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EXHIBIT 99.4
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[ARTHUR ANDERSEN LLP LETTERHEAD]
CORPORATE, GOVERNMENT AND EDUCATION
DIVISION OF EGGHEAD, INC.
STATEMENTS OF ASSETS AND LIABILITIES,
AS OF MARCH 30, 1996 AND APRIL 1, 1995
AND STATEMENTS OF OPERATIONS
FOR EACH OF THE TWO YEARS ENDED
MARCH 30, 1996
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[ARTHUR ANDERSEN LLP LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Egghead, Inc.:
We have audited the accompanying statement of assets and liabilities of the
Corporate, Government and Education Division (CGE Division) of Egghead, Inc. as
of March 30, 1996 and April 1, 1995, and the related statements of operations
for each of the two years ended March 30, 1996. These statements are the
responsibility of Egghead's management. Our responsibility is to express an
opinion on these statements based on our audit.
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 statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the statements referred to above present fairly, in all
material respects, the combined assets and liabilities of the CGE Division as
of March 30, 1996 and April 1, 1995 and the results of its operations for each
of the years then ended in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
Seattle, Washington,
May 29, 1996
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CORPORATE, GOVERNMENT AND EDUCATION DIVISION OF EGGHEAD, INC.
STATEMENTS OF ASSETS AND LIABILITIES
MARCH 30, 1996 AND APRIL 1, 1995
ASSETS
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March 30, April 1,
1996 1995
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CURRENT ASSETS:
Accounts receivable, net of allowance for doubtful
accounts of $1,376 and $2,185 $ 61,735 $ 64,019
Merchandise inventory 9,307 4,375
Current deferred income taxes 753 1,664
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Total current assets 71,795 70,058
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PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $1,623 and $601 1,687 1,440
OTHER ASSETS 40 520
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Total assets $ 73,522 $ 72,018
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LIABILITIES
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LIABILITIES:
Accounts payable $ 29,495 $ 27,451
Accrued liabilities 4,012 3,986
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Total liabilities $ 33,507 $ 31,437
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Excess of assets over liabilities $ 40,015 $ 40,581
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The accompanying notes are an integral part of these statements.
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CORPORATE, GOVERNMENT AND EDUCATION DIVISION OF EGGHEAD, INC.
STATEMENTS OF OPERATIONS
MARCH 30, 1996 AND APRIL 1, 1995
1996 1995
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NET SALES $ 363,338 $ 428,529
COST OF SALES, including certain buying, occupancy
and distribution costs 326,667 380,003
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GROSS MARGIN 36,671 48,526
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 38,848 42,001
DEPRECIATION AND AMORTIZATION EXPENSE, net of
amounts included in cost of sales 3,369 2,686
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OPERATING (LOSS) INCOME (5,546) 3,839
OTHER INCOME (EXPENSE), net (410) 11
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(LOSS) INCOME BEFORE (BENEFIT) CHARGE IN LIEU OF TAXES (5,956) 3,850
(BENEFIT) CHARGE IN LIEU OF TAXES (2,305) 1,502
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NET (LOSS) INCOME $ (3,651) $ 2,348
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The accompanying notes are an integral part of these statements.
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CORPORATE, GOVERNMENT AND EDUCATION DIVISION OF EGGHEAD, INC.
NOTES TO STATEMENTS
MARCH 30, 1996
1. BASIS OF PRESENTATION
The Corporate, Government and Education (CGE) Division of Egghead, Inc. sells
personal computer hardware, software and related products to customers
primarily in North America. The assets, liabilities, and results of operations
of the CGE Division have historically been included in the consolidated
financial statements of Egghead, Inc. (Egghead).
The CGE Division has shared the same distribution facilities as Egghead's other
operations. In addition, certain overhead functions, such as Buying and
Merchandising, Finance, Information Systems and Human Resources, have also been
shared with Egghead's other businesses.
The statements have been prepared from the accounting records of Egghead, Inc.
Certain estimates and assumptions have been used to identify those assets,
liabilities and results of operations of the CGE Division. These estimates and
assumptions are summarized below.
Fiscal Years
The CGE Division uses a 52/53 week fiscal year, ending on the Saturday nearest
March 31 of each year. Fiscal years 1996 and 1995 each had 52 weeks.
All references herein to fiscal 1996 and 1995 relate to the fiscal years ended
March 30, 1996 and April 1, 1995, respectively.
Cash and Financing Arrangements
No cash has been included in the accompanying CGE Division statements. All cash
and cash management needs of the CGE Division, including periodic borrowings
against Egghead's line of credit, have been handled by Egghead. Egghead has not
historically maintained separate cash records for the CGE Division, nor
allocated periodic borrowings or related interest charges or interest credits
to it. Consequently, no interest charges or credits are included in the
accompanying statements.
Accounts Receivable
Accounts receivable include the trade receivables from the CGE Division's
customers that result in the normal course of selling software, hardware and
software under license and maintenance agreements, less an allowance for
doubtful accounts. Certain receivables such as vendor rebates calculated on
total Egghead purchases have been excluded from these statements.
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Merchandise Inventory
Inventory includes those stock keeping units (SKUs) identified by management as
sold solely through the CGE Division and not through Egghead's retail or mail
order businesses.
Property and Equipment
Property and equipment include those assets specifically identifiable with the
CGE Division including furniture, fixtures, equipment and certain capitalized
information system costs.
Other Assets
Other assets include the book value of the investment in the Egghead Uchida
joint venture, accounted for using the equity method.
Accounts Payable
Accounts payable includes vendor payables and net deferred revenues
attributable to volume license and maintenance agreement sales. Trade accounts
payable related to the Division's inventory purchases are commingled with
Egghead's other businesses and have not been included in these statements.
Accrued Liabilities
Accrued liabilities primarily include payroll and related costs for those
employees directly involved in the Division. Payroll and related benefits for
employees of shared functions have not been included.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include costs specifically
identifiable to the CGE Division's business and an allocation of headquarters
and distribution costs. Management believes that the allocated overhead and
distribution costs fairly reflect the costs that would have been incurred had
the CGE Division operated as a separate entity in all material respects.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Accounts Receivable and Revenue Recognition
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. Revenue from the sale of software under maintenance
agreements is recognized ratably over the contractual period. Advanced billings
are recorded as deferred revenue. The CGE Division records provisions for
doubtful accounts and sales returns and allowances based upon historical
experience.
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Merchandise Inventory
Merchandise inventory is accounted for using the moving weighted average cost
method and are stated at the lower of cost or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation of equipment, furniture
and fixtures is provided using the straight-line method over their estimated
useful lives, ranging from two to seven years. Property and equipment at March
30, 1996 and April 1, 1995, consisted primarily of office furniture, office
equipment and capitalized costs related to the customer order entry system used
by the CGE Division.
3. INCOME TAXES:
The CGE Division is not a taxable entity and has historically been included in
the consolidated tax return of Egghead. Accordingly, the statement of revenues
and expenses reflects a "charge in lieu of taxes" equivalent to the effective
rate for Egghead during the periods presented. Management believes that the
effective tax rates of 38.7% and 39%, used in fiscal 1996 and 1995, fairly
reflect the rate that would have resulted had the CGE Division operated as a
separate taxable entity.
The statements of assets and liabilities includes deferred taxes which result
from temporary differences in recognition for tax and financial reporting
purposes of those assets and liabilities included in the accompanying
statements.
4. 401(k) PLAN:
Employees of the division participate in a 401(k) retirement plan sponsored by
Egghead. 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 Egghead at 50% of each employee's contribution up to 4% of their
compensation. Egghead's contributions are fully vested upon the completion of
two years of service.
5. CONCENTRATION OF CREDIT RISK:
During fiscal years 1996 and 1995, the CGE Division granted credit to
substantially all of its corporate, government and education customers on an
unsecured basis. Approximately 15% and 22% of the CGE Division's trade accounts
receivable were from customers in various segments of the United States
government at March 30, 1996, and April 1, 1995, respectively. The financial
positions of these and other customers were considered in determining the
allowance for doubtful accounts.
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6. SUBSEQUENT EVENT
Effective May 13, 1996, Egghead sold its CGE Division to Software Spectrum,
Inc., a Texas corporation, for $45 million in cash pursuant to the terms of an
asset purchase agreement entered into on March 23, 1996. Software Spectrum has
the option to purchase additional inventory and accounts receivable at amounts
to be negotiated at designated dates in the future. The sale of the CGE
Division will be recorded in Egghead's financial statements in the first
quarter of fiscal 1997.