SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period from July 2, 1995 to September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-16930
EGGHEAD, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1296187
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
22705 East Mission
Liberty Lake, Washington 99019
------------------------ -----
(Address of principal executive offices) (Zip Code)
(509) 922-7031
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock:
Outstanding at
Class October 28, 1995
----- ----------------
Common Stock 17,540,200
$.01 par value shares
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements and Supplementary Data
Refer to Exhibit 23 for the results of the limited review performed
by Arthur Andersen LLP, independent public accountants.
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
September 30, April 1,
1995 1995
------------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 55,909 $ 42,592
Accounts receivable, net of allowance for
doubtful accounts of $3,809 and $4,354,
respectively 87,815 84,514
Merchandise inventories <F2> 155,942 102,918
Prepaid expenses and other current assets 8,232 4,045
Current deferred income taxes <F3> 6,760 6,964
-------- --------
Total current assets 314,658 241,033
-------- --------
Property and equipment, net 25,917 23,365
Non-current deferred income taxes <F3> 2,918 3,051
Other assets 1,979 2,692
-------- --------
$345,472 $270,141
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks <F5> $ - $ -
Accounts payable 180,087 104,425
Accrued liabilities 20,089 17,303
Income taxes payable - 325
Current portion of capital lease
obligations 345 252
-------- --------
Total current liabilities 200,521 122,305
-------- --------
Capital lease obligations, less current
portion 424 106
Deferred rent 1,202 1,314
-------- --------
Total liabilities 202,147 123,725
Commitments and contingencies <F6>
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
(Dollars in thousands)
September 30, April 1,
1995 1995
------------- ---------
(unaudited)
Shareholders' equity:
Common stock, $.01 par value:
50,000,000 shares authorized;
17,493,452 and 17,166,031 shares
issued outstanding, respectively $ 175 $ 172
Additional paid-in capital 124,063 120,572
Retained earnings 19,087 25,672
-------- --------
Total shareholders' equity 143,325 146,416
-------- --------
$345,472 $270,141
======== ========
See Notes to Consolidated Financial Statements.
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
13 Weeks Ended 26 Weeks Ended
------------------------ ------------------------
(unaudited) (unaudited)
September 30, October 1, September 30, October 1,
1995 1994 1995 1994
------------- ---------- ------------- ----------
Net sales $191,218 $194,311 $365,852 $388,159
Cost of sales, including
certain buying, occupancy,
and distribution costs 171,450 171,961 326,848 343,617
-------- -------- -------- --------
Gross margin 19,768 22,350 39,004 44,542
Selling, general, and
administrative expense 23,841 21,494 46,356 43,251
Depreciation and amortization
expense, net of amounts
included in cost of sales 2,386 2,352 4,792 4,764
-------- -------- -------- --------
Operating loss (6,459) (1,496) (12,144) (3,473)
Other income (expense):
Interest income 894 153 1,591 338
Interest expense (16) (5) (37) (11)
Other, net (162) (259) (337) (261)
-------- -------- -------- --------
Loss before income taxes (5,743) (1,607) (10,927) (3,407)
Income tax benefit 2,229 626 4,251 1,328
-------- -------- -------- --------
Net loss $ (3,514) $ (981) $ (6,676) $ (2,079)
======== ======== ======== ========
Loss per share <F4> $ (0.20) $ (0.06) $ (0.39) $ (0.12)
======== ======== ======== ========
Weighted average common shares
and common equivalent
shares outstanding 17,490 17,163 17,331 17,143
======== ======== ======== ========
See Notes to Consolidated Financial Statements.
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
26 Weeks Ended
-------------------------
(unaudited)
September 30, October 1,
1995 1994
------------- ----------
Cash flows from operating activities:
Net loss $ (6,676) $ (2,079)
-------- --------
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities:
Depreciation and amortization 5,385 5,303
Deferred rent (111) (7)
Deferred income taxes 337 300
(Gain) loss on disposition of assets (35) 286
Changes in assets and liabilities:
Accounts receivable, net (2,916) 2,185
Merchandise inventories (53,036) (14,006)
Prepaid expenses and other current
assets (4,185) (843)
Other assets 502 316
Accounts payable 75,260 15,594
Accrued liabilities 2,791 (1,144)
Income taxes payable (325) (494)
-------- --------
Total adjustments 23,667 7,490
-------- --------
Net cash provided by operating
activities 16,991 5,411
-------- --------
Cash flows from investing activities:
Additions to property and equipment (7,039) (2,645)
Proceeds from sale of equipment 57 33
-------- --------
Net cash used by investing
activities (6,982) (2,612)
-------- --------
Cash flows from financing activities:
Payments on capital lease obligations (293) (146)
Proceeds from stock issuances 3,493 258
-------- --------
Net cash provided by financing
activities 3,200 112
-------- --------
Effect of exchange rates on cash 108 7
-------- --------
Net decrease in cash 13,317 2,918
Cash at beginning of period 42,592 25,677
-------- --------
Cash at end of period $ 55,909 $ 28,595
======== ========
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(Dollars in thousands)
26 Weeks Ended
-------------------------
(unaudited)
September 30, October 1,
1995 1994
------------- ----------
Supplemental disclosures of cash paid:
Interest $ 36 $ 11
Income taxes $ 334 $ 213
See Notes to Consolidated Financial Statements.
EGGHEAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 Basis of Presentation
The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for
interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. While these
statements reflect the adjustments which are, in the opinion of
management, necessary to fairly state the results of the interim
periods, they do not include all the information and footnotes
required by generally accepted accounting principles for complete
financial statements. These adjustments are of a normal and
recurring nature. For further information, refer to the annual
financial statements and footnotes thereto, for the 52 week period
ended April 1, 1995, contained in the Company's Form 10-K, filed
pursuant to the Securities Exchange Act of 1934. The reader is
further cautioned that operating results for the 13 and 26 week
periods ended September 30, 1995, are not necessarily indicative of
the results that may be expected for the full year.
The Company uses a 52/53 week fiscal year, ending on the Saturday
nearest March 31 of each year. Each fiscal quarter consists of 13
weeks.
Note 2 Merchandise Inventories
Merchandise inventories are accounted for using the moving weighted
average cost method and are stated at the lower of cost or market.
Note 3 Income Taxes
Deferred income taxes result from temporary differences in the
recognition of certain items for income tax and financial reporting
purposes.
Note 4 Earnings (Loss) Per Share
Net loss per share amounts are computed using the weighted average
number of common shares and dilutive common equivalent shares
outstanding during each period using the treasury stock method.
Common equivalent shares result from the assumed exercise of stock
options and from the conversion of cash related to the employee
stock purchase plan into common shares based upon the terms of the
plan. The effects of common equivalent shares were not included in
computation of the loss per share amount for the 13 and 26 week
periods ended September 30, 1995, and October 1, 1994, because they
were anti-dilutive.
EGGHEAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Note 5 Notes Payable to Banks
Effective October 1, 1994, the Company entered into a revolving
loan agreement with two banks providing for unsecured borrowings of
up to $50,000,000 through November 30, 1995. Each bank provides a
$25,000,000 line of credit and one bank serves as agent for the
agreement. The Company may elect interest rates on the notes based
on the participating banks' rates on overnight funds, or on the
agent bank's rate on certificates of deposit, LIBOR, or prime rate.
The agreement contains a number of covenants, including a restric-
tion on the payment of dividends and certain financial ratio
requirements. {The Company was in compliance with the financial
covenants as of September 30, 1995. Need debt compliance calico.
Need waiver from bank and copy of extension to send to Arthur
Anderson} There were no borrowings under these or previous lines of
credit during the first quarter of fiscal 1996.
Note 6 Leases
The Company leases all its retail stores, its corporate, government,
and education sales offices, it's distribution facilities in
Lancaster, Pennsylvania, Wilmington, Ohio and Sacramento,
California, and it's former headquarter facilities in Issaquah,
Washington, under operating leases with remaining terms ranging from
one to five years. As of September 30, 1995, the future minimum
rental payments under these operating leases were as follows (in
thousands):
Fiscal Year
----------------------
1996 (remainder) $ 6,473
1997 11,718
1998 8,209
1999 4,414
2000 1,412
Thereafter 52
-------
Total minimum payments $32,278
=======
ITEM 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
The Company uses a 52/53 week fiscal year, ending on the Saturday
nearest March 31 of each year. Each fiscal quarter consists of 13
weeks. All references herein to fiscal year 1996 and 1995 relate to
fiscal years ended March 30, 1996 and April 1, 1995, respectively.
RESULTS OF OPERATIONS
The following table shows the relationship of certain items included
in the Company's Consolidated Statements of Operations expressed as
a percentage of net sales:
Percentage of Net Sales
--------------------------------------
Second Quarter Year to Date
13 Weeks Ended 26 Weeks Ended
------------------ ------------------
Sept. 30, Oct. 1, Sept. 30, Oct. 1,
1995 1994 1995 1994
--------- ------- --------- -------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, including
certain buying,occupancy,
and distribution costs 89.7 88.5 89.3 88.5
----- ----- ----- -----
Gross margin 10.3 11.5 10.7 11.5
Selling, general, and
administrative expense 12.5 11.1 12.7 11.2
Depreciation and amortization
expense, net of amounts
included in cost of sales 1.2 1.2 1.3 1.2
----- ----- ----- -----
Operating loss (3.4) (0.8) (3.3) (0.9)
----- ----- ----- -----
Loss before income taxes (3.0) (0.8) (3.0) (0.9)
Income tax benefit 1.2 0.3 1.2 0.4
----- ----- ----- -----
Net loss (1.8)% (0.5)% (1.8)% (0.5)%
===== ===== ===== =====
Net sales of $191.2 million for the 13 week period ended
September 30, 1995, were $3.1 million, or 2% less than net sales of
$194.3 million for the 13 week period ended October 1, 1994.
Year-to-date sales of $365.9 million for the 26 week period ended
September 30, 1995, decreased $22.3 million, or 6%, from net sales
of $388.2 million for the comparable period ended October 1, 1994.
The corporate, government, and education (CGE) group generated 47%
of total net sales during the second quarter of fiscal 1996, with
53% generated by retail operations. This compares to 52% generated
by the CGE group and 48% generated by retail operations in the
second quarter of fiscal 1995.
Fiscal year 1996 year-to-date total net sales were comprised of
approximately 49% from the CGE group and 51% from retail operations.
This compares to 53% from the CGE group and 47% from retail opera-
tions for the year-to-date fiscal year 1995 total net sales.
Corporate, Government, and Education Sales
CGE sales of $90.6 million in the second quarter of fiscal 1996
decreased $11.0 million, or 11%, compared to $101.6 million in the
second quarter of fiscal 1995. Year-to-date CGE sales for the 26
weeks ended September 30, 1995, were $180.5 million, a $23.7 million
or a 5% decrease compared to $204.2 million for the same period a
year ago.
These decreases were due primarily to price reductions as prices for
many software products have continued to decline due to industry-
wide pricing pressure related to both competitors and vendors
pricing.
The Company serves as a designated reseller for volume licensing and
maintenance (VLAM) agreements between certain of its customers and
major publishers of microcomputer software. VLAM agreements
typically are used by large customers seeking to standardize desktop
software applications. For each of the 13 and 26 week periods ended
September 30, 1995, sales of software through VLAM agreements
represented approximately 30% of total CGE sales, compared to
approximately 15% for the same periods last year.
During the first quarter of fiscal year 1996, the Company consoli-
dated the operations of its CGE customer service centers in
Issaquah, Washington and Canada to one customer service center in
Spokane, Washington. Inside sales representatives and support
personnel work out of the customer service center. Outside sales
representatives continue to work throughout the U.S. and Canada.
Retail Sales
Retail sales of $100.6 million for the second quarter of fiscal year
1996 increased $7.9 million, or 8%, compared to $92.7 million in the
second quarter of fiscal year 1995, despite operating 16 fewer
stores at September 30, 1995 as compared to October 1, 1994.
Comparable retail store sales, which include the August 24 Microsoft
Windows 95 launch, increased 20% from last year's second quarter.
Sales of Microsoft Windows 95, along with related products which
run on Windows 95, contributed $19.5 million to second quarter
retail sales.
Retail sales for the 26 week periods ended September 30, 1995, and
October 1, 1994, were $185.3 million and $184.0 million, respec-
tively. Year-to-date comparable retail store sales increased 11%.
The Company introduced its new prototype store in Beaverton, Oregon
in the beginning of the second quarter of fiscal 1996. The new
store is twice the size of its predecessor and represents a new
merchandising approach for the Company. Sales for the Beaverton
store for the second quarter of fiscal 1996 increased 61% compared
to the second quarter last year.
Retail Locations
During the first half of fiscal year 1996, the Company opened two
stores, closed eight, relocated one, and operated a total of 163
stores at September 30, 1995. This compares to 179 at the end of
the second quarter a year ago.
Gross margin as a percentage of net sales was 10.3% in the second
quarter of fiscal year 1996, compared to 11.5% in the second quarter
last year. Gross margin as a percentage of sales was 10.7% for
year-to-date fiscal 1996, compared to 11.5% for year-to-date fiscal
1995. During fiscal 1996, gross margin as a percentage of sales has
continued to be affected by industry-wide pricing pressure related
to both competitors pricing and vendors pricing. The Company's
promotion of Microsoft Windows 95 negatively impacted gross margin
as a percentage of sales in the second quarter of fiscal 1996.
Selling, general, and administrative (SG&A) expense was 12.5% of
total net sales in the second quarter of fiscal year 1996, compared
to 11.1% in the second quarter of fiscal year 1995. The increase in
SG&A expense was primarily attributable to $2.7 million ($1.65
million or $0.09 per share, after tax) of relocation, severance, and
related costs associated with consolidating the Company s adminis-
trative operations formerly located in Issaquah, Washington, to its
customer service center in Spokane, Washington. These costs
increased SG&A expense as a percentage of sales by 1.4% in the
second quarter of fiscal 1996.
Year-to-date fiscal 1996 SG&A expense as a percentage of total net
sales was 12.7% compared to 11.2% for year-to-date fiscal year 1995.
In addition to the costs associated with consolidating the Company's
administrative operations as discussed above, during the first
quarter of fiscal 1996, the Company consolidated its direct response
operation, formerly located in Kalispell, Montana, and the remainder
of its CGE customer service operations and its credit operations,
formerly located in Issaquah, Washington, to its customer service
center in Spokane, Washington. The changes were made to improve
customer service and reduce costs. Total consolidation costs year-
to-date through the second quarter of fiscal 1996 totaled approxi-
mately $3.8 million ($2.3 million or $0.13 per share, after tax), or
1% of net sales.
The Company expects that these changes will result in net expense in
fiscal 1996, and net savings in future years due to lower labor
rates and occupancy costs.
FINANCIAL CONDITION
Cash and short-term investments were $55.9 million at September 30,
1995 compared to $42.6 million at April 1, 1995. The $13.3 million
increase was mainly due to a $75.3 million increase in accounts
payable, partially offset by a $53.0 million increase in merchandise
inventories as presented in the Consolidated Statement of Cash Flows
for the 26 week period ended September 30, 1995 on page 3.
Accounts receivable, net increased from $84.5 million at April 1,
1995 to $87.8 million at September 30, 1995. The increase resulted
mainly from increases in vendor rebates and marketing receivables
related to the Company's Microsoft Windows 95 promotion.
Merchandise inventories of $155.9 million at September 30, 1995,
increased $53.0 million, or 52%, compared to $102.9 million at
April 1, 1995, due primarily to the purchase of Microsoft Windows 95
and related products.
Accounts payable increased to $180.1 million at September 30, 1995,
from $104.4 million at April 1, 1995. The increase was due pri-
marily to the increased portion of CGE sales that came from VLAM
agreements during the second quarter this year compared to the
second quarter last year, as discussed on page 7. Increased sales
resulted in an increase in accounts payable without a corresponding
increase in merchandise inventory, as VLAM agreements are not
inventoried product. In addition, there was an increase in accounts
payable for inventoried product, due to the increase in merchandise
inventories, as well as, a system conversion and relocation of the
Company's administrative operations to Spokane, Washington, which
delayed processing of payments to several vendors.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $17.0 million for the
26 weeks ended September 30, 1995, compared to $5.4 million during
the same period a year ago. During the second quarter of fiscal
1996, there was a $75.3 million increase in accounts payable,
partially offset by a $53.0 million increase in merchandise
inventories and a $4.2 million increase in prepaid expenses. For
further information, see the Consolidated Statement of Cash Flows
for the 26 week periods ended September 30, 1995, and October 1,
1994, on page 3.
Effective October 1, 1994, the Company entered into a revolving loan
agreement with two banks providing for unsecured borrowings up to
$50 million through 1995. Each bank provides a $25 million line of
credit and one bank serves as agent for the agreement. The agree-
ment contains a number of covenants, including a restriction on the
payment of dividends and certain financial ratio requirements. {The
Company was in compliance with all financial covenants and had no
outstanding borrowings on September 30, 1995. Need waiver from bank
and extension agreement for AA}
There was no long-term debt outstanding during the first half of
fiscal 1996 or fiscal 1995. During the first half of fiscal 1996,
working capital requirements and capital expenditures were financed
from operations.
The Company expects that working capital requirements in the fore-
seeable future will be satisfied by cash flow from operations and
borrowings under these lines of credit. Depending on its rate of
growth, the Company may require additional financing, including bank
borrowings and further issuances of debt and/or equity securities.
Part II. OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company held its annual Meeting of Shareholders on August 31,
1995. Richard P. Cooley, Terence M. Strom and Samuel N. Stroum were
elected as Class I directors, whose terms expire in 1997. The
number of votes cast for election of the above Board of Directors
was as follows:
Nominee In Favor Withheld
----------------- ---------- ---------
Richard P. Cooley 14,671,705 143,196
Terence M. Strom 14,434,028 470,873
Samuel N. Stroum 14,782,542 122,359
The Amendment to the Egghead, Inc. Nonemployee Director Stock
Option Plan was approved by a vote of 12,463,882 shares in favor,
2,223,469 shares against and 217,550 shares abstaining. There were
no broker nonvotes on this matter.
ITEM 6. Exhibits and Reports On Form 8-K
a. Exhibits
23 Report of Independent Public Accountants.
27 Financial Data Schedule.
b. Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
EGGHEAD, INC.
(Registrant)
Date: November 13, 1995 /s/ Brian W. Bender
-----------------------------------
Brian W. Bender
Vice President, Chief Financial
Officer (Principal Financial and