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 June 29, 1997 to September 27, 1997
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-16930
EGGHEAD, INC.
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(Exact name of registrant as specified in its charter)
Washington 91-1296187
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
East 22705 Mission
Liberty Lake, Washington 99019
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(Address of principal executive offices) (Zip Code)
(509) 922-7031
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES x NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock:
Outstanding at
Class October 25, 1997
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Common Stock 23,001,671
$.01 par value shares
ITEM 1. Financial Statements and Supplementary Data
EGGHEAD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
September 27, March 29,
1997 1997
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Current assets:
Cash and cash equivalents $ 54,131 $ 83,473
Accounts receivable, net of allowance for
doubtful accounts of $4,438 and $4,680,
respectively 10,532 13,917
Receivable from Joint Venture - 4,000
Merchandise inventories, net 63,268 49,087
Prepaid expenses and other current assets 3,768 4,116
Property held for sale 7,852 7,692
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Total current assets 139,551 162,285
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Property and equipment, net 12,922 12,018
Goodwill, net 34,153 -
Other assets 430 1,217
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$187,056 $175,520
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 36,991 $ 43,027
Accrued liabilities 11,805 12,996
Liabilities related to disposition of CGE division 5,860 7,754
Reserves and liabilities related to restructuring 7,870 11,258
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Total current liabilities 65,526 75,035
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Other long-term liabilities 243 438
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Total liabilities 67,479 75,473
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Commitments and contingencies - -
Shareholders' equity :
Common stock, $.01 par value:
50,000,000 shares authorized; 22,953,851 and
17,591,052 shares issued and outstanding,
respectively 230 176
Additional paid-in capital 157,206 124,457
Retained earnings (deficit) (33,149) (24,586)
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Total shareholders' equity 124,287 100,047
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$187,056 $175,520
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
13 WEEKS ENDED 26 WEEKS ENDED
------------------------ ------------------------
(UNAUDITED) (UNAUDITED)
September September September September
27, 28, 27, 28,
1997 1996 1997 1996
--------- --------- --------- ----------
Net sales:
Egghead Computer $54,967 $79,971 $111,128 $158,617
Surplus Direct 8,323 - 8,323 -
--------- --------- --------- ----------
Net sales 63,290 79,971 119,451 158,617
Cost of sales, including certain buying,
occupancy, and distribution costs 55,875 71,786 106,261 143,822
--------- --------- --------- ----------
Gross margin 7,415 8,185 13,190 14,795
Selling, general, and
administrative expense 12,020 15,015 21,502 32,949
Depreciation and amortization expense, net
of amounts included in cost of sales 1,022 1,766 1,979 3,513
--------- --------- --------- ----------
Operating loss (5,627) (8,596) (10,291) (21,667)
Other income (expense) 722 960 1,728 1,615
--------- --------- --------- ----------
Loss from continuing operations before income taxes,
effects of discontinued operations and cumulative
effect of change in accounting principle (4,905) (7,636) (8,563) (20,052)
--------- --------- --------- ----------
Income tax benefit - 2,978 - 7,820
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Net loss from continuing operations before effects
of discontinued operations and cumulative
effect of change in accounting principle (4,905) (4,658) (8,563) (12,232)
--------- --------- --------- ----------
Discontinued operations:
Income (loss) from discontinued
operations, net of tax - - - (14,548)
Gain on disposal of discontinued
operations, net of tax - - - 22,286
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Income (loss) from discontinued operations - - - 7,738
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Net loss before cumulative effect of
change in account principles (4,905) (4,658) (8,563) (4,494)
Cumulative effect of change in
account principles net of tax - (711)
--------- --------- --------- ----------
Net loss $(4.905) $(4,658) $(8,563) $(5,205)
--------- --------- --------- ----------
--------- --------- --------- ----------
Loss per share:
Continuing operations $(0.24) $(0.25) $(0.45) $(0.70)
Discontinued operations:
Loss from discontinued
operations - - - (0.83)
Gain on disposal of discontinued
operations - - - 1.27
Change in accounting principle - - - (0.04)
--------- --------- --------- ----------
Loss per share $(0.24) $(0.27) $(0.45) $ (0.30)
--------- --------- --------- ----------
--------- --------- --------- ----------
Weighted average common shares and common
equivalent shares outstanding 20,127 17,567 18,859 17,561
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
Common Stock Additional
------------ Paid-in Retained
Shares Amount Capital Earnings Total
--------------------- ---------- --------- -----
Balance, March 29, 1997 17,591 $ 176 $ 124,457 $ (24,586) $100,047
Stock issued for cash, pursuant
to employee stock purchase
plan 23 - 78 78
Stock issued for cash, pursuant
to stock option plan 29 1 149 150
Stock issued for acquisition of
Surplus Software, Inc. 5,311 53 32,522 32,575
Net loss (8,563) (8,563)
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Balance, September 27, 1997 22,954 $ 230 $ 157,206 $ (33,149) $124,287
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
26 Weeks Ended
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(UNAUDITED)
September 27, September 28,
1997 1996
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Cash flows from operating activities:
Net loss $ (8,563) $ (5,205)
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Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 2,276 4,300
Deferred rent (195) (194)
Deferred income taxes - (753)
Cumulative effect of change in accounting principle - 1,163
(Gain) loss on disposition of assets (1) 2,730
(Gain) on sale of CGE, before taxes - (36,535)
Reserves recorded in connection with CGE disposal (1,788) 8,465
Changes in assets and liabilities:
Accounts receivable, net 7,385 6,545
Merchandise inventories (18,891) (14,520)
Prepaid expenses and other current assets (151) (3,674)
Other assets (727) 56
Accounts payable 510 (36,682)
Accrued liabilities 1,309 (2,581)
Income taxes payable - -
Discontinued Operations (3,761) 67,049
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Total adjustments (14,034) (4,631)
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Net cash (used) provided by operating activities (22,597) (9,836)
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Cash flows from investing activities:
Additions to property and equipment (793) (2,845)
Proceeds from sale of equipment 7 28
Proceeds from sale of CGE - 45,000
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Net cash (used) provided by investing activities (786) 42,183
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Cash flows from financing activities:
Payments on capital lease obligations (125) (173)
Payments on notes payable (6,000)
Proceeds from stock issuances 166 191
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Net cash (used) provided by financing activities (5,959) 18
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Effect of exchange rates on cash - (35)
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Net increase (decrease) in cash (29,342) 32,330
Cash and cash equivalents at beginning of period 83,473 49,590
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Cash and cash equivalents at end of period $ 54,131 $ 81,920
Supplemental disclosures of cash paid:
Interest $ 24 $ 22
Income taxes $ - $ 67
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. While these statements reflect the
adjustments which are, in the opinion of management, necessary to fairly
state the results of the interim periods, they do not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements. These adjustments are of a
normal and recurring nature. For further information, refer to the annual
financial statements and footnotes thereto, for the 52 week period ended
March 29, 1997, contained in the Company's Form 10-K, filed pursuant to
the Securities Exchange Act of 1934. The reader is further cautioned that
operating results for the 13 and 26 weeks ended September 27, 1997, are
not necessarily indicative of the results that may be expected for the
full year.
The Company uses a 52/53 week fiscal year, ending on the Saturday nearest
March 31 of each year. Each fiscal quarter consists of 13 weeks.
NOTE 2 EARNINGS (LOSS) PER SHARE
Net earnings (loss) per share amounts are computed using the weighted
average number of common shares and dilutive common equivalent shares
outstanding during each period using the treasury stock method. Common
equivalent shares result from the assumed exercise of stock options and
from the conversion of cash related to the employee stock purchase plan
into common shares based upon the terms of the plan. Common equivalent
shares had no effect on the computation of the loss per share amount for
the 13 and 26 week periods ended September 27, 1997, and September 28,
1996, because it was anti-dilutive.
NOTE 3 DISCONTINUED OPERATIONS
Effective May 13, 1996, the Company sold its CGE division to Software
Spectrum, Inc. (SSI), a Texas Corporation for $45 million in cash pursuant
to the terms of an asset purchase agreement entered into on March 23,
1996. The asset purchase agreement required Egghead to provide SSI with
certain support services for a period not to exceed 120 days on Egghead's
behalf, SSI's collection of Egghead's CGE related accounts receivable for
a period not to exceed 150 days and a lease to SSI for a minimum period of
three years of a portion of Egghead's Liberty Lake corporate facility.
Gain on disposition of the discontinued operation was $36.5 million ($22.3
million after tax). The sale price for the CGE division was $45 million,
which did not include the accounts receivable, which were collected during
fiscal 1997. The reported gain is net of fixed assets and lease write-
offs of $1.2 million, transaction, legal and accounting fees of $2.0
million, transition period employment costs of $1.8 million and costs
related to the fulfillment of post-sale obligations as noted above.
The net liabilities relating to discontinued operations have been
segregated on the consolidated balance sheet from their historic
classifications. Liabilities related to the disposition of the CGE
division at September 27, 1997 and March 29, 1997 included
6
liabilities from CGE activities and additional reserves deemed necessary
to complete the disposition of remaining CGE assets, including the
settlement of any remaining claims.
Information related to the effects of the discontinued operation on the
consolidated statements of income are reflected in the income statement as
income(loss) from discontinued operations. Discontinued operations for
the fiscal year-to-date period ended September 28, 1996, resulted in a
loss, net of tax, of $14.5 million. This loss includes accounts receivable
and inventory write-offs, equipment lease buyouts and write-offs, warehouse
closing costs, severance, operating costs and other expenses.
NOTE 4 INCOME TAXES
Egghead determines its income tax accounts in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS No. 109). Deferred income
taxes result primarily from temporary differences in the recognition of
certain items for income tax and financial reporting purposes.
Given the recent losses, Egghead determined that its deferred tax assets
no longer meet the realization criteria of SFAS No. 109. Under SFAS 109,
the realization of the deferred tax assets depends on generating future
taxable income. Until Egghead has determined that all of its existing net
operation losses, which expire 15 years after origination, are realizable,
it will not record a tax charge or benefit for future operating results.
NOTE 5 LEASES
The Company leases retail stores and a distribution facility under
operating leases with remaining lives on most leases ranging from one to
five years. As of September 27, 1997 the future minimum rental payments
under these noncancelable operating leases for continuing retail stores,
the distribution facility and equipment were as follows (in thousands):
Fiscal Year
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1998 $3,241
1999 4,484
2000 2,481
2001 1,555
2002 502
Thereafter 1,280
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Total minimum payments $13,543
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------
7
Notes to Consolidated Financial Statements (CONTINUED)
(UNAUDITED)
NOTE 6 RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This new standard required that long-lived assets and certain
identifiable intangible assets be evaluated to determine whether the
carrying amount is recoverable based on estimated future cash flows
expected from the use of the assets and cash to be received upon disposal
of the assets. Egghead adopted this standard at the beginning of the
first quarter of fiscal 1997. The cumulative effect of the change in
accounting principle, which was recognized in the first quarter of fiscal
1997, was a charge of $0.7 million, after tax, or $0.04 per share,. This
charge represents the writedown of Egghead's property held for sale in
Kalispell, Montana and the related goodwill. In connection with its
adoption of SFAS No. 121, Egghead also recorded a pretax charge of
approximately $0.1 million related to retail assets, the carrying amounts
of which were not likely to be recovered through future cash flows.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128 (SFAS 128), "Earnings Per Share." SFAS 128 establishes
new standards for computing and presenting earnings per share and
supersedes Accounting Principles Board Opinion No. 15, "Earnings Per
Share." SFAS 128 will be adopted by Egghead in the third quarter of
fiscal 1998. Management does not believe the adoption of this new
standard would have a material effect on earnings (loss) per share as
currently reported.
NOTE 7 STOCK OPTION REPRICING
On April 4, 1997, the Compensation Committee of the Egghead Board approved
a plan pursuant to which employees other than executive officers were
offered an opportunity to exchange options having per share exercise
prices in excess of the then current fair market value per share of
Egghead common stock for new options having an exercise price of $4.375
per share of Egghead stock. The Compensation Committee approved a similar
option repricing for certain executive officers on April 23, 1997.
Recipients of the repriced replacement options received credit for vesting
under the original options, but cannot exercise the new options for a one-
year period following the date of grant of the new options. The total
number of options repriced under the option repricing described above was
465,014.
8
Notes to Consolidated Financial Statements (CONTINUED)
(UNAUDITED)
NOTE 8 ACQUISITION
On August 14, 1997, the Company acquired Surplus Software, Inc. d/b/a Surplus
Direct, of Hood River, Oregon, by issuing 5,310,888 shares of common stock and
289,112 options to purchase common stock of Egghead, Inc. The transaction
included payment of $6.0 million of Surplus Direct debt. Surplus Direct is
engaged in the direct marketing of previous version computer hardware and
software. This acquisition was recorded under the purchase method of
accounting and operating results of Surplus Direct are included in the
statement of operations from the date of acquisition. An excess purchase price
of approximately $34.3 million has been determined based on the fair values of
assets acquired and liabilities assumed. A final allocation of purchase price
to goodwill will be made during fiscal 1998 when appraisals and other studies
are completed. Amortization of goodwill will be over a period not to exceed 20
years.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
GENERAL
RESULTS OF OPERATIONS
OVERVIEW
Egghead, Inc. ("Egghead") is a national reseller of personal computer ("PC")
hardware, software, peripherals and accessories through 85 retail stores, two
Internet catalog sites an Internet auction site and two direct response
divisions (1-800EGGHEAD and 1-800SURPLUS). Egghead markets its products
primarily through two subsidiaries DJ&J Software d/b/a/ Egghead Computer and
Surplus Software, Inc. d/b/a/ Surplus Direct. Egghead began operations in
1984 primarily as a software reseller, but has recently expanded its product
offerings to include a greater percentage of hardware, other non-software
products, electronic software downloads, as well as off-price and previous
version merchandise, build to order computers and liquidation items.
On August 14, 1997, Egghead acquired Oregon based Surplus Direct for 5.6
million newly issued shares of Egghead common stock (the "Merger"). The
transaction included repayment of $6.0 million of Surplus Direct debt. Surplus
Direct specializes in sales of previous version computer hardware and software.
Egghead believes this Merger will create synergies through the combination of
surplus Direct's hardware purchasing expertise, access to the surplus PC
products channel, entrepreneurial management and Internet commerce development
capabilities with Egghead's greater software product procurement expertise and
seasoned retail management. Nevertheless, there can be no assurance that these
benefits will be achieved.
Egghead's profitability over its early operating history was mixed; however,
over its last five fiscal years, Egghead has reported increasing losses from
continuing operations. Egghead's losses over the last five fiscal years are
attributable primarily to an increased number of competitors selling PC
products through a greater variety of channels, severe price competition among
PC product resellers, a trend toward lower margins on computer and related
software products, Egghead's relatively high headquarters expenses and other
factors. Egghead has taken a number of steps intended to reduce or eliminate
Egghead's losses. These steps include divesting a non-retail business segment,
focusing its retail operations in certain geographic markets, closing
unprofitable stores, upgrading existing stores, experimenting with new store
formats and implementing new Internet commerce sites.
For example, in May 1996, Egghead sold its Corporate, Government and Education
("CGE") division to generate cash and to allow management to focus on retail
operations. The sale resulted in a net gain of $22.3 million, offset by a
related net loss from the CGE operations of $12.3 million. During the fourth
quarter of fiscal 1997, Egghead substantially restructured and reorganized its
operations by (i) closing 70 of its worst performing retail stores,
(ii) substantially reducing its headquarters personnel, (iii) closing its
Lancaster, Pennsylvania distribution center, and (iv) offering for sale certain
real estate assets, including its administrative headquarters building located
in Liberty Lake, Washington. Egghead intends to close an additional seven
poorly performing retail stores as part of the restructuring and
reorganization. The restructuring and reorganization concentrated Egghead's
retail stores into fewer geographic markets and is expected to reduce
headquarters and distribution expenses for continuing operations. Overall,
Egghead's selling, general and administrative expenses have decreased $14.4
million during the first half of fiscal 1998, offset by the addition of $1.4
million of Surplus Direct operating expenses, $1.0 million of acquisition
expenses and an increase of $0.5 million in development expenses of its Elekom
Corporation subsidiary. Egghead also opened the first Egghead Computer Surplus
warehouse format store in Portland, Oregon in November 1996 and expanded the
Spokane, Washington store to accommodate the
10
warehouse format product mix in August 1997. The warehouse store format is
approximately 12,000 square feet and carries a product mix of new and
off-price computer hardware and software. These stores have demonstrated
positive sales revenues with the Spokane location recording a 69% increase in
sales since the expansion. The product mix in this format provides for a
larger offering of hardware and computer accessories. The Portland and
Spokane stores second quarter results were 86% non-software products.
Egghead plans to open at least two new warehouse stores prior to the 1997
Holiday selling season.
The Company's year-to-date pretax operating losses as of September 27, 1997
have decreased $11.5 million from the prior year comparable period. Although
the fiscal 1997 restructuring and reorganization have reduced headquarters
and distribution expenses, further reductions in operating expenses may be
necessary. Closure of poorly performing stores should improve retail store
operating performance and inventory turn ratios for the remaining stores, but
results from its the warehouse store format are still new. Egghead Computer
will continue to evaluate the performance of its larger format stores and
expects that further refinement of its store format and locations may be
required. Egghead Computer and Surplus Direct's Internet sites are
relatively new and the long-term growth of this industry has not yet been
proven. Accordingly, it is not yet clear that Egghead has developed a
business strategy that will accomplish the goal of further reducing and
eliminating its losses, and there can be no assurance that it will be able to
do so.
Egghead uses a 52/53-week fiscal year, ending on the Saturday nearest March 31
of each year. Each fiscal quarter consists of 13 weeks. Information contained
in this report excludes, unless otherwise stated, any data relative to the
discontinued operations of the CGE division.
When used in this report and elsewhere by management, from time to time, the
words "believes,: "anticipates" and "expects" and similar expressions are
intended to identify forward-looking statements. Certain important factors
could cause actual result to differ materially from those expressed in the
forward-looking statements. These factors are detailed in Egghead's Annual
Report on From 10-K for the fiscal year ended March 29, 1997, and include, but
are not limited to, risks associated with the fluctuations in, and the
uncertainty of, future operating results, the intensely competitive nature of
the business of selling PC software, hardware and related products, Egghead's
dependence on certain supply sources, and Egghead's limited experience, and
risks associated, with Internet commerce. Readers are cautioned not to place
undue reliance on the forward-looking statements, which speak only as of the
date made. The Company undertakes no obligation to publicly release the
results of any revision to the forward-looking statements that may be made to
reflect subsequent events or circumstances or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS
Egghead reported a total net loss for the quarter ended September 27, 1997 of
$4.9 million compared to a total net loss of $4.7 million for the quarter ended
September 28, 1996. On a pretax basis, the loss from continuing operations for
the second quarters of fiscal 1998 and 1997 were $4.9 million and $7.6 million,
respectively. The pretax loss from continuing operations for the six months
ended September 27, 1997 and September 28, 1996 were $8.6 million and $20.1
million, respectively.
During the second quarter of fiscal 1998, the pretax loss for Egghead computer
was $2.6 million compared to a pretax loss of $7.3 million last year. Elekom
Corporation lost $0.8 million versus $0.3 million for the prior year comparable
quarter. In addition, Egghead incurred one-time costs associated with the
acquisition of Surplus Direct of $1.0 million and Surplus Direct incurred an
operating loss of $0.5 million during the quarter.
Had the company recorded comparable tax benefits for the quarters, the net loss
from continuing operations after tax would have been $3.0 million for the
second quarter of fiscal
11
1998 as compared to $4.7 million for the second quarter of fiscal 1997.
Until Egghead has determined that all of its existing net operating loss
carryforwards are realizable. It will not record a tax charge or benefit for
future operating results. For comparative purposes, Egghead's results of
operations are discussed below on a pretax basis.
CONTINUING OPERATIONS
PRETAX LOSS. Loss from continuing operations includes the results of Egghead
Computer's retail stores, 1-800EGGHEAD direct response unit, Internet catalog
operations and ELEKOM as well as selling, general, and administrative expenses
related to these operations. In addition, the fiscal 1998 second quarter
results include the operations of Surplus Direct from the date of acquisition.
The pretax net loss for the second quarter from continuing operations was $4.9
million compared to the net loss of $7.6 million for the same period of the
previous year. The following table shows the relationship of certain items
relating to continuing operations included in Egghead's Consolidated Statements
of Operations expressed as a percentage of net sales:
PERCENTAGE OF NET SALES
Second Quarter Year to Date
13 Weeks Ended 26 Weeks Ended
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1997 1996 1997 1996
-------- ------- --------- ------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, including certain
buying, occupancy, and
distribution costs 88.3 89.8 89.0 90.7
Gross margin 11.7 10.2 11.0 9.3
Selling, general, and
administrative expense 19.0 18.8 18.0 20.8
Depreciation and amortization
expense, net of amounts
included in cost of sales 1.6 2.2 1.7 2.2
Operating loss (8.9) (10.8) (8.7) (13.7)
Loss from continuing operations
before income taxes (7.8) (9.6) (7.2) (12.7)
NET SALES. Net sales for the second quarter of fiscal 1998 were $63.3 million,
a decrease of 20.9% from the $80.0 million in revenue for the same period of
the previous year. Surplus Direct contributed $8.3 million in sales for the
six weeks after the acquisition date of August 14, 1997. Surplus Direct's
sales increase approximately 103% over the prior year comparable period. The
sales results reflect a 31% decline in Egghead computer's sales primarily due
to the decrease in the average number of stores open to 86 from 162 in the
second quarter of fiscal 1997. The decreases in the second quarter and year-
to-date sales reflect the previously announced closure of 70 stores in the
February 1997. Comparable store sales for the second quarter and six months
ended September 27, 1997 decreased 5.6% and 2.2%, respectively, from the same
periods last year. Comparable store sales measure sales for stores that were
open in both periods being evaluated.
GROSS MARGIN. Consolidated gross margins (net sales minus cost of sales,
including certain buying, occupancy, and distribution costs) grew from 10.2 %
of sales for the second quarter of fiscal 1997 to 11.7% for the second quarter
of fiscal 1998. Gross margin dollars declined to $7.4 million for the second
quarter of fiscal 1998, compared to $8.2 million for the prior year
12
comparable period. The gross margin percentage increases for the
second quarter and six-months ended September 27, 1997 were primarily due to
an increase in initial margin and decreases in retail occupancy costs and
inventory shrinkage. These improvements were partially offset by an increase
in shipping costs and a reduction in vendor rebates.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE. Selling, General and
administrative expenses declined to $12.0 million and $21.5 million for the
three-month and six-month periods ended September 27, 1997 compared to $15.0
million and $32.9 million for the prior year periods. The improvements are
primarily attributable to reductions in Egghead Computer's retail operating
costs, headquarters costs and advertising expense, partially offset by the
second quarter addition of Surplus Direct operating and headquarters expenses
of $1.4 million, one-time acquisition costs of $1.0 million and an increase
in administrative costs incurred by Elekom Corporation.
DEPRECIATION AND AMORTIZATION EXPENSE, NET OF AMOUNTS INCLUDED IN COST OF
SALES. Depreciation and amortization was $1.0 million or 1.6% of net sales in
the second quarter of fiscal 1998, compared to $1.8 million or 2.2% of net
sales for the prior year comparable period. The decrease in depreciation and
amortization expense is primarily attributable to the reduction in the average
number of stores open during the quarter, partially offset by the amortization
of goodwill associated with the acquisition of Surplus Direct.
DISCONTINUED OPERATIONS
All results for the operations of the CGE division are reported as a
discontinued operation. Certain general, administrative and distribution areas
have traditionally supported all of Egghead's business lines. The expenses
included in the results of the discontinued operations reflect only those
activities directly related to only the CGE division.
GAIN ON THE DISPOSITION OF THE DISCONTINUED OPERATION during the six months
ended September 28, 1996, was $36.5 million ($22.3 million after tax). The
sales price for the CGE division was $45.0 million in cash, which did not
include the accounts receivable, which were collected during fiscal 1997. The
reported gain is net of fixed assets and lease write-offs of $1.2 million,
transaction, legal, and accounting fees of $2.0 million, transition period
employment costs of $1.8 million and costs of $3.4 million related to the
fulfillment of post-sale obligations.
LOSS FROM THE DISCONTINUED OPERATION was $23.8 million ($14.5 million after
tax) for the six months ended September 28, 1996. The major components of the
loss were inventory write-offs of $6.9 million, accounts receivable write-offs
of $5.1 million, fixed asset dispositions and equipment lease buyouts of $3.2
million, warehouse closing costs of $1.9 million and operating losses,
severance and other costs of $6.7 million.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE was a charge of $0.7
million, after tax or $0.04 per share for the six months ended September 28,
1996. This charge represents the adoption of SFAS 121 and the related
writedown of Egghead's property held for sale in Kalispell, Montana property
and the related goodwill.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $29.4 million from $83.5 million at March
29, 1997, to $54.1 million at September 27, 1997. The decrease in the cash
balance was primarily due to the increase in inventory and the net loss.
The receivable from Joint Venture decreased with the acquisition of Surplus
Direct and the dissolution of the joint venture between Egghead and Surplus
Direct.
13
Merchandise inventory, net increased $14.2 million from March 29, 1997 due to
preparation for the Holiday shopping season. This increase includes $5.4
million of primarily prepaid inventory acquired with Surplus Direct on
August 14, 1997. Despite the increase in inventory, accounts payable decreased,
primarily due to the acquired Surplus Direct prepaid inventory.
Reserves and liabilities related to the CGE division and the restructuring
decreased $1.9 million and $3.4 million, respectively, from March 29, 1997 with
the ongoing settlement of these liabilities.
14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Egghead, Inc.'s Annual Meeting of Shareholders was held on September 4,
1997 ("Meeting"), at which the directors below were elected to
three-year terms, except for Jonathan Brodeur who was elected to a
two-year term. The votes were cast as set forth below:
Nominee For Withheld
------- --- --------
Gregory J. Boudreau 14,739,613 732,725
Jonathan W. Brodeur 14,740,488 731,850
George P. Orban 14,740,434 731,904
Eric P. Robinson 14,743,048 729,290
At the meeting the proposal to amend the Egghead, Inc. 1993 Stock Option
Plan received the following votes:
For 13,934,019
Against 1,360,955
Abstain 53,180
Broker non-votes 124,184
Unvoted 2,142,004
A Special Meeting of Shareholders of Egghead, Inc. was held on August 14,
1997 to approve issuance of common stock pursuant to an Agreement and Plan
of Merger dated April 30, 1997, as amended, by and among Egghead, Inc.,
North Face Merger Sub, Inc., Surplus Software, Inc. and the principal
shareholders of Surplus Software., and the following votes were received:
For 10,602,709
Against 760,885
Abstain 2,391
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
10.1 Egghead, Inc. Amended 1993 Stock Option Plan (filed herewith).
10.2 Agreement And Plan of Merger, dated April 30, 1997, among Egghead,
Inc. ("Egghead"), North Face Merger Sub, Inc ("North Face") and Surplus
Software, Inc. ("Surplus Direct"), and certain shareholders of Surplus Direct,
and amendment thereto dated May 23, 1997 (Incorporated by reference to, and
previously filed with, Egghead's Registration Statement on Form S-4
(Registration No. 333-31251) as Exhibit 2.1, filed with the SEC on July 14,
1997).
10.3 Employment Agreement between Surplus Software, Inc. and Gregory
Boudreau, dated May 15, 1996 (filed herewith).
10.4 Employment Agreement Amendment, effective April 30, 1997. between
Surplus Software, Inc. and Gregory Boudreau (Incorporated by reference to, and
previously filed as part of, Egghead's Registration Statement of Form S-4
(Registration No. 333-31251) as Annex III to the Proxy Statement/Prospectus
contained in the Registration Statement, filed with the SEC on July 14, 1997).
10.5 Employment Agreement between Surplus Software, Inc. and Jonathan
Brodeur, dated May 15, 1996 (filed herewith).
10.6 Employment Agreement Amendment, effective April 30, 1997, between
Surplus Software, Inc. and Jonathan Brodeur (Incorporated by reference to, and
previously filed as part of, Egghead's Registration Statement on Form S-4
(Registration No. 333-31251) as Annex III to the Proxy Statement/Prospectus
contained in the Registration Statement, filed with the SEC on July 14, 1997).
27 Financial Data Schedule.
b. Reports on Form 8-K
A Form 8-K was filed by the Company on August 29, 1997 to report, under
Item 5 of Form 8-K, the acquisition of closely held Surplus Software,
Inc. for 5.6 million newly issued shares of Egghead, Inc. Common Stock.
The transaction was completed on August 14, 1997.
15
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 November 10, 1997.
EGGHEAD, INC.
By /s/ George P. Orban
----------------------------------------------
George P. Orban
Chief Executive Officer, Chairman of the Board
/s/ Brian W. Bender
----------------------------------------------
Brian W. Bender
Chief Accounting Officer, Chief Financial
Officer
16