================================================================================ SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. ) Filed by the Registrant [X] Filed by a Party other than the Registrant [_] Check the appropriate box: [_] Preliminary Proxy Statement [_] Confidential, for Use of the Commission only (as permitted by Rule 14a-6(e)(2)) [X] Definitive Proxy Statement [_] Definitive Additional Materials [_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12 Egghead.com, Inc. - -------------------------------------------------------------------------------- (Name of Registrant as Specified In Its Charter) - -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [X] No fee required [_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. (1) Title of each class of securities to which transaction applies: ------------------------------------------------------------------------- (2) Aggregate number of securities to which transaction applies: ------------------------------------------------------------------------- (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): ------------------------------------------------------------------------- (4) Proposed maximum aggregate value of transaction: ------------------------------------------------------------------------- (5) Total fee paid: ------------------------------------------------------------------------- [_] Fee paid previously with preliminary materials. [_] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: ------------------------------------------------------------------------- (2) Form, Schedule or Registration Statement No.: ------------------------------------------------------------------------- (3) Filing Party: ------------------------------------------------------------------------- (4) Date Filed: ------------------------------------------------------------------------- Notes: [LOGO OF EGGHEAD.COM, INC.] 22705 EAST MISSION AVE. LIBERTY LAKE, WASHINGTON 99019 ---------------- NOTICE OF ANNUAL MEETING OF SHAREHOLDERS WEDNESDAY, SEPTEMBER 2, 1998 ---------------- Notice is hereby given that the Annual Meeting of Shareholders of EGGHEAD.COM, INC. (the "Company") will be held at 10:00 a.m. local time on Wednesday, September 2, 1998, in the Columbian A Room of the Sheraton Portland Airport Hotel, 8235 N.E. Airport Way, Portland, Oregon. Free parking is available at the facility. In addition to hearing a report about the Company and having an opportunity to ask questions of general interest to shareholders, the meeting is called for the following purposes: 1. To elect three Class I directors to the Company's Board of Directors to serve for three year terms; and 2. To transact such other business as may properly come before the meeting. Shareholders of record on the books of the Company at the close of business on July 7, 1998, will be entitled to notice of and to vote at the meeting. By Order of the Board of Directors /s/ Brian W. Bender Brian W. Bender Secretary Liberty Lake, Washington July 30, 1998 YOUR VOTE IS IMPORTANT ---------------- Whether or not you plan to attend the meeting in person, please sign, date, mark, and return the accompanying proxy in the enclosed stamped and pre- addressed envelope. The giving of the proxy will not affect your right to vote at the meeting if the proxy is revoked in the manner described in the accompanying proxy statement. EGGHEAD.COM, INC. 22705 EAST MISSION AVE. LIBERTY LAKE, WASHINGTON 99019 ---------------- PROXY STATEMENT ---------------- INFORMATION REGARDING PROXIES This proxy statement is furnished in connection with the solicitation of proxies by the Board of Directors of Egghead.com, Inc. (the "Company") for use at the 1998 Annual Meeting of Shareholders of the Company (the "1998 Annual Meeting"), and any adjournment thereof, to be held on Wednesday, September 2, 1998, at 10:00 a.m. local time, in the Columbian A Room at the Sheraton Portland Airport Hotel, 8235 N.E. Airport Way, Portland, Oregon. Only shareholders of record on the books of the Company at the close of business on July 7, 1998 (the "Record Date"), will be entitled to notice of and to vote at the 1998 Annual Meeting. It is anticipated that these proxy solicitation materials and a copy of the Company's 1998 Annual Report to Shareholders will be sent to shareholders of record on or about July 30, 1998. Any shareholder giving a proxy has the power to revoke it at any time before it is exercised by (i) delivering written notice of revocation or another proxy dated as of a later date to Brian W. Bender, Secretary of the Company, or (ii) voting in person at the 1998 Annual Meeting. VOTING SECURITIES The only voting securities of the Company are shares of its common stock, $0.01 par value per share (the "Common Stock"), each of which is entitled to one vote. At the Record Date, there were issued and outstanding 23,667,589 shares of Common Stock. The presence in person or by proxy of holders of record of a majority of the outstanding shares of Common Stock is required to constitute a quorum for the transaction of business at the 1998 Annual Meeting. Under Washington law and the Company's Articles of Incorporation, if a quorum is present, the nominees for director at the 1998 Annual Meeting who receive the greatest number of votes cast for the election of directors will be elected directors at the 1998 Annual Meeting. Shareholders do not have the right to cumulate their votes in the election of directors. In the election of directors, abstentions and broker nonvotes will have the practical effect of a vote withheld from that nominee. ELECTION OF DIRECTORS The Company's Board of Directors (the "Board") is divided into three classes: Class I, Class II, and Class III. Each director serves for a term ending at the third annual meeting of shareholders following the annual meeting at which he or she was elected, except that any director appointed by the Board serves, subject to election by the shareholders at the next annual meeting after appointed, for a term ending at the annual meeting of shareholders at which the term of the class to which the director was appointed ends. Each director serves until his or her successor is elected and qualified or until his or her earlier death, resignation, or removal. Information is provided below with respect to the three nominees for Class I director, as well as those other directors whose terms will continue after the 1998 Annual Meeting. Unless otherwise instructed, the persons named in the accompanying proxy intend to vote shares represented by properly executed proxies FOR the three nominees to the Board named below. Although the Board anticipates that Mr. Gibson, Mr. Wall and Ms. White will be available to serve as directors of the Company, should any of them not accept the nomination, or otherwise be unwilling or unable to serve, it is intended that the proxies will be voted for the election of a substitute nominee or nominees designated by the Board. NOMINEES FOR ELECTION CLASS I DIRECTORS (TERMS TO EXPIRE IN 2001) C. SCOTT GIBSON, age 46, has been nominated by the Board for election at the 1998 Annual Meeting as a Class I director of the Company. From March 1992 to the present, Mr. Gibson has served as a strategic advisor to eight high technology companies spanning computer hardware, enterprise software and the Internet. From 1983 to March 1992, Mr. Gibson served as the President and Chief Operating Officer of Sequent Computer Systems, a computer manufacturing company which he co-founded. He is a member of the Board of Directors of Radisys Corporation, Integrated Measurement Systems, Inc., TriQuint Semiconductor, Inc., Inference Corporation, and Adaptive Solution Corporation. ROBERT T. WALL, age 53, has been nominated by the Board for election at the 1998 Annual Meeting as a Class I director of the Company. Since June 1997 Mr. Wall has served as Chief Executive Officer of Clarity Wireless, Inc., a high speed wireless data communications company. From April 1994 until August 1997, Mr. Wall served as Chairman, President and Chief Executive Officer of Theatrix Interactive, Inc., a consumer educational software publisher. Mr. Wall also serves as President of On Point Developments, Inc., a venture management company which he founded in 1984. Mr. Wall is a director of Network Appliance, Inc., a network data server company. KAREN WHITE, age 36, has been nominated by the Board for election at the 1998 Annual Meeting as a Class I director. Since April 1998, Ms. White has served as the Senior Vice President, World Wide Business Development and Emerging Markets, for Oracle Corporation ("Oracle"), a software company that is currently the largest supplier of software for information management. Ms. White joined Oracle in July 1993 as Vice President of Strategy and in August 1994 she became Senior Vice President of Strategy & Planning. From February 1996 until June 1997, she also served as head of Strategic Marketing & Business Development for Oracle. From June 1997 to April 1998, she was the head of World Wide Marketing for Oracle. Prior to July 1993, Ms. White was Chief Executive Officer for EGIS Corporation, an international high technology consulting company. CONTINUING BOARD MEMBERS CONTINUING CLASS II DIRECTORS (TERMS TO EXPIRE IN 1999) JONATHAN W. BRODEUR, age 38, has been a director of the Company since August 1997. Mr. Brodeur has served as a director and President of Surplus Software, Inc. ("Surplus Direct") since July 1995. From June 1993 to June 1995, Mr. Brodeur was the Chief Operating/Operations Improvement Officer for Connecticut Spring and Stamping, a high-precision manufacturing company. Mr. Brodeur served as Senior Manager at KPMG Peat Marwick LLP's National Consulting Practice from August 1988 to June 1993. MELVIN A. WILMORE, age 52, has been a director of the Company since July 1996. Mr. Wilmore has been a director and President since March 1993, and Chief Operating Officer since December 1991, of Ross Stores, Inc., which operates a nationwide chain of retail off-price apparel stores. From October 1989 to December 1991, Mr. Wilmore was President and Chief Executive Officer of Live Specialty Retail, a division of LIVE Entertainment, Inc., which operates a chain of prerecorded software home entertainment stores. He also serves as a director of Hechinger Company. CONTINUING CLASS III DIRECTORS (TERMS TO EXPIRE IN 2000) GREGORY J. BOUDREAU, age 35, has been a director of the Company since August 1997. Mr. Brodeur is one of the founders of Surplus Direct and has served as its Chief Executive Officer, Secretary, and a director since its inception in June 1992. From October 1985 to June 1992, Mr. Boudreau owned and operated Software Wholesalers, a liquidation oriented wholesaler of computer products. GEORGE P. ORBAN, age 52, has been a director of the Company since November 1985. Mr. Orban has served as Chairman of the Board of the Company since May 1996 and as the Company's Chief Executive Officer 2 since January 1997. Mr. Orban is Managing Partner of Orban Partners, a private investment company, and a director and cofounder of Ross Stores, Inc. Mr. Orban is a former director of Surplus Direct. ERIC P. ROBISON, age 38, has been a director of the Company since July 1996. Since January 1994, Mr. Robison has been a Business Development Associate for Vulcan Ventures Inc., a venture capital firm wholly owned by Paul G. Allen, where Mr. Robison is responsible for providing strategic business consultation to the companies controlled by Mr. Allen. From January 1992 to December 1993, Mr. Robison served as Vice President of The Stanton Robison Group, Inc., a business development, marketing and advertising consulting firm which he cofounded. He also serves as a director of ARI Network Services, Inc. and C/NET, Inc. CURRENT DIRECTORS WITH TERMS EXPIRING AT 1998 ANNUAL MEETING RICHARD P. COOLEY, age 74, currently serves as a Class I director and will be retiring from service on the Board on September 2, 1998, the date of the 1998 Annual Meeting, concurrent with the expiration of his three-year term. Mr. Cooley has been a Director of the Company since September 1992 and served as Chairman of the Board from February 1993 to June 1993. Mr. Cooley was Chairman of Seattle-First National Bank ("Seafirst Bank") from January 1983 to December 1990, was Chairman of the Executive Committee of Seafirst Bank from January 1991 to March 1994, and was named Honorary Director of Seafirst Bank in April 1994. Mr. Cooley also serves as a director of Ackerly Communications, Inc. SAMUEL N. STROUM, age 77, currently serves as a Class I director and will be retiring from service on the Board on September 2, 1998, the date of the 1998 Annual Meeting, concurrent with the expiration of his three-year term. Mr. Stroum has been a Director of the Company since June 1984. He is the principal of Samuel Stroum Enterprises, a private investment company, and Chairman of the Board of MACS Air, Inc., an air charter company. From 1975 to April 1991, Mr. Stroum served as a director of Seafirst Bank and Seafirst Corporation. Mr. Stroum also served on the Executive Committee of Seafirst Corporation and was Chairman of its Organization Committee. He is the senior Regent and a past President of the Board of Regents of the University of Washington. BOARD AND COMMITTEE MEETINGS The Board held nine meetings during the Company's 1998 fiscal year, which ended on March 28, 1998. The Board's Audit Committee met once during fiscal year 1998. The Committee consists of two non-employee directors who are currently Mr. Robison and Mr. Cooley (Chairman). The Committee's function is to (i) recommend to the Board the independent auditors to be retained by the Company; (ii) review the scope of proposed audits and audit procedures with the independent auditors and financial management of the Company; (iii) report to the Board the results of audits and submit appropriate recommendations; (iv) review the adequacy of the Company's internal accounting, financial, and operating controls; (v) review the Company's reporting obligations and proposed audit plans; and (vi) review the Company's financial statements and procedures to ensure compliance with applicable financial reporting requirements. The Board's Compensation Committee held three meetings during fiscal year 1998. The Committee consists of two non-employee directors who are currently Messrs. Cooley and Stroum (Chairman). The function of the Compensation Committee is to (i) consider and make recommendations to the Board on salaries, bonuses, and other forms of compensation for the Company's five most highly compensated executive officers; (ii) establish salaries, bonuses, and other forms of compensation for the Company's other officers and employees; and (iii) administer the Company's stock option plans, including granting stock options to employees thereunder, and reviewing management recommendations for granting stock options and any proposed plans or practices of the Company relating to compensation of its employees and directors. The Board's Nominating Committee met once during fiscal year 1998. The Committee consists of the four non-employee directors who are currently Messrs. Cooley, Stroum, Robison and Wilmore (Chairman). The Committee's function is to recommend nominees for election as directors at annual meetings of shareholders 3 and to fill vacancies on the Board between annual meetings. The Nominating Committee will consider written proposals from shareholders for nominees for directors to be elected at the 1999 Annual Meeting of Shareholders which are submitted to the Secretary of the Company by April 8, 1999. Each director attended at least 75% of all meetings of the Board and committees of the Board to which he was assigned that were held during fiscal year 1998. NONEMPLOYEE DIRECTORS' COMPENSATION Directors who are not also employees of the Company are compensated at the rate of $25,000 per annum. In addition, nonemployee directors receive $1,000 for each Board meeting attended and $1,000 for each Board committee meeting attended, provided that such committee meeting is not held in conjunction with a Board meeting. Nonemployee directors are also reimbursed for actual travel and out-of-pocket expenses incurred in connection with Board membership. In addition, each nonemployee director is granted an option to purchase 22,500 shares of Common Stock upon his or her initial election to the Board at an annual shareholders meeting, subject to three-year vesting in annual increments of one-third. Any non-employee director who is initially elected or appointed other than at an annual shareholders meeting is granted an option to purchase up to 7,500 shares of Common Stock, prorated for the number of months between the date of grant and the next annual shareholders meeting thereafter, subject to vesting in full on the date of such meeting. All of the current nonemployee directors were granted a new option to purchase an additional 22,500 shares of Common Stock on the day after the 1996 Annual Shareholders' Meeting, two-thirds of which will be vested immediately after the 1998 Annual Meeting. EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS BRIAN W. BENDER, age 49, joined the Company initially in May 1995, and served as Chief Financial Officer, Vice President and Secretary until his resignation from the Company in May 1996. Mr. Bender rejoined the Company in November 1996 and since that time has served as Chief Financial Officer, Vice President and Secretary. From May 1996 to November 1996, Mr. Bender served as Senior Vice President and Chief Financial Officer of Proffitts, Inc., an operator of department stores. From May 1993 to May 1995, Mr. Bender served as Senior Vice President, Controller and Assistant Treasurer of Younkers, Inc., a department store chain. TOMMY E. COLLINS, age 41, joined the Company in July 1995. He served as Director of Management Information Systems ("MIS") until May 1996 when he was promoted to Vice President of MIS. He currently serves as Vice President and, subsequent to April 1998, also as Chief Technology Officer. From August 1990 to July 1995, Mr. Collins served as Director of Corporate Information Services at Key Tronic Corporation, an independent computer peripheral manufacturing company. NORMAN F. HULLINGER, age 38, joined the Company in September 1996. He served as Vice President of Store Operations from September 1996 to April 1998. Since April 1998 he has served as Vice President of Sales and Operations. From January 1993 to September 1996, he was Vice-President of Store Operations, Distribution and Real Estate at California-based Aaron Brothers, Inc., a retail art supply chain and wholly owned subsidiary of Michaels Stores Inc., a crafts and art supply chain. JAMES F. KALASKY, age 48, joined the Company in July 1995. He served as Merchandising Manager from July 1995 to May 1996, and as Vice President of Merchandising from May 1996 to April 1998. Since April 1998 he has served as Vice President of Merchandising and Advertising. From November 1994 to July 1995, Mr. Kalasky was Director of Merchandising at Damark International, a membership-driven consumer direct-marketing company, and from April 1992 to November 1994, Vice President of Merchandising at Best Buy Co., Inc., a consumer electronics retail chain. 4 COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of July 7, 1998 by: (i) each person known by the Company to own beneficially 5% or more of the Company's outstanding Common Stock; (ii) each director and nominee for director, (iii) each executive officer of the Company for whom information is given in the Summary Compensation Table in this Proxy Statement; and (iv) all directors, nominees, and executive officers of the Company as a group. SHARES OF EGGHEAD.COM, INC. COMMON STOCK --------------------------------------- NUMBER OF SHARES PERCENT OF SHARES BENEFICIALLY OWNED(1) OUTSTANDING --------------------- ----------------- GREATER THAN 5% SHAREHOLDERS Morgan Stanley, Dean Witter, Discover & Co.(2)(3)............................. 2,374,406 10.0% 1585 Broadway New York NY 10036 Vulcan Ventures, Inc.(4)............... 1,368,934 5.8% 110 - 110th Ave. N.E., #550 Bellevue, Washington 98004 EXECUTIVE OFFICERS Brian W. Bender(5)..................... 65,000 * Tommy E. Collins(6).................... 67,222 * James F. Kalasky(7).................... 65,000 * George P. Orban(8)..................... 1,221,494 5.0% 22705 East Mission Ave. Liberty Lake, WA 99019 Norman F. Hullinger(9)................. 45,000 * DIRECTORS AND NOMINEES Gregory J. Boudreau.................... 1,475,824 6.2% 489 N. 8th Street Hood River, OR 97031 Jonathan W. Brodeur(10)................ 227,252 * Richard P. Cooley(11).................. 45,000 * C. Scott Gibson ....................... -- -- Eric P. Robison(12).................... 8,750 * Samuel N. Stroum(13)................... 195,096 * Robert T. Wall......................... -- -- Karen White............................ -- -- Melvin A. Wilmore(14).................. 16,250 * Directors and executive officers as a group (11 persons)(15)................ 3,431,888 14.3% - --------------------- * Less than one percent. [Footnotes to this table appear on the following page.] 5 (1) The persons named in the above table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, except as otherwise described in these footnotes. (2) Deemed beneficial owner of the shares of Common Stock by virtue of the direct or indirect investment and/or voting discretion possessed by such person pursuant to the provisions of investment advisory agreements with clients or other fiduciary arrangements such as partnership agreements. (3) Based on Schedule 13G filed February 12, 1998, with the Securities and Exchange Commission (the "Commission"). Morgan Stanley Asset Management Ltd. ("MSAM"), a wholly-owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co. ("MSDWD"), manages accounts that have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of such securities; no such account holds more than 5% of the class. MSDWD has shared voting power for 2,264,406 shares and shared dispositive power for 2,374,406 shares. MSAM has shared voting power for 2,115,823 shares and shared dispositive power for 2,225,823 shares (4) Based on Amendment No. 3 to Schedule 13D dated February 4, 1998 as filed with the Commission. Vulcan Ventures, Inc. is a private venture capital firm of which Paul Allen, former director of the Company, is President and sole shareholder. (5) Represents 5,000 shares held directly by Mr. Bender and 60,000 shares subject to options that are exercisable currently or within 60 days of July 7, 1998. (6) Represents 9,722 shares held directly by Mr. Collins and 57,500 shares subject to options that are exercisable currently or within 60 days of July 7, 1998. (7) Represents 5,000 shares held directly by Mr. Kalasky and 60,000 shares subject to options that are exercisable currently or within 60 days of July 7, 1998. (8) Represents 84,000 shares held by Orban Partners, a general partnership of which Mr. Orban is Managing Partner, 107,494 shares held by Mr. Orban and 1,030,000 shares subject to options that are exercisable currently or within 60 days of July 7, 1998. Mr. Orban is a director in addition to being a named executive officer. (9) Represents 5,000 shares held directly by Mr. Hullinger and 40,000 shares subject to options that are exercisable currently or within 60 days of July 7, 1998. (10) Represents 208,614 shares held directly by Mr. Brodeur and 18,638 shares held in trusts for the benefit of Mr. Brodeur's children. Mr. Brodeur disclaims beneficial ownership of the 18,638 shares held in such trusts. (11) Represents 45,000 shares subject to options held by Mr. Cooley that are exercisable currently or within 60 days of July 7, 1998. (12) Represents 8,750 shares subject to options held by Mr. Robison that are exercisable currently or within 60 days of July 7, 1998. (13) Represents 150,002 shares held directly by Mr. Stroum, 94 shares as to which Mr. Stroum shares voting and investment power with his spouse and 45,000 shares subject to options held by Mr. Stroum that are exercisable currently or within 60 days of July 7, 1998. (14) Represents 16,250 shares subject to options held by Mr. Wilmore that are exercisable currently or within 60 days of July 7, 1998. (15) Includes 1,362,500 shares subject to options held by such directors and executive officers that are exercisable currently or within 60 days of July 7, 1998. 6 EXECUTIVE COMPENSATION ANNUAL AND LONG TERM COMPENSATION The following table sets forth annual and long-term compensation for services rendered during fiscal years 1998, 1997, and 1996, by George P. Orban, the Company's Chief Executive Officer, and the other four most highly compensated executive officers of the Company (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE LONG TERM COMPENSATION ANNUAL COMPENSATION AWARDS ------------------------------ ------------ OTHER ANNUAL SECURITIES ALL OTHER NAME AND PRINCIPAL FISCAL SALARY BONUS COMPENSATION UNDERLYING COMPENSATION POSITION YEAR ($)(1) ($) ($) OPTIONS (#) ($) - ------------------ ------ ------- ------ ------------ ------------ ------------ George P. Orban(2)...... 1998 300,000 0 0 0 300 Chief Executive Officer 1997 35,766 0 0 1,022,500 220,000 Brian W. Bender(3)...... 1998 225,000 37,500(4) 0 80,000(5) 26,097 Vice President, Chief 1997 117,705 0 0 40,000 33,950 Financial Officer 1996 196,442 30,080 0 45,000(6) 49,703 and Secretary Norman F. Hullinger(7).. 1998 155,000 37,500(4) 0 80,000(5) 24,002 Vice President, Sales and 1997 86,442 0 0 40,000 11,588 Operations Tommy E. Collins(8)..... 1998 148,846 37,500(4) 0 80,000(9) 216 Chief Technology Officer............... 1997 132,692 20,000 0 30,000 2,843 James F. Kalasky(10).... 1998 170,000 37,500(4) 0 80,000(5) 200 Vice President of 1997 150,769 5,000 0 30,000 3,088 Merchandising & Advertising - --------------------- (1) Fiscal 1998, 1997 and 1996 each had 52 weeks. (2) Mr. Orban commenced employment as the Chief Executive Officer of the Company in January 1997. Salary shown for fiscal year 1997 is for a partial fiscal year's employment. All Other Compensation for fiscal year 1998 represents amounts paid for Mr. Orban's relocation costs associated with the reorganization of some of the Company's offices to Portland, Oregon and for fiscal year 1997 represents consulting fees paid to Retail Enterprises, Inc., a firm wholly-owned by Mr. Orban. (3) Mr. Bender joined the Company initially in May 1995, resigning in May 1996 and rejoining in November 1996. The salary shown for each of fiscal years 1997 and 1996 is for a partial fiscal year's employment. All Other Compensation for fiscal year 1998 represents amounts paid for Mr. Bender's relocation costs associated with his re-employment with the Company ($25,996) and premiums paid by the Company on a split dollar life insurance policy ($101). All Other Compensation for fiscal year 1997 and 1996 represents amounts paid for Mr. Bender's relocation costs associated with his re-employment and initial employment, respectively, with the Company. (4) Represents the fair market value, on the date of grant, of 5,000 shares of the Company's Common Stock granted to this executive officer, effective June 5, 1998. See "EXECUTIVE COMPENSATION--Board Compensation Committee Report on Executive Compensation." (5) Options granted in fiscal year 1998 represent an option for 40,000 shares granted in connection with the repricing in exchange for an option for 40,000 shares originally granted in fiscal year 1997 that were canceled in connection with the repricing, and an additional option for 40,000 shares granted in fiscal year 1998. See "EXECUTIVE COMPENSATION--Report on Option Repricing." 7 (6) These stock options expired pursuant to Mr. Bender's resignation from the Company in May 1996. (7) All Other Compensation for fiscal 1998 represents premiums in the amount of $214 paid by the Company on a split dollar life insurance policy and the amount of $23,788 paid for Mr. Hullinger's relocation costs associated with the reorganization of some of the Company's offices to Portland, Oregon. Mr. Hullinger's salary shown for fiscal year 1997 represents a partial year's employment. All Other Compensation for fiscal year 1997 represents amounts paid for Mr. Hullinger's relocation costs associated with his initial employment with the Company. Mr. Hullinger's employment with the Company commenced in September 1996. (8) All Other Compensation for fiscal 1998 represents premiums paid by the Company on a split dollar life insurance policy. The bonus paid in fiscal 1997 relates to the completion of the sale of the Company's Corporate, Government and Education ("CGE") Division. All Other Compensation for fiscal 1997 represents Company matching contributions under the Company's 401(k) savings plan. Mr. Collins was not an executive officer in fiscal 1996. (9) Options granted in fiscal year 1998 represent an option for 35,000 shares granted in connection with the repricing in exchange for options for 30,000 shares originally granted in fiscal year 1997 and for 5,000 shares originally granted in fiscal year 1996 that were canceled in connection with the repricing, and an additional option for 45,000 shares granted in fiscal year 1998. See "EXECUTIVE COMPENSATION--Report on Option Repricing." (10) All Other Compensation for fiscal 1998 represents premiums paid by the Company on a split dollar life insurance policy. The bonus paid in fiscal 1997 relates to the completion of the sale of the Company's CGE Division. All Other Compensation for fiscal 1997 represents Company matching contributions under the Company's 401(k) savings plan. Mr. Kalasky was not an executive officer in fiscal 1996. OPTION GRANTS IN FISCAL YEAR 1998 The following table sets forth stock option grants made during the fiscal year ended March 28, 1998, to the Company's Chief Executive Officer, and the other Named Executive Officers, pursuant to the Company's Amended 1993 Employee Stock Option Plan. OPTION GRANTS IN FISCAL YEAR 1998 POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE --------------------------------------------------------------- AT ASSUMED PERCENT OF ANNUAL RATES OF NUMBER OF TOTAL FAIR STOCK PRICE SECURITIES OPTIONS MARKET APPRECIATION UNDERLYING GRANTED TO VALUE ON FOR OPTION TERM OPTIONS VESTING EMPLOYEES EXERCISE DATE OF --------------- GRANTED REFERENCE IN FISCAL PRICE GRANT EXPIRATION 5% 10% NAME: (#)(1) DATE YEAR ($/SHARE) ($/SHARE) DATE ($)(2) ($)(2) - ----- ---------- --------- ---------- --------- --------- ---------- ------- ------- George P. Orban(3)...... -0- -- -- -- -- -- -- -- Brian W. Bender......... 40,000(4) 11/29/96 2.81% 4.3750 3.8750 11/29/06 77,480 227,030 40,000 05/01/97 2.81% 4.8125 4.8125 05/01/07 121,063 306,796 Tommy E. Collins........ 5,000(4) 06/07/95 0.35% 4.3750 3.8750 06/07/05 9,685 28,379 30,000(4) 05/03/96 2.11% 4.3750 3.8750 05/03/06 58,110 170,273 45,000 05/01/97 3.16% 4.8125 4.8125 05/01/07 136,195 345,145 Norman F. Hullinger..... 40,000(4) 09/03/96 2.81% 4.3750 3.8750 09/03/06 77,480 227,030 40,000 05/01/97 2.81% 4.8125 4.8125 05/01/07 121,063 306,796 James F. Kalasky........ 10,000(4) 08/07/95 0.70% 4.3750 3.8750 08/07/05 19,370 56,758 30,000(4) 05/03/96 2.11% 4.3750 3.8750 05/03/06 58,110 170,273 40,000 05/01/97 2.81% 4.8125 4.8125 05/01/07 121,062 306,796 - --------------------- [Footnotes to this table appear on the following page.] 8 (1) Except as otherwise noted in footnote (4) below, the options shown in the above table are nonqualified options, have a 10-year term from the date of grant and vest over a three-year period with the following vesting schedule: one-sixth on the first anniversary of grant; one-third on the second anniversary of grant; and one-half on the third anniversary of grant. The Vesting Reference Date is the date of grant, except that for a repriced option the Vesting Reference Date is the date of grant of the original, underwater option for which the repriced option was exchanged. Upon the occurrence of certain business combinations, the exercisability of the options would be accelerated unless the options are assumed by the surviving or acquiring corporation. (2) Represent amounts that may be realized upon exercise of the options immediately prior to their expiration assuming the specified compounded rates of appreciation on the base price (5% and 10%) of the Common Stock over the option terms. The 5% and 10% amounts are calculated based on rules required by the Commission and do not reflect the Company's estimate of future stock price growth. Actual gains, if any, on stock option exercises depend on the timing of such exercises, the future performance of the Common Stock and overall stock market conditions. There can be no assurance that the rates of appreciation assumed in these columns can be achieved or that the amounts reflected will be received by the individuals. (3) Mr. Orban's options were not included in the repricing program and he was not granted any new options during fiscal year 1998. (4) These options were granted in fiscal year 1998 under the Company's repricing program which allowed employees to exchange underwater options for options with the exercise price shown under the column "Exercise Price". Each of these new options has a term ending on the tenth anniversary of the date of issuance of the option for which it was exchanged, and vests in accordance with the vesting schedule applicable to the option for which it was exchanged, except that the terms of the repricing program required that each repriced option generally was not permitted to be exercised during a one year "blackout" period following April 23, 1997, irrespective of vesting. The repriced options vest according to the following schedule: one-sixth on the first anniversary of the Vesting Reference Date; one-third on the second anniversary of the Vesting Reference Date; and one-half on the third anniversary of the Vesting Reference Date. OPTION EXERCISES IN FISCAL YEAR 1998 AND FISCAL YEAR-END OPTION VALUES The following table sets forth information with respect to stock option grants made under the Company's stock option plans to the Chief Executive Officer and the other Named Executive Officers, including (i) the number of shares of Common Stock purchased upon exercise of options in fiscal year 1998; (ii) the net value realized upon such exercise; (iii) the number of unexercised options outstanding at March 28, 1998; and (iv) the value of unexercised in-the-money options at March 28, 1998. AGGREGATED OPTION EXERCISES IN FISCAL 1998 AND FISCAL YEAR-END OPTION VALUES NUMBER OF SECURITIES SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED ACQUIRED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT ON VALUE YEAR END(#) FISCAL YEAR END(1) EXERCISE REALIZED ------------------------- ------------------------- NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- -------- -------- ----------- ------------- ----------- ------------- George P. Orban......... -0- -0- 853,600 191,400 $4,120,079 $937,538 Brian W. Bender......... -0- -0- 20,000 60,000 118,750 338,750 Tommy E. Collins........ -0- -0- 7,501 72,499 44,538 410,776 Norman F. Hullinger..... -0- -0- 6,668 73,332 39,592 417,909 James F. Kalasky........ -0- -0- 10,001 69,999 59,381 398,120 - --------------------- (1) Values are based on the difference between the option exercise price and the fair market value on March 28, 1998 ($7.50 per share as quoted on the Nasdaq Stock Market), multiplied by the respective number of shares exercisable or unexercisable. 9 TEN-YEAR OPTION/SAR REPRICINGS The following table provides information on repricing of options held by the Named Executive Officers during fiscal year 1998. Other than pursuant to the repricing program implemented in April 1997, the Company has not repriced any stock options during the past ten years. TEN-YEAR OPTION/SAR REPRICINGS MARKET NUMBER OF PRICE OF EXERCISE SECURITIES STOCK AT PRICE AT LENGTH OF UNDERLYING TIME OF TIME OF NEW EXERCISE ORIGINAL OPTION OPTIONS/SAR'S REPRICING REPRICING PRICE TERM REMAINING AT NAME DATE REPRICED (#) ($/SHARE) ($/SHARE) ($/SHARE)(1) DATE OF REPRICING - ---- ------- ------------- --------- --------- ------------ ----------------- George Orban(2)......... -- -0- -0- -0- -0- -- Brian W. Bender......... 4/23/97 40,000 3.875 6.1875 4.375 9 years, 222 days Tommy E. Collins........ 4/23/97 5,000 3.875 13.5000 4.375 8 years, 47 days 4/23/97 30,000 3.875 10.9375 4.375 9 years, 12 days Norman F. Hullinger..... 4/23/97 40,000 3.875 5.8750 4.375 9 years, 135 days James F. Kalasky........ 4/23/97 10,000 3.875 12.0000 4.375 8 years, 108 days 4/23/97 30,000 3.875 10.9375 4.375 9 years, 12 days - --------------------- (1) The Compensation Committee approved an option repricing program for employees of the Company other than executive officers and certain individuals on April 4, 1997, pursuant to which such employees were allowed to exchange options with exercise prices in excess of the then current fair market value of the Common Stock for new options having exercise prices equal to the then current fair market value of the Common Stock, $4.375 per share. On April 23, 1997, the Compensation Committee approved the option repricing program for executive officers and certain other individuals (excluding Mr. Orban). The repriced options were granted to the Named Executive Officers with an exercise price of $4.375 per share, which exceeded the fair market value of the Common Stock on the grant date, to cause the exercise price of the repriced options granted to the Named Executive Officer to be equivalent to, and not more favorable than, the exercise price of the repriced options granted to employees on April 4, 1998. (2) Mr. Orban's stock options were not repriced. REPORT ON OPTION REPRICING On April 4, 1997, the Compensation Committee of the Board of Directors approved a plan pursuant to which employees (other than executive officers and certain other individuals) were allowed to exchange options with exercise prices in excess of the then current fair market value of the Common Stock for new options having exercise prices equal to the then current fair market value of the Common Stock, $4.375 per share. On April 23, 1997, the Compensation Committee approved a similar plan for executive officers and certain other individuals (other than the Chief Executive Officer) pursuant to which such persons were allowed to exchange options with exercise prices in excess of the then current fair market value per share of the Common Stock for new options with an exercise price per share of $4.375, which exceeded the fair market value per share of the Common Stock on the grant date and which was selected in order to cause the exercise price of the repriced options granted to such persons to be equivalent to, and not more favorable than, the exercise price of the repriced options granted to employees on April 4, 1997. The Compensation Committee believes that stock options are a significant factor in the Company's ability to retain and provide incentives for employees and executives. The Compensation Committee further believes that, at their original exercise prices, the disparity between the exercise price of these options and the market prices for the Common Stock at the time the repricing plan was implemented did not provide meaningful incentives to the employees and executives holding the options. The Compensation Committee also believes that the repricing plan benefits the Company's shareholders by strengthening the Company's ability to retain 10 experienced and productive employees and executives, improving the morale of employees and executives and creating greater incentives for employees and executives to improve the Company's financial performance. COMPENSATION COMMITTEE Richard P. Cooley Samuel N. Stroum, Chairman COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION Overview and Philosophy. The Compensation Committee of the Board (the "Committee") is responsible for recommending to the Board compensation for the Company's five highest-compensated executive officers, including the Company's Chief Executive Officer, and for reviewing and approving compensation recommendations made by the Chief Executive Officer for the other executive officers. The Committee is also responsible for administering all of the Company's compensation programs. The Committee's goal is to provide compensation that is fair and competitive and that will reward sustained high performance. The Committee also believes that executives should have the opportunity for a significant portion of their compensation to be "at risk" in the form of incentive compensation. The Company's executive compensation packages generally consist of base salary and long-term incentive compensation in the form of stock options, and may, from time to time, include incentive compensation in the form of bonuses. The Committee also administers and reviews employment agreements between the Company and its executives. Compensation payments in excess of $1 million to the Chief Executive Officer or other Named Executive Officers are subject to a limitation on deductibility for the Company under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). Certain performance-based compensation is not subject to the limitation on deductibility. The Compensation Committee does not expect cash compensation in 1998 to its Chief Executive Officer or any other executive officer to materially exceed $1 million. The Company's Amended 1993 Stock Option Plan is designed to qualify for the performance-based exception to the $1 million limitation on deductibility of compensation payments. Base Salary. In determining the base salary for a particular executive within the salary range for his or her position, the Committee initially takes into account the salary necessary to encourage the executive to join the Company in lieu of pursuing other employment opportunities. In later years, the Committee considers the amount budgeted by the Board for salary increases, the executive's level of responsibility, prior experience, breadth of knowledge and job performance, and the amount of increase necessary to retain the executive. The Company does not have a target range for base salaries for executive officers. Annual Incentive Compensation. In fiscal year 1998, cash bonuses for executives were considered at the end of the fiscal year by the Committee in consultation with certain members of Company management. Such consultation took into consideration the Company's financial performance, including the Company's earnings per share, and the Company's restructuring and reorganization. The Committee recognized the extraordinary efforts of the executives with respect to the restructuring and reorganization of the Company but desired to conserve the Company's cash for the development and expansion of its Internet business. Therefore, in order to facilitate retention of the key executives, reward the key executives for their efforts in connection with the transition to Internet retailing and motivate them to continue such efforts, the Committee recommended that the Board grant, and the Board granted, 5,000 shares of the Company's Common Stock to each of the four Named Executive Officers, Brian W. Bender, Tommy E. Collins, James F. Kalasky, Norman F. Hullinger, and to the President of Surplus Direct, Jonathan W. Brodeur. Long-Term Incentive Compensation. The primary objective of the Company's stock option program is to provide incentives tied to the performance of the Company as measured by stock price appreciation. The Committee believes that the Company's stock option program better aligns the interests of the Company's executives with those of its shareholders. The Committee generally has granted stock options with an exercise 11 price equal to the fair market value of the Common Stock on the date of grant and a three year vesting schedule for options granted prior to October 1997, and a four year vesting schedule for options granted subsequent to October 1997. In granting options, the Committee considers the amount and value of options currently held, but does not have a target ownership level for Common Stock holdings for executives. In fiscal year 1998, the Committee granted options to purchase 1,423,014 shares of Common Stock, of which options to purchase 380,000 shares were granted to executive officers, four of which are Named Executive Officers, and the remaining 1,043,014 were granted to a broad range of employees, generally fixed by salary grade. Within the group of executive officers (other than the Chief Executive Officer), the exact number of shares subject to options was recommended to the Committee by the Chief Executive Officer. Of the total options granted in fiscal year 1998, options for a total of 465,014 shares were granted in connection with the repricing. See "EXECUTIVE COMPENSATION-- Report on Option Repricing". Chief Executive Officer Compensation. Mr. Orban was elected Chairman of the Company in May 1996 and Chief Executive Officer of the Company in January 1997. Upon commencement of his employment, the Committee granted Mr. Orban an option to purchase 1,000,000 shares of Common Stock. In January 1997, the Company entered into an employment agreement with Mr. Orban which expires on August 31, 1998. Under the agreement, Mr. Orban receives, among other things, an annual base salary of $300,000 and a retention incentive bonus of $750,000 if Mr. Orban's employment with the Company has not terminated prior to August 31, 1998. The agreement provides for a lump-sum payment of $1,600,000 payable 30 days after the termination by the Company of his employment during the term of the agreement for any reason other than "cause" as defined in the agreement, or payable in the event of a sale of substantially all of the assets of the Company or a merger or business combination under certain circumstances if Mr. Orban continues his employment through the completion of such transaction. See "EXECUTIVE COMPENSATION--Employment Arrangements--Chief Executive Officer's Employment Agreement; Change of Control Arrangement." In approving Mr. Orban's employment and option arrangements, the Committee's goal was to offer fair and competitive compensation that would attract and retain Mr. Orban as the Chief Executive Officer and an equity incentive that puts a substantial portion of Mr. Orban's compensation "at risk" and will reward him for the successful performance of the Company. In addition, the Committee believes that Mr. Orban's participation in the Company's stock price appreciation through his stock option grant aligns his interests with those of the shareholders. COMPENSATION COMMITTEE Richard P. Cooley Samuel N. Stroum, Chairman COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Each of Richard P. Cooley, Samuel N. Stroum, and Steven E. Lebow, served on the Compensation Committee of the Board during fiscal year 1998. On August 14, 1997, the Company merged with Surplus Software, Inc. dba Surplus Direct, an Oregon corporation that became a wholly owned subsidiary of the Company. Steven E. Lebow, a former director of the Company who served on the Board of Directors during part of fiscal year 1998, is a Managing Director of the Investment Banking Division of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), an investment banking firm that assisted the Company with the merger transaction. In that connection, DLJ was paid fees and expenses in the aggregate amount of $546,860. This amount included out-of-pocket expenses, including reasonable fees and expenses of its counsel, a fee of $300,000 in respect of DLJ's opinion as to the fairness from a financial point of view of the consideration payable by the Company in the Merger (without regard to the conclusion reached in such opinion) and a stock performance-dependent transaction fee. In addition, the Company agreed to indemnify DLJ in the event of certain liabilities and expenses arising out of the Merger or 12 the transactions in connection therewith, including liabilities under federal securities laws. The terms of the fee arrangement with DLJ, which DLJ and the Company believe are customary in transactions of this nature, were negotiated at arm's length between the Company and DLJ, and the Board was aware of such arrangements. EMPLOYMENT ARRANGEMENTS Employment Agreements. In fiscal 1998, the Company terminated Senior Management Employment Agreements it had previously entered into with Brian W. Bender, Norman F. Hullinger, Tommy E. Collins, and James F. Kalasky, which agreements provided certain benefits if the employee's employment was terminated by the Company for any reason other than "cause" or by the executive for "good reason" (as both terms were defined in the agreements) following a "change of control" of the Company. In lieu thereof, the Company entered into new Executive Employment Agreements with its senior executive officers, Brian W. Bender, Tommy E. Collins, James F. Kalasky and Norman F. Hullinger. The four Executive Employment Agreements provide certain benefits if, during the three-year term of the agreement, the executive's employment is terminated by the Company for any reason other than "cause", or by the executive for "Good Reason" (as such terms are defined in the agreements). Such benefits include (i) payment of the amount equal to the executive's annual base salary in one lump sum within 10 days of the termination date; (ii) payment of the executive's base salary for up to an additional six months after the end of twelve months following the termination date for so long as the executive has not commenced alternative employment; (iii) continuation of life insurance, disability, medical and dental, and other similar employee benefits until the earlier of eighteen months after the termination date or the date that the executive commences alternative employment which provides comparable benefits; and (iv) acceleration of the executive's outstanding and unexercised stock options, on a pro rata basis determined based on the number of weeks the executive was employed by the Company during the stock option's entire vesting period, except in the case of a "change of control" of the Company (as such term is defined in the agreement) in which case all options vest immediately prior to such change of control. The Agreements also include non-solicitation and non-competition restrictions which apply for a period of eighteen months after the termination date, subject to limited exceptions. Chief Executive Officer's Employment Agreement; Change of Control Arrangement. In January 1997, the Company entered into an employment agreement with George P. Orban, setting forth the terms and conditions of his employment as Chairman of the Board and Chief Executive Officer (the "Agreement"). The Agreement provides for an annual base salary of $300,000 through August 31, 1998, the end of the Agreement's term, and a lump-sum payment of $1,600,000 (the "Severance Obligation") payable (i) 30 days after termination by the Company of his employment during the term of the Agreement for any reason other than "cause," as defined in the Agreement, or (ii) in the event of a sale of substantially all of the assets of the Company or a merger or business combination of the Company in which holders of voting stock of the Company before such a transaction own less than 50% of the voting stock of the combined or surviving company following such a transaction, if Mr. Orban continues his employment through the completion of such transaction. If Mr. Orban is employed by the Company as of August 31, 1998, he would receive a retention incentive bonus of $750,000 (the "Bonus Obligation"). Should Mr. Orban choose to continue with the Company as a consultant from September 1, 1998 through March 31, 1999, he would receive $550,000 on April 1, 1999 (the "Consulting Amount"). In addition, the Company will reimburse Mr. Orban in an amount up to $3,000 per year in 1997, 1998 and 1999 for the cost of life insurance premiums. The Agreement also provides that Mr. Orban may not compete with the Company for two years after termination of his employment or until August 31, 2000, whichever is later. The Company and Mr. Orban entered into a Pledge Agreement, dated February 25, 1998, pursuant to which the Company pledged cash assets in the amount of $1,600,000, and granted a security interest in such assets to Mr. Orban, to secure performance of payment of the Severance Obligation, Bonus Obligation and Consulting Amount under the Agreement. Option Plans. The Company's stock option plans provide that, upon the occurrence of certain transactions, including certain mergers and other business combinations involving the Company, outstanding options will fully vest, subject to termination upon consummation of such transaction. In the alternative, at the discretion of the 13 Company and the corporation(s) participating in such transactions, such options may be assumed by the acquiring or surviving corporation. Director Plan. The Company's Restated Nonemployee Director Stock Option Plan provides that upon the occurrence of certain transactions, including certain mergers and business combinations involving the Company, the vesting of outstanding options will be accelerated so that all options would be immediately exercisable. Any options not exercised would terminate upon consummation of such a transaction. [THIS SPACE INTENTIONALLY LEFT BLANK.] 14 STOCK PRICE PERFORMANCE GRAPH The graph below shows a comparison of cumulative total shareholder returns of the Company for the last five fiscal years ("Cumulative Shareholder Returns") with (a) the cumulative total return of the University of Chicago's Center for Research in Security Prices ("CRSP") Index for Nasdaq Stock Market SIC Code 573--U.S., a retail trade line-of-business index of U.S. company equities that includes, among others, consumer electronics retailers (the "U.S. SIC 573 Index") and (b) the cumulative total return of the CRSP Index for the Nasdaq Stock Market--U.S., a broad market equity index including U.S. company equities ("Nasdaq U.S. Index"). The comparison assumes $100 was invested in the Company's Common Stock and in each of the foregoing indices on April 2, 1993, and assumes reinvestment of dividends, if any. The Company has not paid dividends. Dates on the horizontal axis on the graph represent the last day of trading before the respective fiscal year end. The stock performance shown on the graph below is not necessarily indicative of future price performance. [PERFORMANCE GRAPH APPEARS HERE] COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURNS PERFORMANCE REPORT FOR EGGHEAD.COM, INC. COMPANY MARKET PEER DATE INDEX INDEX INDEX ---- ------- ------ ----- 04/02/93 100.000 100.000 100.000 04/30/93 101.563 98.700 95.835 05/28/93 107.813 104.592 100.507 06/30/93 101.563 105.074 92.749 07/30/93 89.063 105.199 94.334 08/31/93 90.625 110.636 98.438 09/30/93 87.500 113.931 108.726 10/29/93 92.188 116.491 110.091 11/30/93 107.813 113.019 107.311 12/31/93 112.500 116.170 101.624 01/31/94 118.750 119.696 95.977 02/28/94 118.750 118.579 91.489 03/31/94 107.813 111.286 81.768 04/29/94 106.250 109.842 76.172 05/31/94 98.438 110.110 71.921 06/30/94 90.625 106.082 66.613 07/29/94 82.813 108.258 67.377 08/31/94 85.938 115.160 69.878 09/30/94 89.063 114.865 73.044 10/31/94 106.250 117.123 72.791 11/30/94 128.125 113.237 75.334 12/30/94 146.875 113.554 70.541 01/31/95 134.375 114.192 69.530 02/28/95 131.250 120.230 65.252 03/31/95 106.250 123.796 61.892 04/28/95 118.750 127.694 59.653 05/31/95 128.125 130.988 61.943 06/30/95 167.188 141.604 70.677 07/31/95 164.063 152.013 72.020 08/31/95 150.000 155.095 71.531 09/29/95 101.563 158.662 64.990 10/31/95 85.938 157.752 56.334 11/30/95 100.000 161.456 51.943 12/29/95 80.469 160.595 42.652 01/31/96 76.563 161.387 41.084 02/29/96 72.656 167.529 39.907 03/29/96 133.594 168.085 44.872 04/30/96 121.875 182.030 49.169 05/31/96 148.438 190.388 55.579 06/28/96 139.063 181.806 53.192 07/31/96 115.625 165.617 41.962 08/30/96 103.125 174.896 40.448 09/30/96 75.000 188.274 34.991 10/31/96 64.063 186.194 31.735 11/29/96 77.344 197.704 32.408 12/31/96 65.625 197.526 28.756 01/31/97 67.188 211.566 29.332 02/28/97 64.063 199.864 32.350 03/27/97 57.813 191.145 29.797 04/30/97 57.813 192.656 27.289 05/30/97 58.594 214.488 31.655 06/30/97 49.219 221.056 31.261 07/31/97 79.688 244.391 35.236 08/29/97 81.250 244.019 37.549 09/30/97 112.500 258.457 38.899 10/31/97 120.313 245.068 34.803 11/28/97 90.625 246.297 35.914 12/31/97 81.250 242.362 33.997 01/30/98 98.438 249.969 38.413 02/27/98 120.313 273.438 40.097 03/27/98 128.906 281.510 42.768 The index level for all series was set to 100.0 on 04/02/93. 15 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During fiscal 1998, Steven E. Lebow, a former director of the Company, was a party to certain transactions with the Company. See "EXECUTIVE COMPENSATION-- Compensation Committee Interlocks and Insider Participation." Karen White, a nominee for election at the 1998 Annual Meeting as a Class I director, currently serves as a Senior Vice President for Oracle Corporation ("Oracle"). See "ELECTION OF DIRECTORS--Nominees for Election." In May 1998, the Company entered into a three-year Network Licensing Agreement with Oracle, pursuant to which the Company purchased certain hardware, software and related licenses and maintenance from Oracle which will permit the Company to use the Oracle data bases and applications in the Company's Internet business. The Company expects to make payments to Oracle of approximately $1,147,000 over the three year term of the Agreement. The contract was negotiated at arms- length prior to Ms. White's nomination by the Board's Nominating Committee for election at the 1998 Annual Meeting. Mr. Paul Allen is a shareholder and director of Microsoft Corporation and the President and sole shareholder of Vulcan Ventures, Inc., a principal shareholder of the Company. Eric P. Robison, director of the Company, is employed by Vulcan Ventures, Inc. In fiscal year 1998, aggregate software purchases by the Company directly from Microsoft were approximately $4,942,000 and were made on an arm's-length basis. During fiscal year 1998, Gregory J. Boudreau, a director and principal shareholder of the Company who is also employed by the Company, received a salary of $118,500, part of which was paid by Surplus Direct prior to August 14, 1997 when the acquisition of Surplus Direct by the Company (the "Merger") was consummated. In addition, after the Merger, Mr. Boudreau received a bonus from Surplus Direct of $361,667 relating to his work associated with the Merger, and $2,122 from Surplus Direct in matching payments to Surplus Direct's 401(k) savings plan. During fiscal year 1998, Jonathan W. Brodeur, a director of the Company and President of Surplus Direct, was employed by the Company and received a salary of $106,480, part of which was paid by Surplus Direct prior to the Merger date of August 14, 1997. After the Merger, Mr. Brodeur was also paid a bonus by Surplus Direct of $186,666 for his work associated with the Merger, and $2,257 by Surplus Direct in matching payments to its 401(k) savings plan. Terence M. Strom, former Chief Executive Officer of the Company, was a member of the Board until his resignation in January 1998. During fiscal year 1998, the Company paid Mr. Strom severance payments in the aggregate amount of $300,000 in accordance with the Release and Termination Agreement dated February 15, 1997 between Mr. Strom and the Company. INDEPENDENT AUDITORS The Company has selected Arthur Andersen LLP to continue as its independent auditors for the fiscal year ending April 3, 1999. Representatives of Arthur Andersen LLP are expected to attend the 1998 Annual Meeting and to have the opportunity to make a statement if they so desire and to respond to appropriate questions. OTHER BUSINESS As of the date of this proxy statement, management knows of no other business that will be presented for action at the 1998 Annual Meeting. If any other business requiring a vote of the shareholders should come before the meeting, the persons designated as your proxies will vote or refrain from voting in accordance with their best judgment. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Officers and directors of the Company and persons who own more than ten percent of the Company's stock are required to report to the Commission ownership and changes in ownership of the Company's stock. Regulations promulgated by the Commission require the Company to disclose to its shareholders those filings that were not made on a timely basis. Based solely on its review of copies of such reports received by it, or written representations received from reporting persons that no such forms were required for those persons, the Company believes that, during fiscal year 1998, its officers and directors complied with all applicable filing requirements. 16 SHAREHOLDER PROPOSALS FOR THE 1999 ANNUAL MEETING OF SHAREHOLDERS Shareholder proposals to be presented at the 1999 Annual Meeting of Shareholders must be received at the Company's executive offices by April 8, 1999, in order to be included in the Company's proxy statement and form of proxy relating to that meeting. AVAILABILITY OF ADDITIONAL INFORMATION A copy of the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1998 is available to shareholders without charge upon written request to Brian W. Bender, Secretary of the Company, at 22705 East Mission Avenue, Liberty Lake, Washington 99019. SOLICITATION OF PROXIES This solicitation is made on behalf of the Board of Directors of the Company. Proxies may be solicited by officers, directors, and regular supervisory and executive employees of the Company, none of whom will receive any additional compensation for their services. In addition, Allen Nelson & Co. will assist the Company in the solicitation of proxies by the Company for a fee of approximately $5,500, plus reasonable expenses. Solicitations of proxies may be made personally, or by mail, telephone, telegraph, facsimile, or messenger. The Company will pay persons holding shares of Common Stock in their names or in the names of nominees, but not owning such shares beneficially, such as brokerage houses, banks, and other fiduciaries, for the expense of forwarding soliciting materials to their principals. The Company will pay all the costs of solicitation of proxies. By Order of the Board of Directors /s/ Brian W. Bender Brian W. Bender Secretary Liberty Lake, Washington July 30, 1998 17 PROXY EGGHEAD.COM, INC. ANNUAL MEETING OF SHAREHOLDERS THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF EGGHEAD.COM, INC. (THE "BOARD"). The undersigned hereby appoints Brian W. Bender and George P. Orban and each of them as proxies, each with full power of substitution, to represent and vote for and on behalf of the undersigned, the number of shares of common stock of Egghead.com, Inc. that the undersigned would be entitled to vote if personally present at the 1998 Annual Meeting of Shareholders (the "1998 Annual Meeting") to be held on September 2, 1998, or at any adjournment thereof. The undesigned directs that this proxy be voted as follows. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED ON THIS PROXY CARD. MANAGEMENT RECOMMENDS A VOTE FOR ALL NOMINEES DESIGNATED ON THIS PROXY CARD. IF NO SPECIFICATIONS ARE MADE, A VOTE FOR ALL OF SAID NOMINEES WILL BE ENTERED. The undersigned hereby revokes any proxy or proxies heretofore given for such shares and ratifies all that said proxies or their substitutes may lawfully do by virtue hereof. (Continued and to be signed on the other side) . FOLD AND DETACH HERE . Please mark your votes X as indicated 1. Election of Directors: FOR all nominees WITHHOLD (except as indicated to AUTHORITY to vote the contrary below) for all nominees [ ] [ ] NOMINEES: C. SCOTT GIBSON, ROBERT T. WALL and KAREN WHITE INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, PRINT THAT NOMINEE'S NAME IN THE FOLLOWING SPACE: - -------------------------------------------------------------------------------- 2. In their discretion, the holders of this proxy are authorized to vote upon such other business as may properly come before the meeting. Please sign exactly as name appears on this proxy. If stock is held jointly, both persons should sign. Persons signing in a representative capacity should give their title. Date: , 1998 ----------------------------- ----------------------------------------- Signature ----------------------------------------- Signature if held jointly . FOLD AND DETACH HERE .