SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD FROM MARCH 29,1998 TO JUNE 27, 1998
------------------------------
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.COM, INC.
-----------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 91-1296187
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
EAST 22705 MISSION
LIBERTY LAKE, WASHINGTON 99019
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(509) 922-7031
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
----- -----
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK:
OUTSTANDING AT
CLASS JULY 25, 1998
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COMMON STOCK 24,297,507
$.01 PAR VALUE SHARES
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EGGHEAD.COM, INC. AND SUBSIDIARIES
________________________________________________________________________________
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
JUNE 27, MARCH 28,
1998 1998
-------- ---------
Current assets: (unaudited)
Cash and cash equivalents $ 67,034 $ 67,381
Accounts receivable, net of allowance for
doubtful accounts of $1,733 and $2,611, respectively 5,134 5,670
Merchandise inventories, net 10,896 12,923
Prepaid expenses and other current assets 561 999
Property held for sale 1,224 8,047
-------- --------
Total current assets 84,849 95,020
-------- --------
Property and equipment, net 2,524 2,806
Goodwill 32,920 33,225
Other assets 320 336
-------- --------
$120,613 $131,387
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,869 $ 15,834
Accrued liabilities 10,694 12,002
Reserves and liabilities related to restructuring 11,589 17,461
-------- --------
Total current liabilities 39,152 45,297
-------- --------
Other long-term liabilities - 3
-------- --------
Total liabilities 39,152 45,300
-------- --------
Commitments and contingencies - -
Shareholders' equity:
Common stock, $.01 par value:
50,000,000 shares authorized; 23,642,378 and
23,492,502 shares issued and outstanding, respectively 236 235
Additional paid-in capital 161,591 160,669
Retained deficit (80,366) (74,817)
-------- --------
Total shareholders' equity 81,461 86,087
-------- --------
$120,613 $131,387
======== ========
See Notes to Consolidated Financial Statements.
2
EGGHEAD.COM, INC. AND SUBSIDIARIES
________________________________________________________________________________
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
13 weeks ended
(unaudited)
--------------------
June 27, June 28,
1998 1997
--------- ---------
Net sales:
Retail $ -- $52,067
Ongoing 29,520 4,093
------- -------
29,520 56,160
Cost of sales:
Retail -- 43,503
Ongoing 26,463 3,419
------- -------
26,463 46,922
------- -------
Gross margin:
Retail -- 8,564
Ongoing 3,057 674
------- -------
3,057 9,238
Selling and marketing expense 5,768 9,000
General and administrative expense 3,068 3,668
Amortization of goodwill 419 --
Depreciation 365 1,254
------- -------
Operating loss (6,563) (4,684)
Other income, net 1,014 1,026
------- -------
Loss before income taxes (5,549) (3,658)
Income tax expense -- --
------- -------
Net loss $(5,549) $(3,658)
======= =======
Basic loss per share $ (0.24) $ (0.21)
======= =======
Weighted average common shares outstanding 23,570 17,591
======= =======
See Notes to Consolidated Financial Statements.
3
EGGHEAD.COM, INC. AND SUBSIDIARIES
________________________________________________________________________________
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands)
Common Stock Additional
--------------- Paid-in Retained
Shares Amount Capital Earnings Total
------ ------ ---------- -------- -------
Balance, March 28, 1998 23,493 $235 $160,669 $(74,817) $86,087
Stock issued for cash,
pursuant to employee
stock option plan 149 1 922 923
Net loss (5,549) (5,549)
------ ---- -------- ------- -------
Balance, June 27, 1998 23,642 $236 $161,591 $(80,366) $81,461
====== ==== ======== ======== =======
(unaudited)
See Notes to Consolidated Financial Statements.
4
EGGHEAD.COM, INC. AND SUBSIDIARIES
________________________________________________________________________________
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
13 Weeks Ended
-------------------------
(unaudited)
June 27, June 28,
1998 1997
---------- ----------
Cash flows from operating activities:
Net loss $(5,549) $(3,658)
------- -------
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 784 1,254
Deferred rent (3) (150)
(Gain) loss on disposition of assets (273) (2)
Changes in assets and liabilities:
Accounts receivable, net 536 (586)
Merchandise inventories 2,027 6,193
Prepaid expenses and other current assets 438 413
Other assets (98) 525
Accounts payable 1,035 (6,548)
Accrued liabilities (1,308) (2,258)
Liabilities related to disposition of CGE division (1,425)
Reserves and liabilities related to restructuring (5,872) (2,562)
------- -------
Total adjustments (2,734) (5,146)
------- -------
Net cash (used) provided by operating activities (8,283) (8,804)
------- -------
Cash flows from investing activities:
Additions to property and equipment (87) (370)
Proceeds from sale of assets 7,100 2
------- -------
Net cash (used) provided by investing activities 7,013 (368)
------- -------
Cash flows from financing activities:
Payments on capital lease obligations (125)
Proceeds from stock issuances 923 -
------- -------
Net cash (used) provided by financing activities 923 (125)
------- -------
Net increase (decrease) in cash (347) (9,297)
Cash and cash equivalents at beginning of period 67,381 83,473
------- -------
Cash and cash equivalents at end of period $67,034 $74,176
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH PAID (RECEIVED):
Interest $ - $ -
Income taxes $ (230) $ -
See Notes to Consolidated Financial Statements.
5
EGGHEAD.COM, 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
March 28, 1998, contained in the Company's Form 10-K, filed pursuant to the
Securities Exchange Act of 1934. The reader is further cautioned that
operating results for the 13 weeks ended June 27, 1998, are not necessarily
indicative of the results that may be expected for the full year.
Fiscal Years
The Company uses a 52/53 week fiscal year, ending on the Saturday nearest
March 31 of each year. Fiscal quarters are such that the first three
quarters consist of 13 weeks and the fourth quarter consists of the
remaining 13/14 weeks. Fiscal 1999 will consist of 53 weeks. Fiscal 1998
had 52 weeks.
Reclassifications
Certain prior year balances have been reclassified to conform with the
current period presentation. These reclassifications had no effect on
retained earnings or net income as previously reported.
Income Statement Captions
During fiscal 1998, Egghead closed its remaining retail stores as a part of
a strategic restructuring. The retail store operations do not meet the
requirements of a "discontinued operation" under Accounting Principles
Board Opinion No. 30. However, the Company has split its sales, cost of
sales and gross margin amounts between retail store operations and the
ongoing business, consisting of Internet, direct response and catalog
sales.
NOTE 2 EARNINGS (LOSS) PER SHARE
Basic loss per share amounts are computed by dividing the net loss by the
weighted average number of shares of common stock outstanding during the
year. Diluted earnings per common share are not disclosed as potentially
dilutive securities would have been anti-dilutive to the loss per share
calculation for the 13 week periods ended June 27, 1998 and June 28, 1997.
Effective December 27, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." Prior
earnings per common share amounts were not affected by the adoption of SFAS
No. 128.
6
EGGHEAD.COM, INC. AND SUBSIDIARIES
________________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 INCOME TAXES
Egghead determines its income tax accounts in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109. Deferred income taxes
result primarily from temporary differences in the recognition of certain
items for income tax and financial reporting purposes.
Given its recent losses, Egghead determined that its deferred tax assets no
longer meet the realization criteria of SFAS No. 109. Under SFAS 109, the
realization of the deferred tax assets depends on generating future taxable
income. Until Egghead has determined that all of its existing net
operation losses, which expire 15 years after origination, are realizable,
it will not record a tax charge or benefit for future operating results.
NOTE 4 LEASES
The Company leases corporate offices and distribution facilities under
operating leases with remaining lives on most leases ranging from one to
three years. As of June 27, 1998 the future minimum rental payments under
these noncancelable operating leases for headquarters and distribution
facilities and equipment consisted of the following (in thousands):
Fiscal Year Operating
----------- ---------
1999 $ 544
2000 393
2001 131
2002 4
Thereafter 1
---------
Total minimum payments $ 1,073
=========
On July 1, 1998, the Company leased an additional 46,000 square feet of
headquarters space under a six year lease requiring annual rental payments
of $416,250. On July 2, 1998, the Company leased computer equipment under
a 30 month operating lease requiring annual rental payments of $243,900.
7
EGGHEAD.COM, INC. AND SUBSIDIARIES
________________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
NOTE 5 RECENT ACCOUNTING PRONOUNCEMENTS
During June 1997, the Financial Accounting Standards Board issues Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. The new standard requires companies to
record derivatives on the balance sheet as assets or liabilities, measured
at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. Due to the
Company's minimal use of derivatives, the new standard is expected to have
no material impact on its financial position or results of operations.
SFAS 133 will be effective for the Company's fiscal year 2001.
NOTE 6 RESTRUCTURING AND REORGANIZATION
In the fourth quarter of fiscal 1998, Egghead.com announced plans to
reorganize its operations involving, among other things, closing the
remaining Egghead.com stores, a significant reduction in its headquarters
staff and the closure of its Sacramento, California distribution center.
The fiscal 1998 fourth quarter charge of $37.6 million included
approximately $17.1 million for retail lease terminations and related fixed
asset disposals, $10.0 million for store closing costs, $6.2 million for
the liquidation of inventory, $2.1 million for the closure of the
Sacramento distribution center and $2.2 million in severance, fixed asset
disposal and other miscellaneous expenses related to the reduction of the
Company's headquarters operation. Egghead.com anticipates that the closure
of all activities and stores and the settlement of all leases and claims
related to the restructuring will be substantially completed by the end of
fiscal 1999.
In the fourth quarter of fiscal 1997, Egghead.com recorded a $24.0 million
restructuring and impairment charge to reorganize its operations. This
plan involved among other things, closing 70 of the 156 Egghead.com stores,
a significant reduction in its headquarters staff and the closure of its
Lancaster, Pennsylvania distribution center. The Company anticipates that
the remaining payables related to the restructure, consisting at June 27,
1998 primarily of $1.3 million in lease obligations and $0.5 million in
severance will be substantially settled by the third quarter of fiscal
1999.
NOTE 7 RECAPITALIZATION OF SUBSIDIARY
On November 11, 1997 Egghead.com recapitalized its wholly owned subsidiary
Elekom Corporation ("Elekom"). As part of the recapitalization, certain
venture capitalists invested capital in Elekom, reducing the Company's
ownership percentage to approximately 26% as of June 27, 1998. Prior to
recapitalization, income and expenses of Elekom were recorded in the
Company's operating results. After recapitalization, the Company's share
of the results of operations of Elekom were included using the equity
method of accounting and are reflected in the other income (expense) in the
Company's consolidated statements of operations.
8
EGGHEAD.COM, INC. AND SUBSIDIARIES
________________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
NOTE 8 PROPERTY HELD FOR SALE
On May 1, 1998, the Company sold its previous headquarters building located
in Liberty Lake, Washington, for approximately $7.5 million. The building
was recorded in the Property Held for Sale on the Company's Balance Sheet
as of March 28, 1998. The Company will lease approximately 7,000 square
feet of the building over a lease term of one year, including extensions.
The Company recorded a gain of approximately $270,000 on this sale.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
RESULTS OF OPERATIONS
OVERVIEW
Egghead.com, Inc. ("Egghead" or the "Company") is one of the leading on-line
resellers of personal computer ("PC") hardware, software, peripherals and
accessories to consumers and businesses. The Company sells a broad selection of
PC hardware and software products, as well as other consumer merchandise,
through three Internet websites, the Egghead.com site, the Surplusdirect.com
site and the Surplusauction.com site, and a direct response division. These
products consist of current and off-price merchandise including excess,
closeout, refurbished, and reconditioned goods. In order to enhance its Internet
presence and expand its product offering, Egghead acquired Surplus Software,
Inc. ("Surplus Direct") on August 14, 1997. On January 28, 1998, Egghead
announced that it would change its name to Egghead.com, Inc.; shift its business
emphasis to Internet commerce; close its remaining retail network of 80 stores;
close its distribution center in Sacramento, California; and combine its
management and operations with those of Surplus Direct.
Egghead, a Washington corporation, was incorporated in 1988 and is the successor
to a corporation that was incorporated in Washington in 1984. Unless the context
indicates otherwise, references to Egghead or the Company include Egghead and
its wholly owned subsidiaries.
Egghead operates three electronic commerce sites, Egghead.com, Surplusdirect.com
and Surplusauction.com, which in the aggregate were ranked as the seventh most
visited at-home shopping sites and the sixth most visited at work shopping site
on the Internet during June 1998 according to Media Metrix, a leading
independent market research firm.. These interlinked web sites represent
Egghead's Internet "superstore," where customers can choose from a large
assortment of products, sourced, priced and configured to meet a wide variety of
needs. The Company's websites reported sequential growth from the fourth quarter
of fiscal 1998 to the first quarter of fiscal 1999 in the number of registered
auction site bidders from 96,000 to 168,000 and in the number of visits to the
websites from 14 million to 21 million. The customer e-mail database grew to 2.0
million names as of June 27, 1998.
The Egghead.com web site offers over 40,000 products, which are primarily
current version PC hardware, software, peripherals and accessories. Egghead
offers electronic delivery of selected software products, which permits a
customer to place an order and have the software product transmitted directly
electronically onto his or her PC. Egghead customers can use the Internet
commerce site to search for software titles, browse merchandise categories and
products and view demonstrations of selected software programs before placing an
order. The majority of the products offered on the Egghead web site are
available for shipment within 24 hours through third-party distribution
facilities.
The Surplusdirect.com web site is a leading reseller of primarily name
brand, off-price PC hardware, software and peripherals. These products are
primarily special purchases of excess, closeout, refurbished and reconditioned
merchandise. Through its merchandising organization, Egghead is able to provide
consumers and businesses the unique values created through the opportunistic
acquisition of goods. Customers may place orders directly on the Surplus Direct
home page, and products are generally shipped to customers the same day orders
are placed
10
The Surplusauction.com web site sells all of the aforementioned categories
of goods through interactive online auctions. The auction format allows
customers to bid competitively against each other. The web site currently
offers up to 15 auctions per week, selling quantities of one to more than 1,500
of each item where customers can bid online 24 hours a day, seven days a week.
By comparison to the traditional fixed price formats of online catalogs, the
auction format enables the customers to impact the price through auction-style
bidding. At the designated closing time, the Company selects the winning
bidders and sends an e-mail message to them confirming their purchases. In
addition to offering an exciting forum for Internet purchases, the auction site
allows vendors to dispose of excess merchandise efficiently and effectively.
The site was launched in July 1997 and has over 168,000 registered bidders as of
June 27, 1998.
Egghead also operates a 1-800 customer service center which responds to inbound
telephone calls and inquiries from consumers as well as corporate, government,
reseller and educational institution customers and takes orders for the same
hardware and software products that are offered on the Company's web sites.
These inquiries are mainly generated by the Company's promotional efforts which
include both online and traditional advertising, principally through the limited
circulation of its catalogs. Egghead ships merchandise purchased through the 1-
800 service directly to the customer from Egghead's distribution center in
Vancouver, Washington or from third-party distributors.
The Company's web sites and 1-800 customer service center are referenced as
"ongoing" operations in the following discussion of financial condition and
results of operations. "Continuing" operations includes the retail store network
during its existence and the ongoing operations, but excludes the corporate,
government and educational ("CGE") division which the Company sold in FY 97: the
CGE division is referred to as "discontinued" operations.
This Report on Form 10-Q and the documents incorporated herein by reference
contain forward-looking statements based on current expectations, estimates and
projections about the Company's industry, management's beliefs and certain
assumptions made by management. When used in this report and elsewhere by
management, from time to time, the words "believes," "plans," estimates,"
"intends," "anticipates," "seeks," and "expects" and similar expressions are
intended to identify forward-looking statements. These forward-looking
statements are not guarantees of future performance and are subject to certain
risks and uncertainties that are difficult to predict. Accordingly, actual
results may differ materially from those anticipated or expressed in such
statements. Potential risks and uncertainties include, among others, those set
forth under "Additional Factors That May Affect Future Results" in Egghead's
Annual Report on Form 10-K for fiscal year ended March 28, 1998. Particular
attention should be paid to the cautionary statements involving the Company's
limited Internet operating history, the rapid evolution of Internet commerce and
related technology, management of potential growth, the intensely competitive
nature of the business of selling PC software, hardware and related products,
and of the electronic commerce business, Egghead's dependence on vendors,
distributors and certain supply sources and risks associated with the closing of
the Company's retail store network and the combination of the management and
operations of the Company with those of Surplus Direct. Readers are cautioned
not to place undue reliance on the forward-looking statements, which speak only
as of the date made. Except as required by law, the Company undertakes no
obligation to update any forward-looking statement, whether as a result of new
information, future events or otherwise. Readers, however, should carefully
review the factors set forth in other reports or documents that the Company
files from time to time with the SEC.
11
RESULTS OF OPERATIONS
Egghead reported a total net loss for the quarter ended June 27, 1998 of $5.5
million compared to a total net loss of $3.7 million for the quarter ended June
28, 1997.
Continuing Operations
Pretax Loss. The Company's loss before income taxes includes the results of the
Internet commerce operations, including Surplusdirect and Surplusauction sites
from acquisition on August 14, 1997, the direct response unit, and the retail
store network through its closure on February 28, 1998, as well as the selling,
general and administrative expenses related to these operations. Net sales,
costs of sales and gross margin for the ongoing operations of the three web
sites and the inbound call center are detailed separately in the discussions
below from the similar information for the closed retail store network. The
following table shows the relationship of certain items relating to continuing
operations included in Egghead's Consolidated Statements of Operations,
including restructuring and impairment charges, expressed as a percentage of net
sales:
13 WEEKS ENDED
--------------
JUNE 27, 1998 June 28, 1997
------------- -------------
Net sales:...............................................
Retail................................................. -% 92.7%
Ongoing................................................ 100.0 7.3
------ -----
Total net sales.......................................... 100.0 100.0
------ -----
Cost of sales:...........................................
Retail................................................. - 83.6
Ongoing................................................ 89.6 83.5
------ -----
Total cost of sales...................................... 89.6 83.6
------ -----
Gross margin............................................. 10.4 16.4
Selling and marketing expense............................ 19.5 16.0
General and administrative expense... 10.4 6.5
Depreciation and amortization expense.................... 2.7 2.2
------ -----
Operating loss........................................... (22.2) (8.3)
Other income, net........................................ 3.4 1.8
------ -----
Loss before income taxes................................. (18.8)% (6.5)%
====== =====
Net Sales. The Company's total revenues for the first quarter of fiscal 1999
were $29.5 million, compared to $56.2 million for the same period of fiscal
1998. The decrease is primarily attributable to the previously announced closure
of all retail store operations on February 28, 1998. Excluding retail store
sales, first quarter sales from ongoing operations increased from $4.1 million
in fiscal 1998 to $29.5 million in fiscal 1999. The prior year's first quarter
historical results do not include Surplus Direct's operations prior to the
acquisition which closed on August 14, 1997. For the three months ended June 30,
1997, Surplus Direct's revenues were approximately $14.0 million. On a pro forma
basis including Surplus Direct, revenues from ongoing operations increased 63%
from the first quarter of fiscal 1998. The Company's total revenues from orders
placed on-line grew to $21.1 million compared to $15.0 million for the fourth
quarter of fiscal 1998, an increase of 41%. Revenue from other sources,
including telephone orders placed as a result of website promotions and catalogs
were $8.4 million compared to $15.5 million. The decrease was due to primarily
to a managed reduction in catalog and call center operations.
12
Gross Margin. Gross margin consists of net sales minus cost of sales. Gross
margin is primarily affected by sales volume and the mix of PC products sold, as
well as vendor rebates and freight and obsolescence charges. Gross margin as a
percentage of net sales may also be significantly affected by industry-wide
pricing pressure related to both competitors' pricing and vendors' pricing.
Gross margin from ongoing operations was 10.4% for the first quarter of fiscal
1999, an increase of 40 basis points over the fourth quarter of fiscal 1998. The
gross margin for ongoing operations as compared to first quarter of fiscal 1998
decreased 6.1%. The first quarter of fiscal 1999 reflects a managed reduction in
call center and catalog sales as compared to the first quarter of fiscal 1998.
In addition, the first quarter of fiscal 1998 does not include the operations of
Surplus Direct as this time period was prior to the acquisition. In view of
Egghead's limited Internet operation history, the Company believes that period-
to-period comparisons of its operating results, including the Company's gross
margin and operating expense as a percentage of net sales, are not necessarily
meaningful and should not be relied upon as an indication of future performance.
Selling, and Marketing Expense. Selling and marketing expense consists
primarily of operating expenses, including direct response, Internet commerce,
merchandising, purchasing, distribution, and marketing expense. Such operating
expenses include payroll and benefits, telecommunications, credit card
processing costs and supplies in addition to the occupancy costs, before
closure, of the retail stores. The selling and marketing expenses for the first
quarter of fiscal 1999 were $5.8 million, a reduction from the same period in
fiscal 1998 of $3.2 million and a reduction from the fourth quarter of fiscal
1998 of $7.2 million. The prior year first quarter historical expenses do not
include Surplus Direct costs prior to the acquisition in August 1997. The
reduction as compared to the fourth quarter of fiscal 1998 reflects a reduction
in headquarters' expenses to adjust for the closure of the retail stores on
February 28, 1998. The Company expects selling and marketing expenses to
increase significantly as a percentage of net sales as it endeavors to enhance
its brand name recognition through marketing alliances.
General and Administrative Expense. General and administrative expense consists
primarily of headquarters support functions. Such operating expenses include
payroll and benefits, professional services, facilities rent and maintenance and
related supplies. The general and administrative expenses of $3.1 million for
the first quarter of fiscal 1999 is $600,000 and $2.0 million lower than expense
for the first quarter and fourth quarters of fiscal 1998, respectively. The
prior year first quarter historical expenses do not include Surplus Direct costs
prior to the acquisition in August 1997. The reduction as compared to the fourth
quarter of fiscal 1998 reflects the closure of the retail stores on February 28,
1998. The Company anticipates the general and administrative costs to decline
from prior year levels as Egghead adjusts its overhead functions for the
elimination of the retail store operations.
Depreciation and Amortization. Depreciation and amortization expense primarily
includes depreciation of Egghead.com's former headquarters facility and capital
equipment and amortization of the goodwill recorded with the acquisition of
Surplus Direct in August 1997. The depreciation expense of $365,000 the period
ended June 27, 1998 declined compared to $1.3 million for the prior year
comparable period, primarily due to the closure of the remaining retail stores
in February 1998. Amortization expense of $419,000 in the first quarter of
fiscal 1999 reflects the amortization of the goodwill recorded in August 1997.
Other Income, Net. Interest income was $932,000, and $997,000 for the first
quarters of fiscal 1999 and 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents remained relatively constant at $67.0 million as of
June 27, 1998 as compared to $67.4 million at March 28, 1998. The decrease in
the cash balance was primarily
13
due to a reduction the net operating loss of $5.5 million and the decrease in
restructure liabilities of $5.9 million, partially offset by net proceeds of
$7.1 million from the sale of the former headquarters building and $923,000 in
stock issuances. Egghead expects these cash balances will be adequate to meet
future cash requirements for operations for the foreseeable future.
Cash flows used by operating activities of $8.3 million for the quarter ended
June 27, 1998 was primarily attributable to the net loss of $5.5 million and a
decrease in restructure liabilities of $5.9 million partially offset by a
reduction in merchandise inventories of $2.0 million and a reduction in accounts
payable of $1.0 million.
Net cash provided by investing activities was $7.0 million for the first quarter
of fiscal 1999 and primarily consisted of net proceeds of $7.1 million from the
sale of the former headquarters building.
Cash flows provided by financing activities of $923,000 for the first quarter of
fiscal 1999 consisted of proceeds from stock issuances under the Company's stock
option plans.
As June 27, 1998, the Company's principal source of liquidity was $67.0 million
of cash. As of that date, Egghead principal commitments consisted of
obligations in connection with operating leases and commitments for advertising
and promotional arrangements. Although the Company has no material commitments
for capital expenditures, it anticipates future purchases related to the
redesign of the web sites to improve functionality and navigation, incorporating
features which are intended to improve the customer shopping experience, and
scalability and performance of the sites. In the event of a growth in
operations, these types of expenditures could be substantial.
The Company believes that current cash and cash equivalent balances will be
sufficient to meet its anticipated cash needs for the foreseeable future.
However, any projections of future cash needs and cash flows are subject to
substantial uncertainty. If cash generated from operations is insufficient to
satisfy the Company's liquidity requirements, the Company may seek to sell
additional equity or debt securities or to obtain a line of credit. The sale of
additional equity or debt securities could result in additional dilution to the
Company's stockholders. There can be no assurance that financing will be
available in amounts or on terms acceptable to the Company, if at all. In
addition, the Company will, from time to time, consider the acquisition of or
investment in complementary businesses, products and technologies, which might
increase the Company's liquidity requirements or cause the Company to issue
additional equity or debt securities. The Company does not currently use
derivative financial instruments.
The Company is also developing a plan to modify its information technology to
recognize the Year 2000 and has, to the extent necessary, begun upgrading
certain critical data processing systems. Since the Company's systems and
software are relatively new and the majority are covered by maintenance
agreements with the vendors, management does not expect Year 2000 issues related
to its own internal systems to be significant. There can be no guarantee that
the systems of other companies, on which the Company relies, will be converted
timely and will not have an adverse effect on the Company's systems. Egghead
continues to evaluate the estimated costs associated with these efforts based on
the costs of past programming changes and does not expect the future costs of
resolving its internal Year 2000 problems to be material. The Company currently
expects the project to be complete in 1999. However, no assurance can be given
that the Company's computer systems will be Year 2000 compliant in a timely
manner, that the Company will not incur significant additional expenses pursuing
Year 2000 compliance or that the Year 2000 problem will not have a material
adverse effect on the Company in the future.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 3, 1998, The Company's wholly-owned subsidiary, Surplus Software,
Inc., was served with a complaint for breach of contract, promissory estoppel,
wages, misrepresentation, and unlawful employment practices by five of the
Company's former employees. A former manager of Surplus Software, Inc. is also
named individually in the complaint. The suit alleges the Surplus Software, Inc.
failed to act in good faith and fair dealing, and used unlawful employment
practices that included national origin and age discrimination, and wrongful
termination. The plaintiffs collectively seek damages in an amount exceeding
$1.1 million, plus attorneys' fees. The suit was filed in the Multnomah County
Circuit Court of the State of Oregon.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
If the Company receives notice of a proposal that a shareholder proposes to
submit at the Company's annual meeting of shareholders after April 8, 1998, the
persons named as proxies in such proxy statement and proxy will have
discretionary authority to vote on such shareholder proposal..
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27 Financial Data Schedule.
b. Reports on Form 8-K
Egghead.com, Inc. reported on Item 5 of Form 8-K in a report on Form 8-K,
filed May 23, 1998, which reported on Item 1 of Form 8-K and contained
certain pro-forma financial information.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned; thereunto duly authorized, in the
city of Liberty Lake, State of Washington, on August 10, 1998.
EGGHEAD.COM, INC.
By /s/ George P. Orban
-----------------------------------
George P. Orban
Chief Executive Officer,
Chairman of the Board
/s/ Brian W. Bender
-----------------------------------
Brian W. Bender
Chief Accounting Officer,
Chief Financial Officer
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