (0.03)
-------- -------- --------
-------- -------- --------
Weighted average common shares outstanding 17,437 17,281 17,088
-------- -------- --------
-------- -------- --------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
EGGHEAD, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity
(AMOUNTS IN THOUSANDS)
Additional
Common Stock Paid-in Retained
Shares Amount Capital Earnings Total
--------- --------- --------- --------- ---------
Balance, April 3, 1993 16,983 $ 170 $ 119,242 $ 23,578 $ 142,990
Stock issued for cash, pursuant
to employee stock purchase plan 70 1 487 - 488
Tax benefit related to stock options - - 6 - 6
Stock granted as compensation 68 - 552 - 552
Translation adjustment - - - (106) (106)
Net loss - - - (514) (514)
--------- --------- --------- --------- ---------
Balance, April 2, 1994 17,121 171 120,287 22,958 143,416
Stock issued for cash, pursuant
to employee stock purchase plan 42 1 258 - 259
Stock issued for cash, pursuant
to stock option plan 3 - 27 - 27
Translation adjustment - - - 46 46
Net income - - - 2,668 2,668
--------- --------- --------- --------- ---------
Balance, April 1, 1995 17,166 172 120,572 25,672 146,416
Stock issued for cash, pursuant
to employee stock purchase plan 46 1 286 - 287
Stock issued for cash, pursuant
to stock option plan 335 3 3,246 - 3,249
Translation adjustment - - - 62 62
Net loss - - - (10,745) (10,745)
--------- --------- --------- --------- ---------
Balance, March 30, 1996 17,547 $ 176 $ 124,104 $ 14,989 $ 139,269
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
EGGHEAD, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
(DOLLARS IN THOUSANDS)
1996 1995 1994
-------- -------- --------
Cash flows from operating activities:
Net loss from operations $(10,745) $ 2,668 $ (514)
-------- -------- --------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 10,721 10,468 10,250
Deferred rent (411) (108) (85)
Deferred income taxes (729) 1,084 (1,322)
Stock issued as compensation - - 552
(Gain) loss on disposition of property
and equipment (55) 187 327
Changes in assets and liabilities:
Account receivable, net (3,585) 1,089 (7,935)
Merchandise inventories 13,831 13,558 19,948
Prepaid expenses & other current assets (5,410) (574) 15
Other assets 128 (245) (2,288)
Discontinued operations, net 3,005 (6,881) (4,233)
Accounts payable 14,916 13,401 (7,040)
Accrued liabilities (578) (2,359) 1,307
Income taxes payable (325) (169) (295)
-------- -------- --------
Total adjustments 31,508 29,451 9,201
-------- -------- --------
Net cash provided by operating activities 20,763 32,119 8,687
-------- -------- --------
Cash flows from investing activities:
Additions to property and equipment (16,174) (14,741) (9,483)
Proceeds from sale of equipment 86 103 117
Discontinued operations, net (788) (520) -
-------- -------- --------
Net cash used by investing activities (16,876) (15,158) (9,366)
-------- -------- --------
Cash flows from financing activities:
Proceeds from stock issuances 3,536 286 488
Payments made on capital lease obligations (487) (308) (493)
-------- -------- --------
Net cash provided (used) by
financing activities 3,049 (22) (5)
-------- -------- --------
Effect of exchange rates on cash 62 (24) (25)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents 6,998 16,915 (709)
Cash and cash equivalents at beginning of period 42,592 25,677 26,386
-------- -------- --------
Cash and cash equivalents at end of period $ 49,590 $ 42,592 $ 25,677
-------- -------- --------
-------- -------- --------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
EGGHEAD, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows (CONTINUED)
1996 1995 1994
-------- -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH PAID
DURING THE YEAR (IN THOUSANDS):
Interest $ 77 $ 39 $ 76
Income taxes $ 334 $ 668 $ 1,314
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations totaling $0.7 million and $0.2 million were recorded
in fiscal years 1996 and 1995 respectively, when the Company acquired new
equipment.
29
EGGHEAD, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
All references herein to fiscal 1996, 1995 and 1994 relate to the fiscal years
ended March 30, 1996, April 1, 1995, and April 2, 1994, respectively.
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Egghead, Inc. sells personal computer software, hardware and related
products through its wholly-owned subsidiaries, DJ&J Software Corporation
(DJ&J, d/b/a Egghead Software) and Eggspert Software, Ltd. (Eggspert, a
Canadian subsidiary), EH Direct, Inc. (EH Direct), Egghead International,
Inc. (Egghead International), and Elekom Corporation (Elekom). References
to "the Company" and "Egghead" include Egghead, Inc., its predecessors, and
its subsidiaries. Eggspert and Egghead International became inactive
subsidiaries May 13, 1996 following the sale of corporate, government, and
education (CGE) division to Software Spectrum, Inc. (SSI) SEE NOTE 8.
CONSOLIDATION
The consolidated financial statements include the accounts of Egghead, Inc.
and its wholly-owned subsidiaries, DJ&J, Eggspert, EH Direct, Egghead
International, and ELEKOM, and include all such adjustments and
reclassifications necessary to eliminate the effect of significant
intercompany accounts and transactions. Operating results for Eggspert and
Egghead International are included in discontinued operations. SEE NOTE
8.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less at the time of purchase to be cash equivalents. The
carrying amount of cash equivalents approximates fair value because of the
short-term maturity of those instruments.
ACCOUNTS RECEIVABLE AND REVENUE RECOGNITION
Company sales made on credit generally have terms of net 30 days. The
sales and corresponding trade receivables for inventoried product are
recorded upon merchandise shipment. The Company records provisions for
doubtful accounts and sales returns and allowances based upon historical
experience.
Certain advertising and promotional expenditures are reimbursable from
suppliers under cooperative advertising and other promotional and market
development fund arrangements. Amounts qualifying for reimbursement are
recorded as receivables from the suppliers and as a corresponding reduction
of net advertising expense in the period the expenditure occurs. Also
included in accounts receivable are credit card receivables and amounts due
from vendors for returned inventory and other programs. The Company
records a provision for uncollectible vendor receivables based upon
historical experience.
30
EGGHEAD, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MERCHANDISE INVENTORIES
Merchandise inventories are accounted for using the moving weighted average
cost method and are stated at the lower of cost or market. Egghead
maintains reserves for the obsolescence of merchandise inventory. These
reserves totaled approximately $6.7 million and $8.0 million at March 30,
1996 and April 1, 1995 respectively. Management has developed a plan to
dispose of this obsolete inventory and believes the reserve is adequate to
cover any losses on disposition. Inventories on the balance sheet are
shown net of this reserve.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation of equipment, furniture, and fixtures is provided using the
straight-line method over their estimated useful lives ranging from two to
seven years. Depreciation of buildings is provided using the straight-line
method over their estimated useful lives ranging from 20 to 30 years.
Amortization of leasehold improvements is provided using the straight-line
method over the lesser of the lease term or the assets' estimated useful
lives.
GOODWILL
Net assets of organizations acquired in purchase transactions are recorded
at fair value at date of acquisitions. Unidentified intangibles are
amortized straight line over the estimated life of the remaining long-term
assets acquired. Unidentified intangibles at March 30, 1996 and April 1,
1995 were $998,000 and $1.4 million, respectively, net of accumulated
amortization of $993,000 and $595,000, respectively.
ACCOUNTS PAYABLE
Outstanding checks included in accounts payable were $9.0 million and
$10.4 million at March 30, 1996 and April 1, 1995, respectively.
DEFERRED RENT
Certain store lease agreements provide for scheduled rent increases or for
rent payments to commence at a date later than the date of occupancy. In
these cases, the Company recognizes the aggregate rent expense on a
straight-line basis over the lease term beginning when the store opens.
INCOME TAXES
The Company determines its income tax accounts in accordance with Statement
of Financial Accounting Standards No. 109. Deferred income taxes result
primarily from temporary differences in the recognition of certain items
for income tax and financial reporting purposes.
EARNINGS (LOSS) PER SHARE
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 which would have a dilutive effect in
years where there are earnings. Common equivalent shares had no material
effect on the computation in fiscal years 1996, 1995, or 1994.
31
EGGHEAD, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
Balance sheet accounts of the Company's foreign operations are translated
into U.S. dollars at the exchange rate on the balance sheet date. Results
of operations are translated at the average exchange rate prevailing during
the fiscal year. The results of unrealized exchange rate fluctuations on
translating foreign currency assets and liabilities into U.S. dollars are
recorded as a component of retained earnings. Realized gains and losses
from foreign currency transactions are included in net income.
OTHER ACCOUNTING PRINCIPLES
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. This new standard requires long-
lived assets and certain identifiable intangible assets be evaluated to
determine whether the carrying amount is recoverable based on estimated
future cash flows expected from the use of the assets and cash to be
received upon disposal of the assets. The Company will adopt this standard
in the first quarter of fiscal year 1997 and anticipates the effect of the
adjustment, primarily from goodwill associated with direct response, to be
a charge of approximately $1.3 million before income taxes.
In October 1995, the FASB issued Statement No. 123, Accounting for Stock-
Based Compensation. This new standard requires entities to choose either a
fair valued based method or an intrinsic value based method of accounting
for all employee stock compensation plans. The Company currently uses and
plans to continue to use the intrinsic value based method which requires no
compensation cost to be recognized at the date of the stock compensation
grant if the option is granted at the current market price. The Company
will adopt this new standard during fiscal 1997 at which time additional
footnote disclosure will be required.
FISCAL YEARS
The Company uses a 52/53 week fiscal year, ending on the Saturday nearest
March 31 of each year. Fiscal quarters are such that the first three
quarters consist of 13 weeks and the fourth quarter consists of the
remaining 13/14 weeks. Fiscal years 1996, 1995 and 1994 each had 52
weeks.
32
EGGHEAD, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (CONTINUED)
NOTE 2 PROPERTY AND EQUIPMENT
The components of property and equipment at March 30, 1996 and April 1,
1995 were as follows (in thousands):
March 30, April 1,
1996 1995
--------- ---------
Land and buildings $ 8,547 $ 6,574
Equipment 38,814 33,559
Leasehold improvements 14,157 8,652
Furniture and fixtures 7,080 6,674
--------- ---------
68,598 55,459
Less accumulated depreciation and
amortization (39,103) (33,534)
--------- ---------
Property and equipment, net $ 29,495 $ 21,925
--------- ---------
--------- ---------
NOTE 3 NOTES PAYABLE TO BANKS
Effective December 8, 1995, the Company entered into a revolving loan
agreement with two banks providing for unsecured borrowings of up to $35
million through April 30, 1996. Each bank provided a $17.5 million line of
credit and one bank served as agent for the agreement. The Company could
elect interest rates on the notes based on the participating banks' rates
on certificates of deposit, LIBOR, or prime rate. The agreement contained
a number of covenants, including a restriction on the payment of dividends
and compliance with certain financial ratios. The Company was not in
compliance with net worth ratios as of March 30, 1996. The Company had no
outstanding borrowings under the revolving loan agreement at March 30,
1996. The line was not renewed at expiration.
A summary of borrowings under the lines of credit follows (in thousands):
Fiscal year
-----------
1996 1995 1994
--------- --------- ---------
Maximum amount outstanding $ 11,275 $ - $ 5,950
Average amount outstanding $ 7,400 $ - $ 350
Weighted average interest rate 8.0% -% 3.9%
33
EGGHEAD, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (CONTINUED)
NOTE 4 INCOME TAXES
The provision (benefit) for income taxes is comprised of the following (in
thousands):
Fiscal year
-----------
1996 1995 1994
--------- --------- ---------
Current:
Federal $ (4,383) $ (2,048) $ (3,545)
State (1,917) (896) (990)
--------- --------- ---------
(6,300) (2,944) (4,535)
--------- --------- ---------
Deferred:
Federal (404) 730 (704)
State (326) 108 (104)
--------- --------- ---------
(730) 838 (808)
--------- --------- ---------
Total $ (7,030) $ (2,106) $ (5,343)
--------- --------- ---------
--------- --------- ---------
Deferred income taxes result primarily from temporary differences in certain
items for income tax and financial reporting purposes. The tax effects of
temporary differences giving rise to the deferred tax assets are as follows:
March 30, April 1,
1996 1995
--------- ---------
Accounts receivable $ 857 $ 868
Merchandise inventories 2,651 2,919
Property and equipment 3,625 2,385
Other assets 256 155
Accrued liabilities 1,442 1,717
Deferred rent 249 307
--------- ---------
Total deferred tax assets $ 9,080 $ 8,351
--------- ---------
--------- ---------
The Company's income tax benefit differs from the amount computed by applying
the statutory federal tax rate to loss from continuing operations before taxes
as follows:
Fiscal year
-----------
1996 1995 1994
--------- --------- ---------
Statutory Federal tax rate (34.0)% (34.0)% (34.0)%
State taxes, net of Federal benefit (4.6) (4.0) (4.4)
Tax exempt interest income (1.8) (3.3) (0.7)
Other, net 1.7 2.3 0.1
--------- --------- ---------
(38.7)% (39.0)% (39.0)%
--------- --------- ---------
--------- --------- ---------
34
EGGHEAD, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (CONTINUED)
NOTE 5 STOCK OPTION AND STOCK PURCHASE PLANS
EMPLOYEE STOCK PURCHASE PLAN
The Egghead, Inc. 1989 Employee Stock Purchase Plan currently provides
options to acquire the Common Stock of the Company to substantially all
full-time and certain other employees at the lesser of 85% of the fair
market value of the Common Stock on August 1 of the first and second plan
years and July 1 thereafter, or 85% of the fair market value on the
following July 31 of the first plan year and June 30 of each plan year
thereafter. Under the plan, a maximum of 650,000 shares were reserved for
issuance. As of March 30, 1996, there were approximately 340,000 shares
available for future issuance.
THE 1993 STOCK OPTION PLAN
In September 1993, the Company's shareholders approved the 1993 Stock
Option Plan (the "1993 Plan"), under which 2,000,000 shares of the
Company's Common Stock were reserved for issuance. The 1993 Plan replaced
the 1986 Combined Incentive and Non-Qualified Stock Option Plan (the "1986
Combined Plan") under which 2,000,000 shares were originally reserved for
issuance. The number of shares reserved for issuance under the 1993 Plan
was increased by the shares reserved for issuance under the 1986 Combined
Plan that were not subject to outstanding stock options. Shares presently
subject to outstanding stock options under the 1986 Combined Plan, which
subsequently are canceled or will expire, will increase the number of
shares reserved for issuance under the 1993 Plan. No additional stock
options will be granted under the 1986 Combined Plan.
Options granted, exercised, and canceled under the above Plans are
summarized as follows:
Fiscal year
-----------
1996 1995 1994
--------- --------- ---------
Outstanding, beginning
of year 1,513,089 702,322 1,184,338
Options granted 621,100 1,140,900 250,000
Options exercised (55,395) (2,625) -
Options canceled (705,907) (327,508) (732,016)
--------- --------- ---------
Outstanding, end of year 1,372,887 1,513,089 702,322
--------- --------- ---------
Exercisable, end of year 359,277 293,139 237,497
--------- --------- ---------
--------- --------- ---------
Available for grant in
future years 1,860,873 1,776,066 2,589,458
--------- --------- ---------
--------- --------- ---------
Price of Options:
Granted during year $9.50 - $10.75 $6.19 - $10.25 $7.50 - $8.13
Exercised during year $6.19 - $12.75 $9.88 - $10.75 -
Canceled during year $6.19 - $17.00 $6.19 - $17.00 $8.37 - 17.00
35
EGGHEAD, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (CONTINUED)
NOTE 5 STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED)
THE NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
In September 1993, the Company's shareholders approved the Non-employee
Director Stock Option Plan, and in August 1995 the Company's shareholders
approved amendments thereto (as amended, the "Director Plan") under which
450,000 shares of the Company's Common Stock were reserved for issuance.
As of March 30, 1996, 315,000 shares were available for grant and 135,000
shares were subject to outstanding options which have been granted at
prices ranging from $7.25 to $13.75. As of March 30, 1996, options for
90,000 shares were vested.
THE EXECUTIVE PLAN
In February 1989, the Board of Directors approved four-year employment
agreements and stock option agreements for three executive officers who are
no longer with the Company, Stuart Sloan, Ronald Weinstein, and Matthew
Griffin, whereby the officers' compensation was based on equity incentives.
Each drew an annual salary of $1 per year during their term of employment.
Options to acquire up to 1,700,000 shares of common stock are authorized
under the Plan. As of March 30, 1996, 325,000 shares were available for
grant and 1,096,324 were subject to outstanding options which have been
granted to the above named executive officers of the Company at prices
ranging from $10.38 to $20.00. All outstanding options are vested and
expire in February 1999. As of March 30, 1996, 278,676 of the options had
been exercised at $10.38 per share.
NOTE 6 401(K) PLAN
The Company has a 401(k) retirement plan for the benefit of its employees.
After six months of full-time employment (more than 1,000 hours), an
employee is eligible to participate in the plan. Employee contributions
are matched by the Company at 50% of each employee's contribution up to 4%
of their compensation. The Company's contributions are fully vested upon
the completion of two years of service. The Company's contributions were
approximately $228,000, $446,000 and $571,000 in fiscal years 1996, 1995,
and 1994, respectively.
36
EGGHEAD, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (CONTINUED)
NOTE 7 COMMITMENTS AND CONTINGENCIES
Significant supplier
In fiscal 1996 and 1995, one supplier accounted for sales aggregating
approximately $71.6 million and $61.0 million, respectively. The loss of
this supplier could have a material adverse effect on the Company's
business and financial results and condition.
Leases
The Company leases retail stores and distribution facilities under
operating leases with remaining lives on most leases ranging from one to
five years. Some leases contain renewal options of one to five years which
the Company may exercise at the end of the initial lease term. The leases
generally require the Company to pay taxes, insurance, and certain common
area maintenance costs.
Aggregate rental expense, including common area maintenance charges, for
all operating leases for the fiscal years ended 1996, 1995, and 1994 was
approximately $15,990,829, $16,769,000 and $18,012,000, respectively. As
of March 30, 1996, future minimum rental payments under non-cancelable
operating and capital leases for retail stores and distribution facilities,
and equipment consisted of the following (in thousands):
Capital Operating
Fiscal Year leases leases
----------------------------------------------
1997 330 13,261
1998 306 9,251
1999 - 5,446
2000 - 2,404
2001 1,157
Thereafter - -
------ ------
Total minimum payments 636 $31,519
------
------
Less interest (61)
------
Present value of minimum
lease payments 575
Less current portion (295)
------
Capital lease obligations,
less current portion $280
------
------
37
EGGHEAD, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (CONTINUED)
NOTE 8 DISCONTINUED OPERATIONS AND SUBSEQUENT EVENTS
Effective May 13, 1996, the Company sold its CGE division to SSI, a Texas
corporation, for $45 million in cash pursuant to the terms of an asset
purchase agreement entered into on March 23, 1996. Egghead and SSI also
entered into a Fulfillment Agreement and a Call Center Lease relating to
the provision of certain support services by Egghead to SSI and to the
lease for a period of three years of a portion of Egghead's facility
previously used by the CGE division. The assets, liabilities, and results
of discontinued operations of the CGE division are presented separately in
the accompanying financial statements.
The income from discontinued operations for 1996, 1995, and 1994 is
comprised of the following (in thousands):
Fiscal year
-----------
1996 1995 1994
-------- -------- --------
Net sales $ 363.3 $ 428.5 $ 404.8
Costs and expenses 362.7 418.7 391.9
-------- -------- --------
Income before provision
for income taxes 0.6 9.8 12.9
Income tax expense 0.2 3.8 5.1
-------- -------- --------
Income from
discontinued operations $ 0.4 $ 6.0 $ 7.8
-------- -------- --------
-------- -------- --------
The net assets of discontinued operations for 1996 and 1995 consist of the
following (in thousands):
1996 1995
-------- --------
Accounts receivable - trade, net of allowance $ 61.7 $ 64.0
Merchandise inventory, net 9.3 4.4
Deferred taxes 0.8 1.7
-------- --------
Net current assets of discontinued operations $ 71.8 $ 70.1
-------- --------
-------- --------
NOTE 9 THEFT INSURANCE RECOVERY
Theft insurance recovery of $1.65 million in 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.
38
EGGHEAD, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (CONTINUED)
NOTE 10 SHAREHOLDER LITIGATION
On June 9, 1994, the Company announced that it had settled a shareholders'
lawsuit originally filed against the Company and two former officers who
were also directors. 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 fiscal 1995. This
settlement was approved by the United States District Court for the Western
District of Washington on January 12, 1995. Net of 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).
39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Part III, Item 10, is incorporated by reference
from Egghead, Inc.'s definitive Proxy Statement relating to Egghead, Inc.'s
1996 Annual Meeting of Shareholders, which will be filed pursuant to
Regulation 14A within 120 days of March 30, 1996.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Part III, Item 11, is incorporated by reference
from Egghead, Inc.'s definitive Proxy Statement relating to Egghead, Inc.'s
1996 Annual Meeting of Shareholders, which will be filed pursuant to
Regulation 14A within 120 days of March 30, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Part III, Item 12, is incorporated by reference
from Egghead, Inc.'s definitive Proxy Statement relating to Egghead, Inc.'s
1996 Annual Meeting of Shareholders, which will be filed pursuant to
Regulation 14A within 120 days of March 30, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Part III, Item 13, is incorporated by reference
from Egghead, Inc.'s definitive Proxy Statement relating to Egghead, Inc.'s
1996 Annual Meeting of Shareholders, which will be filed pursuant to
Regulation 14A within 120 days of March 30, 1996.
41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A) Documents filed as a part of this report:
1. Financial Statements
The Consolidated Financial Statements, Notes thereto, Financial
Statement Schedules (none), and Accountants' Report thereon are
included in Part II, Item 8, of this report.
2a. Exhibits
(i) 3.1 Restated Articles of Incorporation of the
Company
(vii) 3.2 Amended Bylaws of the Company
(x) 10.1 * Microsoft 1995/1996 Channel Agreement dated July
1, 1995, as amended through January 1, 1996.
10.2 (Intentionally left blank.)
10.3 (Intentionally left blank.)
10.4 (Intentionally left blank.)
(iv) 10.5 * Microsoft January - June, 1993 Reseller Rebate
and Marketing Fund Agreement.
(v) 10.6 * Microsoft 1993/1994 Channel Agreement dated July
1, 1993.
(v) 10.7 * Rebate and Marketing Fund Addendum to the
1993/1994 Microsoft Channel Agreement dated
November 1, 1993.
(v) 10.8 * Amendment to the Microsoft 1993/1994 Channel
Agreement (appointment as a Major Chain
Reseller) dated November 10, 1993.
(v) 10.9 * Reseller agreement with WordPerfect Corporation
dated April 1, 1994.
(vi) 10.10 * Microsoft 1994/1995 Channel Agreement dated July
1, 1994.
(vi) 10.11 * Addendum to the Microsoft 1994/1995 Channel
Agreement dated July 1, 1994.
(vii) 10.11a Amendment No. 1 to the Addendum to the Microsoft
1994/1995 Channel Agreement (Appointment as a
Large Account Reseller) dated July 1994.
(vi) 10.12 * Follow up letter dated August 2, 1994, from
Microsoft regarding Microsoft 1994/1995 Channel
Agreement dated July 1, 1994.
(vii) 10.13 * Addendum to the 1994/1995 Microsoft Channel
Agreement dated January 1995.
10.14 (Intentionally left blank.)
10.15 Lease, as amended, dated June 9, 1988, between
Sammamish Park Place I Limited Partnership as
Landlord and DJ&J Software Corporation as Tenant
regarding the Company's administrative
headquarters. (Previously filed with
registrant's Form 10-K for the fiscal year ended
April 1, 1989, as Exhibit 10.46.)
10.16 First Amendment to June 9, 1988 lease between
Sammamish Park Place I Limited Partnership and
DJ&J Software Corporation dated
October 4, 1989. (Previously filed with
registrant's Form 10-K for the fiscal year ended
March 31, 1990, as Exhibit 10.46a.)
42
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
10.17 Lease dated March 23, 1992 between
Sammamish Park Place II Limited Partnership
as Landlord and DJ&J Software Corporation
as Tenant regarding the Company's
administrative headquarters. (Previously
filed with registrant's Form 10-K for the
fiscal year ended March 28, 1992, as
Exhibit 10.47.)
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.
(Previously filed with registrant's Form
10-Q for the first quarter of fiscal 1995
ended July 2, 1994.)
(vi) 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.
(vi) 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.
(iii) 10.19 Lease dated March 23, 1989, between The CHY
Company as Landlord and DJ&J Software as
Tenant regarding the Company's Sacramento
distribution facility.
(iii) 10.20 First amendment to lease between The CHY
Company as Landlord and DJ&J Software, as
Tenant regarding the Company's Sacramento
distribution facility.
10.21 (Intentionally left blank.)
(i) 10.22 Lease Agreement dated January 7, 1988, with
Granite Properties, a limited partnership,
as Landlord and DJ&J Software Corporation,
as Tenant regarding Lancaster distribution
facility.
(i) 10.23 Master License Agreement dated February 12,
1988, with Staples, Inc. as Licensor and
DJ&J Software Corporation as Licensee,
regarding an exclusive right to sell items
in Staples' discount stores.
10.24 First Amendment to Master License Agreement
between Staples, Inc. and DJ&J Software
Corporation dated November 14, 1990.
(Previously filed with registrant's Form
10-K for the fiscal year ended March 30,
1991, as same Exhibit number.)
(viii) 10.25 Asset Purchase Agreement by and among
Software Spectrum, Inc., Egghead, Inc. and
DJ&J Software Corporation dated as of March
23, 1996 with Exhibits 4.11 and 4.12
thereto
10.26 (Intentionally left blank.)
10.27 Form of Indemnification Agreement between
the Company and its directors. (Previously
filed with registrant's Form 10-Q for the
third quarter of fiscal 1995 ended December
31, 1994.)
10.28 Form of Indemnification Agreement between
DJ&J Software Corporation and its
directors. (Previously filed with
registrant's Form 10-Q for the third
quarter of fiscal 1995 ended December 31,
1994.)
43
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
(vi) 10.29 Revolving Loan Agreement dated September
30, 1994, among Seattle-First National Bank
and U.S. Bank of Washington, National
Association, Egghead, Inc., and DJ&J
Software Corporation.
10.30 Revolving Loan Agreement dated September
30, 1993 among Seattle-First National Bank
and U.S. Bank of Washington, National
Association, Egghead, Inc., and DJ&J
Software Corporation. (Previously filed
with registrant's Form 10-Q dated October
16, 1993, as same exhibit number.)
10.31 (Intentionally left blank.)
10.32 (Intentionally left blank.)
10.33 ** Executive employment agreement between
Egghead, Inc. and Terence M. Strom dated
June 28, 1993. (Previously filed with
registrant's Form 10-Q dated October 16,
1993, as Exhibit 10.34.)
(ii) 10.34 ** Egghead, Inc. 1989 Executive Retention
Incentive Stock Option Plan.
(ii) 10.35 ** Egghead, Inc. 1989 Executive Retention
Incentive Stock Option Agreement between
Egghead, Inc. and Stuart M. Sloan dated
February 23, 1989.
(ii) 10.36 ** Egghead, Inc. 1989 Executive Retention Non-
Qualified Stock Option Agreement between
Egghead, Inc. and Stuart M. Sloan dated February
23, 1989.
(iii) 10.36a ** Amendment No. 1 to Egghead, Inc. 1989
Executive Retention Non-Qualified Stock
Option Agreement between Egghead, Inc. and
Stuart M. Sloan dated April 17, 1991.
10.37 (Intentionally left blank.)
10.38 (Intentionally left blank.)
(ii) 10.39 ** Egghead, Inc. 1989 Executive Retention
Incentive Stock Option Agreement between
Egghead, Inc. and Ronald A. Weinstein dated
February 23, 1989.
(iii) 10.39a ** Amendment No. 1 to Egghead, Inc. 1989
Executive Retention Incentive Stock Option
Agreement between Egghead, Inc. and Ronald
A. Weinstein dated April 17, 1991.
(ii) 10.40 ** Egghead, Inc. 1989 Executive Retention Non-
Qualified Stock Option Agreement between
Egghead, Inc. and Ronald A. Weinstein dated
February 23, 1989.
(iii) 10.40a ** Amendment No. 1 to Egghead, Inc. 1989
Executive Retention Non-Qualified Stock
Option Agreement between Egghead, Inc. and
Ronald A. Weinstein dated April 17, 1991.
10.41 (Intentionally left blank.)
10.42 (Intentionally left blank.)
(ii) 10.43 ** Egghead, Inc. 1989 Executive Retention
Incentive Stock Option Agreement between
Egghead, Inc. and Matthew J. Griffin dated
February 23, 1989.
44
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
(ii) 10.44 ** Egghead, Inc. 1989 Executive Retention Non-
Qualified Stock Option Agreement between
Egghead, Inc. and Matthew J. Griffin dated
February 23, 1989.
(iii) 10.44a ** Egghead, Inc. 1989 Executive Retention Non-
Qualified Stock Option Agreement between
Egghead, Inc., and Matthew J. Griffin dated
April 17, 1991.
10.45 (Intentionally left blank.)
10.46 (Intentionally left blank.)
10.47 (Intentionally left blank.)
10.48 ** Egghead, Inc. 1989 Employee Stock Purchase
plan. (Previously filed with registrant's
Form S-8 dated June 23, 1990, as Exhibit
10.)
10.49 ** Egghead, Inc. 1993 Stock Option Plan.
(Previously filed with registrant's Form
10-Q dated October 16, 1993, as Exhibit
10.31.)
(x) 10.50 ** Egghead, Inc. Restated Nonemployee Director
Stock Option Plan.
(x) 21.1 Schedule of subsidiaries.
(x) 23.1 Consent of Independent Public Accountants.
24.1 Power of Attorney (See Page 44).
(x) 27 Financial Data Schedule.
Footnotes
(i) Previously filed with registrant's Registration Statement on
Form S-1, Registration No. 33-21472, as same Exhibit number.
(ii) Previously filed with the registrant's Form 8-K dated
February 23, 1989, as Exhibit numbers 10.1 to 10.13.
(iii) Previously filed with registrant's Form 10-K for the fiscal
year ended March 28, 1992, as same Exhibit number.
(iv) Previously filed with registrant's Form 10-K for the fiscal
year ended April 3, 1993, as same Exhibit number.
(v) Previously filed with registrant's Form 10-K for the fiscal
year ended April 2, 1994, as same Exhibit number.
(vi) Previously filed with registrant's Form 10-Q for the second
quarter of fiscal 1995 ended October 1, 1994.
(vii) Previously filed with registrant's Form 10-K for the fiscal
year ended April 1, 1995, as same Exhibit number.
(viii) Previously filed with registrant's Form 8-K dated March 23,
1996, as Exhibit number 2.1.
(x) Filed herewith.
* 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 or compensatory plan or
arrangement.
2b. Form 8-K
Egghead, Inc., filed one report on Form 8-K, dated March 23,
1996, during the fourth quarter of its fiscal year ended
March 30, 1996, which reported on Items 5 and 7 of Form 8-K.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in
the city of Liberty Lake, State of Washington, on June 28, 1996.
EGGHEAD, INC.
By
------------------------------------
Terence M. Strom
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
Terence M. Strom and Edward S. Wozniak, or either of them, his
attorneys-in-fact, with the power of substitution, for him in any and
all capacities, to sign any amendments to this report, and to file the
same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorneys-in-fact, or their
substitute or substitutes, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on June __, 1996,
on behalf of the Registrant and in the capacities indicated.
Signature Title
--------- -----
------------------------------ President, Chief Executive Officer,
Terence M. Strom and Director (Principal
Executive Officer)
------------------------------ Vice President, Chief Financial
Edward S. Wozniak Officer (Principal Financial and
Accounting Officer)
------------------------------ Chairman of the Board, Director
George P. Orban
------------------------------ Director
Paul G. Allen
------------------------------ Director
Richard P. Cooley
------------------------------ Director
Steven E. Lebow
48
SIGNATURES (CONTINUED)
------------------------------ Director
Linda Fayne Levinson
------------------------------ Director
Samuel N. Stroum
49