SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period from March 30, 1997 to June 28, 1997
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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
EGGHEAD, INC.
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(Exact name of registrant as specified in its charter)
WASHINGTON 91-1296187
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
EAST 22705 MISSION
LIBERTY LAKE, WASHINGTON 99019
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(Address of principal executive offices) (Zip Code)
(509) 922-7031
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock:
Outstanding at
Class July 25, 1997
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Common Stock 17,614,342
$.01 par value shares
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EGGHEAD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
June 28, March 29,
1997 1997
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Current assets:
Cash and cash equivalents $74,176 $83,473
Accounts receivable, net of allowance for
doubtful accounts of $4,680 and $5,319, respectively 14,503 13,917
Receivable from Joint Venture 4,000 4,000
Merchandise inventories, net 42,894 49,087
Prepaid expenses and other current assets 3,703 4,116
Property held for sale 7,574 7,692
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Total current assets 146,850 162,285
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Property and equipment, net 11,524 12,018
Other assets 692 1,217
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$ 159,066 $ 175,520
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 36,479 $ 43,027
Accrued liabilities 10,738 12,996
Liabilities related to disposition of CGE division 6,219 7,754
Reserves and liabilities related to restructuring 8,953 11,258
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Total current liabilities 62,389 75,035
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Other long-term liabilities 288 438
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Total liabilities 62,677 75,473
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Commitments and contingencies - -
Shareholders' equity :
Common stock, $.01 par value:
50,000,000 shares authorized; 17,591,052 and
17,591,087 shares issued and outstanding, respectively 176 176
Additional paid-in capital 124,457 124,457
Retained earnings (deficit) (28,244) (24,586)
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Total shareholders' equity 96,389 100,047
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$ 159,066 $ 175,520
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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EGGHEAD, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
13 Weeks Ended
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(UNAUDITED)
June 28, June 29,
1997 1996
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Net sales $ 56,160 $ 78,646
Cost of sales, including certain buying, occupancy
and distribution costs 50,385 72,036
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Gross margin 5,775 6,610
Selling, general and administrative expense 9,482 17,934
Depreciation and amortization expense, net of
amounts included in cost of sales 957 1,747
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Operating loss (4,664) (13,071)
Other income, net 1,006 655
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Loss from continuing operations before
income taxes, effects of discontinued
operations and cumulative effect of change
in accounting principle (3,658) (12,416)
Income tax benefit - 4,842
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Net loss from continuing operations before
effects of discontinued operations and
cumulative effect of change in accounting
principle (3,658) (7,574)
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Discontinued operations:
Income (loss) from discontinued
operations, net of tax - (14,548)
Gain on disposal of discontinued operations,
net of tax - 22,286
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Income from discontinued operations - 7,738
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Net income before cumulative effect of change
in accounting principle (3,658) 164
Cumulative effect of change in accounting principle,
net of tax - (711)
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Net income (loss) $ (3,658) $ (547)
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Earnings (loss) per share:
Continuing operations $ (0.21) $ (0.43)
Discontinued operations:
Income (loss) from discontinued operations - (0.83)
Gain on disposal of discontinued operations - 1.27
Change in accounting principle - (0.04)
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Earnings (loss) per share $ (0.21) $ (0.03)
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Weighted average common shares outstanding 17,591 17,555
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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EGGHEAD, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
Common Stock Additional
------------ Paid-in Retained
Shares Amount Capital Earnings Total
--------------------- ---------- -------- --------
Balance, March 29, 1997 17,591 $ 176 $124,457 $(24,586) $100,047
Net loss (3,658) (3,658)
------ ------ -------- -------- --------
Balance, June 28, 1997 17,591 $ 176 $124,457 $(28,244) $ 96,389
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(DOLLARS IN THOUSANDS)
13 Weeks Ended
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(UNAUDITED)
June 28, June 29,
1997 1996
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Cash flows from operating activities:
Net loss $ (3,658) $ (547)
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Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 1,254 2,181
Deferred rent (150) (28)
Deferred income taxes - (753)
Cumulative effect of change in accounting principle - 1,163
(Gain) loss on disposition of assets (2) 2,686
(Gain) on sale of CGE, before taxes - (36,535)
Changes in assets and liabilities:
Accounts receivable, net (586) (5,941)
Merchandise inventories 6,193 1,364
Prepaid expenses and other current assets 413 (290)
Other assets 525 (7)
Accounts payable (6,548) (21,161)
Accrued liabilities (2,258) (10,248)
Income taxes payable - -
Liabilities related to disposition of CGE division (1,425) 70,474
Reserves and liabilities related to restructuring (2,562) -
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Total adjustments (5,271) 2,905
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Net cash (used) provided by operating activities (8,804) 2,358
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Cash flows from investing activities:
Additions to property and equipment (370) (2,058)
Proceeds from sale of equipment 2 16
Proceeds from sale of CGE - 45,000
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Net cash (used) provided by investing activities (368) 42,958
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Cash flows from financing activities:
Payments on capital lease obligations (125) (91)
Proceeds from stock issuances - 123
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Net cash (used) provided by financing activities (125) 32
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Effect of exchange rates on cash - -
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Net increase (decrease) in cash (9,297) 45,348
Cash and cash equivalents at beginning of period 83,473 49,590
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Cash and cash equivalents at end of period $ 74,176 $ 94,938
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SUPPLEMENTAL DISCLOSURES OF CASH PAID:
Interest $ - $ 13
Income taxes $ - $ 67
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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EGGHEAD, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. While these statements reflect the
adjustments which are, in the opinion of management, necessary to fairly
state the results of the interim periods, they do not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements. These adjustments are of a
normal and recurring nature. For further information, refer to the annual
financial statements and footnotes thereto, for the 52 week period ended
March 29, 1997, contained in the Company's Form 10-K, filed pursuant to the
Securities Exchange Act of 1934. The reader is further cautioned that
operating results for the 13 weeks ended June 28, 1997, are not necessarily
indicative of the results that may be expected for the full year.
The Company uses a 52/53 week fiscal year, ending on the Saturday nearest
March 31 of each year. Each fiscal quarter consists of 13 weeks.
NOTE 2 EARNINGS (LOSS) PER SHARE
Net earnings, (loss) per share amounts are computed using the weighted
average number of common shares and dilutive common equivalent shares
outstanding during each period using the treasury stock method. Common
equivalent shares result from the assumed exercise of stock options and
from the conversion of cash related to the employee stock purchase plan
into common shares based upon the terms of the plan. Common equivalent
shares had no effect on the computation of the loss per share amount for
the 13 week periods ended June 28, 1997, and June 29, 1996, because it was
anti-dilutive.
NOTE 3 DISCONTINUED OPERATIONS
Effective May 13, 1996, the Company sold its CGE division to Software
Spectrum, Inc. (SSI), a Texas Corporation for $45 million in cash pursuant
to the terms of an asset purchase agreement entered into on March 23, 1996.
The asset purchase agreement required Egghead to provide SSI with certain
support services for a period not to exceed 120 days on Egghead's behalf,
SSI's collection of Egghead's CGE related accounts receivable for a period
not to exceed 150 days and a lease to SSI for a minimum period of three
years of a portion of Egghead's Liberty Lake corporate facility.
Gain on disposition of the discontinued operation was $36.5 million ($22.3
million after tax). The sale price for the CGE division was $45 million,
which did not include the accounts receivable, which were collected during
fiscal 1997. The reported gain is net of fixed assets and lease write-offs
of $1.2 million, transaction, legal and accounting fees of $2.0 million,
transition period employment costs of $1.8 million and costs related to the
fulfillment of post-sale obligations as noted above.
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The net liabilities relating to discontinued operations have been
segregated on the consolidated balance sheet from their historic
classifications to separately identify them as being related to the
discontinued operations. Liabilities related to the disposition of the CGE
division at June 28, 1997 and March 29, 1997 related to CGE activities and
additional reserves deemed necessary to complete the disposition of
remaining CGE assets, including the settlement of any remaining claims.
Information related to the effects of the discontinued operation on the
consolidated statements of income are reflected in the income statement as
income(loss) from discontinued operations. Discontinued operations for the
quarter ended June 29, 1996, resulted in a loss, net of tax, of $14.5
million. This loss includes accounts receivable and inventory write-offs,
equipment lease buyouts and write-offs, warehouse closing costs, severance,
operating costs and other expenses.
NOTE 4 INCOME TAXES
Egghead determines its income tax accounts in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS No. 109). Deferred income
taxes result primarily from temporary differences in the recognition of
certain items for income tax and financial reporting purposes.
Given is recent losses, Egghead determined that its deferred tax assets no
longer meet the realization criteria of SFAS No. 109. Under SFAS 109, the
realization of the deferred tax assets depends on generating future taxable
income. Until Egghead has determined that all of its existing net
operation losses, which expire 15 years after origination, are realizable,
it will not record a tax charge or benefit for future operating results.
NOTE 5 LEASES
The Company leases retail stores and a distribution facility under
operating leases with remaining lives on most leases ranging from one to
five years. As of June 28, 1997 the future minimum rental payments under
these noncancelable operating leases for continuing retail stores, the
distribution facility and equipment were as follows (in thousands):
Fiscal Year Operating
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1998 $ 4,679
1999 4,142
2000 2,384
2001 1,537
2002 502
Thereafter 1,280
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Total minimum payments $ 14,524
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EGGHEAD, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6 RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This new standard required that 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. Egghead adopted this standard at the beginning of the first
quarter of fiscal 1997. The cumulative effect of the change in accounting
principle, which was recognized in the first quarter of fiscal 1997, was a
charge of $0.7 million, after tax, or $0.04 per share,. This charge
represents the writedown of Egghead's property held for sale in Kalispell,
Montana and the related goodwill. In connection with its adoption of SFAS
No. 121, Egghead also recorded a pretax charge of approximately $0.1
million related to retail assets, the carrying amounts of which were not
likely to be recovered through future cash flows.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128 (SFAS 128), "Earnings Per Share." SFAS 128 establishes
new standards for computing and presenting earnings per share and
supersedes Accounting Principles Board Opinion No. 15, "Earnings Per
Share." SFAS 128 will be adopted by Egghead in the third quarter of fiscal
1998. Management does not believe the adoption of this new standard would
have a material effect on earnings (loss) per share as currently reported.
NOTE 7 STOCK OPTION REPRICING
On April 4, 1997, the Compensation Committee of the Egghead Board approved
a plan pursuant to which employees other than executive officers were
offered an opportunity to exchange options having per share exercise prices
in excess of the then current fair market value per share of Egghead common
stock for new options having an exercise price of $4.375 per share of
Egghead stock. The Compensation Committee approved a similar option
repricing for certain executive officers on April 23, 1997. Recipients of
the repriced replacement options received credit for vesting under the
original options, but cannot exercise the new options for a one-year period
following the date of grant of the new options. The total number of
options repriced under the option repricing described above was 465,014.
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EGGHEAD, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 8 JOINT VENTURE
Effective November 22, 1996, Egghead invested $250,000 for a 50% interest
in a limited liability company joint venture (the JV). The other principal
member of the JV is Surplus Software, Inc. (dba Surplus Direct) ("Surplus
Direct"). The JV operates a retail outlet for surplus computer hardware,
software and related accessories and services. As of June 28, 1997,
Egghead had loaned the JV $4.0 million at a variable rate of 1/2% above the
prime interest rate as published by Seattle First National Bank.
Egghead accounts for this investment under the equity method and any income
or loss is reflected in other income. Sales to the JV are transacted based
on current market prices and are typically at or below the original cost to
Egghead. Egghead records any markdowns on merchandise sold to the JV as a
component of cost of sales.
NOTE 9 ACQUISITION
On May 1, 1997, Egghead announced a definitive agreement to acquire closely
held Surplus Direct for up to 5.6 million newly issued shares of Egghead
Common Stock in a transaction valued at $31.5 million based on Egghead's
share price as of April 30, 1997 (herein after referred to as "transaction"
or "merger"). The transaction includes repayment of approximately $5.6
million of Surplus Direct debt. Surplus Direct is engaged in the direct
marketing of previous version computer hardware and software and had sales
for the year ended March 31, 1997 of approximately $49 million. The
transaction is subject to shareholder approval and customary closing
conditions and is expected to be completed in August 1997.
In connection with the signing of the agreement, Egghead and Surplus Direct
entered into a Bridge Loan Agreement, dated April 30, 1997, pursuant to
which Egghead loaned Surplus Direct $2.0 million to finance its working
capital needs pending completion of the merger (the Bridge Loan). The
Bridge Loan bears interest at the prime rate (as quoted by Seattle-First
National Bank) plus 5.0% per annum and is due on December 31, 1997 in the
event that the merger does not occur. The Bridge Loan is subordinated to
up to $4.5 million of senior indebtedness (the Bank Debt) of Surplus Direct
under a credit facility with its principal bank (the Bank) and ranks pari
passu with $2.0 million of Surplus Direct debt under a subordinated note
(the SV Capital Note) payable to SV Capital Partners, L.P., which is a
substantial shareholder of Surplus Direct (SV Capital Partners). The
Bridge Loan and the SV Capital Note are secured by a second lien (behind
the Bank Debt) on the principal assets of Surplus Direct. Egghead has
agreed to repay the Bank Debt and the SV Capital Note at the closing of the
merger and the Bank and SV Capital Partners have agreed not to accelerate
their loans prior to the closing of the transaction, except under specified
circumstances.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
GENERAL
RESULTS OF OPERATIONS
OVERVIEW
Egghead, Inc. ("Egghead") is a national reseller of personal computer ("PC")
hardware, software, peripherals and accessories through 87 retail stores, its
1-800-EGGHEAD direct response unit and its Internet commerce site. Egghead
began operations in 1984 primarily as a software reseller, but in recent years
has expanded its product offerings to include a greater percentage of hardware
and other non-software products.
Egghead's profitability over its early operating history was mixed; however,
over its last five fiscal years, Egghead has reported increasing losses from
continuing operations. Egghead's losses over the last five fiscal years are
attributable primarily to an increased number of competitors selling PC products
through a greater variety of channels, severe price competition among PC product
resellers, a trend toward lower margins on computer and related software
products, Egghead's relatively high headquarters expenses and other factors.
Egghead has taken a number of steps intended to reduce or eliminate Egghead's
losses and to achieve break-even operating results on a cash-flow basis for
fiscal 1998. These steps include divesting a non-retail business segment,
focusing its retail operations in certain geographic markets, closing
unprofitable stores, upgrading existing stores, experimenting with new store
formats, developing electronic commerce tools through its ELEKOM subsidiary and
implementing a new Internet commerce site.
For example, in May 1996, Egghead sold its Corporare, Government and Education
("CGE") division to generate cash and to allow management to focus on retail
operations. The sale resulted in a net gain of $22.3 million, offset by a
related net loss from the CGE operations of $12.3 million. During the fourth
quarter of fiscal 1997, Egghead substantially restructured and reorganized its
operations by (i) closing 70 of its worst performing retail stores,
(ii) substantially reducing its headquarters personnel, (iii) closing its
Lancaster, Pennsylvania distribution center, and (iv) offering for sale certain
real estate assets, including its administrative headquarters building located
in Liberty Lake, Washington. Egghead intends to close an additional seven
poorly performing retail stores as part of the restructuring and reorganization.
The restructuring and reorganization concentrated Egghead's retail stores into
26 geographic markets and is expected to reduce headquarters and distribution
expenses for continuing operations to approximately $19.0 million on an
annualized basis from $34.0 million in fiscal 1997. Since fiscal 1996, Egghead
has also opened or remodeled eight 5,000 square foot stores, which are
approximately twice the size of its traditional stores, and increased its
hardware product offerings in these stores in an effort to improve sales.
Egghead currently operates 25 of these larger format stores. In November 1996,
Egghead opened one Egghead Computer Surplus store, operated as a joint venture
with Surplus Software, Inc. (dba Surplus Direct) ("Surplus Direct"), to
participate in a new retail channel for surplus PC products.
These initiatives have achieved mixed results. Although the fiscal 1997
restructuring and reorganization have reduced headquarters and distribution
expenses, further reductions in operating expenses may be necessary. Closure of
poorly performing stores should improve retail store operating performance and
inventory turn ratios for the remaining stores, but results from its new larger
stores have been mixed. Egghead will continue to evaluate the performance of
its larger format stores and expects that further refinement of its store format
will be required. There can be no assurance that Egghead will be able to
maintain the improved results it has achieved in its upgraded stores or
replicate them in other stores. Egghead's Internet commerce site, which was
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activated in February 1996, did not generate significant amounts of revenue and
there can be no assurance that this distribution method will generate
significant revenue in the future. Although ELEKOM is currently testing
prototypes of its products, Egghead's investment in ELEKOM has not resulted in
any revenue to date, and there can be no assurance that it will generate
revenues in future periods. Accordingly, it is not yet clear that Egghead has
developed a business strategy that will accomplish the goal of further reducing
and eliminating its losses, and there can be no assurance that it will be able
to do so.
On May 1, 1997, Egghead announced a definitive agreement (the "Merger
Agreement") to acquire closely held Surplus Direct for up to 5.6 million newly
issued shares of Egghead Common Stock (the "Merger"). The transaction includes
repayment of $5.6 million of Surplus Direct debt. Surplus Direct, a reseller of
previous version computer hardware and software, had sales for the year ended
May 31, 1997 of approximately $49 million. Surplus Direct has a relatively
limited operating history, and, although it reported break-even to profitable
results for the three fiscal years ended May 31, 1996, 1995 and 1994, it
reported a $2.3 million loss for the year ended May 31, 1997. Egghead believes
that the Merger will create synergies through the combination of Surplus
Direct's hardware purchasing expertise, access to the surplus PC products
channel, entrepreneurial management and Internet commerce development
capabilities with Egghead's greater software product procurement expertise and
seasoned retail management. Nevertheless, there can be no assurance that these
benefits will be achieved. The transaction is subject to approval by Egghead's
and Surplus Direct's shareholders and customary closing conditions and is
expected to be completed in August 1997.
In connection with the signing of the Merger Agreement, Egghead and Surplus
Direct entered into a Bridge Loan Agreement, dated April 30, 1997, pursuant
to which Egghead loaned Surplus Direct $2.0 million to finance its working
capital needs pending completion of the Merger (the "Bridge Loan"). The
Bridge Loan bears interest at the prime rate (as quoted by Seattle-First
National Bank) plus 5.0% per annum and is due on December 31, 1997 in the
event that the Merger does not occur. The Bridge Loan is subordinated to up
to $4.5 million of senior indebtedness (the "Bank Debt") of Surplus Direct
under a credit facility with its principal bank (the "Bank") and ranks pari
passu with $2.0 million of Surplus Direct debt under a subordinated note (the
"SV Capital Note") payable to SV Capital Partners, L.P., which is a
substantial shareholder of Surplus Direct ("SV Capital Partners"). The
Bridge Loan and the SV Capital Note are secured by a second lien (behind the
Bank Debt) on the principal assets of Surplus Direct. Egghead has agreed to
repay the Bank Debt and the SV Capital Note at the closing of the Merger, and
the Bank and SV Capital Partners have agreed not to accelerate their loans
prior to the closing of the Merger, except under specified circumstances.
Egghead uses a 52/53-week fiscal year, ending on the Saturday nearest March 31
of each year. Each fiscal quarter consists of 13 weeks. Information contained
in this report excludes, unless otherwise stated, any data relative to the
discontinued operations of the CGE division.
When used in this report and elsewhere by management, from time to time, the
words "believes,: "anticipates" and "expects" and similar expressions are
intended to identify forward-looking statements. Certain important factors
could cause actual result to differ materially from those expressed in the
forward-looking statements. These factors are detailed in Egghead's Annual
Report on From 10-K for the fiscal year ended march 29, 1997, and include, but
are not limited to, risks associated with the fluctuations in, and the
uncertainty of, future operating results, the intensely competitive nature of
the business of selling PC software, hardware and related products, Egghead's
dependence on certain supply sources, and Egghead's limited experience, and
risks associated, with Internet commerce. Readers are cautioned not to place
undue reliance on the forward-looking statements, which speak only as of the
date made. The Company undertakes no obligation to publicly release the results
of any revision to the forward-looking statements that may
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be made to reflect subsequent events or circumstances or to reflect the
occurrence of unanticipated events.
RESULTS OF OPERATIONS
Egghead reported a total net loss for the quarter ended June 28, 1997 of $3.7
million compared to a total net loss of $0.5 million for the quarter ended June
29, 1996. On a pretax basis, the loss from continuing operations for the first
quarters of fiscal 1998 and 1997 were $3.7 million and $12.4 million,
respectively.
The reduction in the pretax loss from continuing operations was primarily
attributable to a $6.9 million or 55% reduction in selling, general and
administrative (SG&A) expenses related to retail and headquarters operations; a
1.9 percentage point improvement in gross margin; a $0.8 million reduction in
depreciation and amortization and a $0.4 million increase in other income.
Separately these improvements were partially offset by the absence of a tax
benefit in the first quarter of fiscal 1998 as compared to a tax benefit of $4.8
million in the prior year first quarter. The after tax loss from continuing
operations was $3.7 million and $7.6 million for the first quarter of fiscal
1998 and 1997, respectively. Had the company recorded comparable tax benefits
for the quarters, the net loss from continuing operations after tax would have
been $2.2 million for the first quarter of fiscal 1998 as compared to $7.6
million for the first quarter of fiscal 1997. Until Egghead has determined
that all of its existing net operating loss carryforwards are realizable, it
will not record a tax charge or benefit for future operating results. For
comparative purposes, Egghead's results of operations are discussed below on
a pretax basis.
CONTINUING OPERATIONS
PRETAX LOSS. Loss from continuing operations includes the results of Egghead's
retail stores, 1-800EGGHEAD direct response unit, Internet commerce operations
and ELEKOM as well as selling, general, and administrative expenses related to
these operations. Net loss for the first quarter from continuing operations was
$3.7 million compared to the net loss of $12.4 million for the same period of
the previous year. The following table shows the relationship of certain items
relating to continuing operations included in Egghead's Consolidated Statements
of Operations expressed as a percentage of net sales:
PERCENTAGE OF NET SALES
First Quarter
13 Weeks Ended
--------------
June 28, June 29,
1997 1996
-------- --------
Net sales 100.0% 100.0%
Cost of sales, including certain buying,
occupancy, and distribution costs 89.7 91.6
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Gross margin 10.3 8.4
Selling, general, and administrative expense 16.9 22.8
Depreciation and amortization expense,
net of amounts included in cost of sales 1.7 2.2
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Operating loss (8.3) (16.6)
Other income 1.8 0.8
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Loss before income taxes (6.5) (15.8)
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NET SALES. Sales through Egghead's retail stores constitute the principal
component of Egghead's net sales. Although Egghead commenced sales of PC
products through the Internet in February 1996, Internet commerce sales did not
represent a significant percentage of net sales during the periods presented.
Net sales for the first quarter of fiscal 1998 were $56.2 million, a decrease of
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29% from the $78.6 million in revenue for the same period of the previous year.
This revenue reflects the previously announced closure of 70 stores in the
fourth quarter of fiscal 1997 which contributed to a reduction in the average
number of stores open during the first quarter of fiscal 1998 to 86 as compared
to 162 during the first quarter of fiscal 1997. Comparable store sales for the
first quarter of fiscal 1998 increased 1.3% from the same period last year.
Comparable store sales measure sales for stores that were open in both periods
being evaluated.
GROSS MARGIN. Gross Margin (net sales minus cost of sales, including certain
buying, occupancy, and distribution costs) was $5.8 million or, as a percentage
of net sales, 10.3% for the first quarter of fiscal 1998, compared to $6.6
million or 8.4% of net sales for the first quarter of fiscal 1997. The $0.8
million gross margin decrease was primarily due to a decline in initial margin
of $4.6 million partially offset by a decrease in retail occupancy expense of
$1.7 million, a decrease in distribution expense of $0.8 million, reduction in
shrink of $0.8 million and vendor recoveries of $0.5 million.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE. SG&A as a percentage of net sales
was 16.9% in the quarter ended June 28, 1997, compared to 22.8% for the quarter
ended June 29, 1996. SG&A, was $9.4 million, a decrease of $8.5 million from
$17.9 million for the same period of the previous fiscal year. The improvement
is primarily attributable to reductions of $3.8 million in retail operating
costs, $2.6 million in headquarters costs and $0.5 million in advertising
expense, partially offset by an increase of $0.6 million in development costs
incurred by ELEKOM. In addition, SG&A costs for the prior year first quarter
included $2.2 million of one time expenses primarily related to the headquarter
relocation from Issaquah, Washington to Liberty Lake, Washington.
DEPRECIATION AND AMORTIZATION EXPENSE, NET OF AMOUNTS INCLUDED IN COST OF SALES.
Depreciation and amortization was $1.0 million or 1.7% of net sales in the first
quarter of fiscal 1998, compared to $1.7 million or 2.2% of net sales for the
prior year comparable period The decrease in depreciation and amortization
expense is primarily attributable to the reduction in the average number of
stores open during the quarter. Assuming consummation of the Merge,
depreciation and amortization expense will increase in subsequent periods as a
result of the amortization of goodwill resulting from the Merger.
DISCONTINUED OPERATIONS
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 Egghead's business lines. The expenses
included in the results of the discontinued operations reflect only those
activities directly related to only the CGE division.
GAIN ON THE DISPOSITION OF THE DISCONTINUED OPERATION during the first quarter
of fiscal 1997, was $36.5 million ($22.3 million after tax). The sales price
for the CGE division was $45.0 million in cash, which did not include the
accounts receivable, which were collected during fiscal 1997. The reported gain
is net of fixed assets and lease write-offs of $1.2 million, transaction, legal,
and accounting fees of $2.0 million, transition period employment costs of $1.8
million and costs of $3.4 million related to the fulfillment of post-sale
obligations.
LOSS FROM THE DISCONTINUED OPERATION was $23.8 million ($14.5 million after tax)
for the first quarter of fiscal 1997. The major components of the loss were
inventory write-offs of $6.9 million, accounts receivable write-offs of $5.1
million, fixed asset dispositions and equipment lease buyouts of $3.2 million,
warehouse closing costs of $1.9 million and operating losses, severance and
other costs of $6.7 million.
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CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE was a charge of $0.7
million, after tax or $0.04 per share for the first quarter of fiscal 1997.
This charge represents the adoption of SFAS 121 and the related writedown of
Egghead's property held for sale in Kalispell, Montana property and the related
goodwill.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $9.3 million from $83.5 million at March 29,
1997, to $74.2 million at June 28, 1997. The decrease in the cash balance was
primarily due to the decrease in accrued liabilities, liabilities related to the
disposal of CGE division and reserves and liabilities related to restructuring.
Merchandise inventories, net, decreased $6.2 million from March 29, 1997,
reflecting the fourth quarter fiscal 1997 closure of 70 stores. In connection
with the decline in inventory, accounts payable decreased $6.5 million.
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Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Linda Fayne Levinson and Steven E. Lebow resigned from the Board of
Directors of the Company, effective June 30, 1997 and July 12, 1997,
respectively.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
10.1 Executive Employment Agreement among Egghead, Inc., DJ&J Software
Corporation and George P. Orban.
27 Financial Data Schedule.
b. Reports on Form 8-K
A Form 8-K was filed by the Company on May 5, 1997 to report, under Item 5
of Form 8-K, a definitive agreement to acquire closely held Surplus
Software, Inc. for up to 5.6 million newly issued shares of Egghead Common
Stock. The transaction is subject to approval by Egghead's and Surplus
Software, Inc.'s shareholders and customary closing conditions and is
expected to be completed in August 1997.
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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 August 8, 1997.
EGGHEAD, INC.
By /s/George P. Orban
-------------------------------------
George P. Orban
Chief Executive Officer, Chairman
of the Board
/s/Brian W. Bender
-------------------------------------
Brian W. Bender
Chief Accounting Officer, Chief
Financial Officer
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