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 October 17, 1993 to January 8, 1994
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-16930
EGGHEAD, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1296187
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
22011 S.E. 51st
Issaquah, Washington 98027
(Address of principal executive offices) (Zip Code)
(206) 391-0800
(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 February 5, 1994
Common Stock 17,121,438
$.01 par value shares
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<TABLE>
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements and Supplementary Data
Refer to Exhibit 99 for the results of the limited review performed by Arthur
Andersen & Co., independent public accountants.
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
<CAPTION>
January 8, April 3,
1994 1993
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $20,968 $26,386
Accounts receivable, net of allowance for
doubtful accounts of $2,818 and $2,391,
respectively 77,309 64,720
Merchandise inventories (Note 2) 161,581 137,158
Prepaid expenses and other current assets 3,532 3,219
Current deferred income taxes (Note 3) 7,851 7,850
Total current assets 271,241 239,333
Property and equipment, net 20,713 21,214
Non-current deferred income taxes (Note 3) 1,895 1,927
Other assets 2,801 742
$296,650 $263,216
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks (Note 5) $ - $ -
Accounts payable 130,947 99,976
Accrued liabilities 19,810 16,141
Income taxes payable - 795
Current portion of capital lease obligations 291 710
Total current liabilities 151,048 117,622
Capital lease obligations, less current portion 253 1,097
Deferred rent 1,528 1,507
Total liabilities 152,829 120,226
Commitments and contingencies (Notes 6 and 7)
Shareholders' equity:
Common stock, $.01 par value: 50,000,000
shares authorized; 17,121,438 and 16,982,737
shares issued and outstanding, respectively 171 170
Additional paid-in capital 120,282 119,242
Retained earnings 23,368 23,578
Total shareholders' equity 143,821 142,990
$296,650 $263,216
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
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<TABLE>
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
<CAPTION>
12 Weeks Ended 40 Weeks Ended
(unaudited) (unaudited)
January 8, January 2, January 8, January 2,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Net sales $208,593 $188,251 $583,460 $529,849
Cost of sales, including certain
buying, occupancy, and
distribution costs 182,973 161,323 504,547 452,674
Gross margin 25,620 26,928 78,913 77,175
Selling, general, and
administrative expense 21,228 19,151 68,332 61,856
Provision for restructuring costs - 1,700 4,400 1,700
Depreciation and amortization
expense, net of amounts
included in cost of sales 2,135 1,676 6,509 5,209
Operating income (loss) 2,257 4,401 (328) 8,410
Other (expense) income:
Interest expense (10) (33) (67) (225)
Interest income 147 31 289 195
Other, net (81) (617) (135) (677)
Income (loss) before income taxes 2,313 3,782 (241) 7,703
Income tax benefit (provision) (902) (1,475) 94 (3,004)
Net income (loss) $1,411 $2,307 $(147) $4,699
Earnings (loss) per share (Note 4) $0.08 $0.14 $(0.01) $0.27
Weighted average common shares
and common equivalent
shares outstanding 17,135 16,981 17,078 17,175
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
<CAPTION>
40 Weeks Ended
(unaudited)
January 8, January 2,
1994 1993
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(147) $4,699
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Depreciation and amortization 7,798 6,765
Deferred rent 22 199
Deferred income taxes 31 (1,285)
Stock issued as compensation 552 -
Loss on disposition of assets 150 667
Changes in assets and liabilities:
Accounts receivable, net (12,649) (8,743)
Merchandise inventories (24,501) (34,657)
Prepaid expenses and other current assets (314) (860)
Other assets (2,172) (92)
Accounts payable 31,077 37,275
Accrued liabilities 3,671 6,583
Income taxes payable (795) 975
Total adjustments 2,870 6,827
Net cash provided by operating activities 2,723 11,526
Cash flows from investing activities:
Additions to property and equipment (8,275) (8,344)
Proceeds from sale of equipment 96 65
Net cash used by investing activities (8,179) (8,279)
Cash flows from financing activities:
Payments on capital lease obligations (428) (418)
Proceeds from stock issuances 488 741
Net cash provided by financing activities 60 323
Effect of exchange rates on cash (22) -
Net increase (decrease) in cash (5,418) 3,570
Cash at beginning of period 26,386 19,300
Cash at end of period $20,968 $22,870
Supplemental disclosures of cash paid:
Interest $64 $223
Income taxes $915 $3,368
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. While these statements reflect the
adjustments which are, in the opinion of management, necessary to fairly
state the results of the interim periods, they do not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements. These adjustments are of
a normal and recurring nature. For further information, refer to the
annual financial statements and footnotes thereto, for the 53 week
period ended April 3, 1993, 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 12 and 40 week periods ended
January 8, 1994, are not necessarily indicative of the results that may
be expected for the full year.
Note 2 Merchandise Inventories
The majority of merchandise inventories are accounted for using the
moving weighted average cost method. The remainder are accounted for
using the first-in first-out cost method. All inventories are stated at
the lower of cost or market.
Note 3 Income Taxes
Deferred income taxes result from temporary differences in certain items
for income tax and financial reporting purposes.
Note 4 Earnings (Loss) Per Share
Primary earnings per share amounts are computed using the weighted
average number of common shares and dilutive common equivalent shares
outstanding during each period using the treasury stock method. Common
equivalent shares result from the assumed exercise of stock options and
from the conversion of cash related to the employee stock purchase plan
into common shares based upon the terms of the plan. The effect of
common equivalent shares was not included in computation of the loss per
share amount for the 40 week period ended January 8, 1994, because it
was anti-dilutive.
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Note 5 Notes Payable to Banks
Effective October 1, 1993, the Company entered into a revolving loan
agreement with two banks providing for unsecured borrowings of up to
$50,000,000 through September 30, 1994. Each bank provides a
$25,000,000 line of credit and one bank serves as agent for the
agreement. The Company may elect interest rates on the notes based on
the participating banks' rates on overnight funds, or on the agent
bank's rate on certificates of deposit, LIBOR, or prime rate. The
agreement contains a number of covenants, including a restriction on the
payment of dividends and certain financial ratio requirements. The
Company was in compliance with the financial covenants as of January 8,
1994. A summary of borrowings under the lines of credit follows (in
thousands):
12 Weeks Ended 40 Weeks Ended
January 8, 1994 January 8, 1994
Maximum amount outstanding $3,200 $5,950
Average amount outstanding 114 365
Weighted average interest rate on
borrowings 3.72% 3.88%
Note 6 Leases
The Company leases all its retail stores, corporate, government, and
education sales offices, it's distribution facilities in Lancaster,
Pennsylvania and Sacramento, California, and it's headquarter facilities
in Issaquah, Washington, under operating leases with terms ranging from
one to eleven years. As of January 8, 1994, the future minimum rental
payments under these operating leases were as follows (in thousands):
Fiscal Year
1994 (remainder) $3,647
1995 13,609
1996 12,637
1997 11,160
1998 7,605
Thereafter 4,869
Total minimum payments $53,527
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Note 7 Contingency
On September 16, 1993, two purchasers of the Company's securities,
individually and on behalf of a proposed class of purchasers between
February 11, 1992 and November 18, 1992, filed a lawsuit against the
Company, a current officer and two former officers who were also
directors, asking for unspecified damages and alleging certain
violations of the Securities Exchange Act of 1934, as amended, the
Washington State Securities Act and the Washington Consumer Protection
Act. The suit, Finucan v. Egghead, Inc., et al., was filed in the
United States District Court of the Western District of Washington.
Plaintiffs allege in general that the company and its officers made
material false statements and omissions in connection with the Company's
public announcements and disclosures. With respect to the individual
defendants, plaintiffs also allege that they sold stock while in the
possession of material non-public information. The Company and the
individual defendants intend to vigorously oppose the action.
Note 8 Reclassifications
Certain reclassifications have been made to the fiscal 1993 financial
statements to conform to the fiscal 1994 presentation.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
The Company uses a 52/53 week fiscal year, ending on the Saturday nearest
March 31 of each year. Fiscal quarters are such that the first quarter
consists of 16 weeks, the second and third quarters are each 12 weeks, and the
fourth quarter consists of the remaining 12 or 13 weeks.
RESULTS OF OPERATIONS
The following table shows the relationship of certain items included in the
Company's Consolidated Statements of Operations expressed as a percentage of
net sales:
Percentage of Net Sales
Third quarter Year to Date
12 Weeks Ended 40 Weeks Ended
January 8, January 2, January 8, January 2,
1994 1993 1994 1993
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, including
certain buying, occupancy,
and distribution costs 87.7 85.7 86.5 85.4
Gross margin 12.3 14.3 13.5 14.6
Selling, general, and
administrative expense 10.2 10.2 11.7 11.7
Provision for restructuring
costs - 0.9 0.7 0.3
Depreciation and amortization
expense, net of amounts
included in cost of sales 1.0 0.9 1.1 1.0
Operating income (loss) 1.1 2.3 - 1.6
Other income (expense) - (0.3) - (0.1)
Income (loss) before income
taxes 1.1 2.0 - 1.5
Income tax benefit
(provision) (0.4) 0.8 - 0.6
Net income (loss) 0.7 1.2 - 0.9
Net sales of $208.6 million for the 12 week period ended January 8, 1994, were
11% greater than net sales of $188.3 million for the 12 week period ended
January 2, 1993.
Year-to-date sales of $583.5 million for the 40 week period ended January 8,
1994 were 10% greater than net sales of $529.8 million for the 40 week period
ended January 2, 1993.
The corporate, government, and education group ("CGE") generated 45% of total
net sales during the third quarter of fiscal 1994, with 55% generated by
retail operations. This compares to 50% generated by CGE and 50% generated by
retail operations in the third quarter of fiscal 1993.
Year-to-date fiscal 1994, CGE generated 53% of total net sales with the
remaining 47% generated by retail operations. This compares to 57% for CGE
and 43% for retail year-to-date last year.
<PAGE>
Corporate, Government, and Education Sales
Corporate, government and education sales decreased $1.2 million, or 1%, from
$94.9 million in the third quarter of fiscal 1993 to $93.7 million in the
third quarter of fiscal 1994. The Company lowered prices during the second
quarter of fiscal 1994 to improve its competitive position. During the third
quarter of fiscal 1994, there was a decrease in the average selling price per
unit compared to the third quarter last year, while the number of units sold
increased slightly. Management believes its restructuring initiative in CGE
is impacting sales.
Year-to-date fiscal 1994 CGE sales of $311.5 million increased $10.2 million,
or 3%, compared to $301.3 million year-to-date last year.
Retail Sales
Retail sales of $114.9 million in the third quarter of fiscal 1994 increased
$21.5 million, or 23%, compared to $93.4 million in the same quarter a year
ago. Comparable retail store sales increased 18% in the third quarter of
fiscal 1994 compared to the third quarter a year ago. There was also an
increase in mail order sales due partly to the acquisition of a new mail order
subsidiary, MPI (d/b/a Mac's Place), during the second quarter of fiscal 1994.
The Company lowered prices during the second quarter of fiscal 1994 to improve
its competitive position. The number of units sold increased during the third
quarter of fiscal 1994, compared to the third quarter last year.
Year-to-date fiscal 1994 retail sales of $272.0 million increased $43.5
million, or 19%, compared to $228.5 million year-to-date last year. Year-to-
date comparable retail store sales increased 11% compared to last year.
The comparable store sales increases in the first few weeks of the fourth
quarter were significantly less than in the third quarter.
Retail Locations
During the third quarter this year, the Company opened no new stores and
closed one. Since the end of the third quarter last year, the Company has
opened six stores and closed 18. As of the end of the third quarter of fiscal
1994, the Company operated 194 retail stores, compared to 206 at the end of
the third quarter a year ago.
Gross margin as a percentage of net sales was 12.3% in the third quarter of
fiscal 1994, compared to 14.3% in the third quarter last year. Year-to-date
gross margin as a percentage of sales was 13.5% in fiscal 1994, compared to
14.6% in fiscal 1993. The Company lowered prices in both its CGE and Retail
businesses during the second quarter of fiscal 1994 to improve its competitive
position. As discussed in the Company's previous Forms 10-Q, gross margin as
a percentage of sales has been impacted by industry-wide pricing pressure
related to both competitors' pricing and vendors' pricing.
The factors discussed above which reduced gross margin as a percentage of
sales were partially offset by certain costs, such as retail occupancy and
distribution costs, remaining relatively constant while sales increased. Also
offsetting the decline was the impact of retail sales making up a larger
percentage of total sales compared to last year. Retail sales, compared to
CGE sales, typically have higher margins and lower volume per transaction.
Management anticipates margins will continue to be lower than last year.
<PAGE>
Selling, general, and administrative expense was 10.2% of net sales in the
third quarters of fiscal 1994 and fiscal 1993. Year-to-date SG&A expense was
11.7% of net sales in fiscal 1994 and fiscal 1993. As discussed in the
Company's previous Forms 10-Q, the Company took restructuring charges in the
first quarter of fiscal 1994 and in fiscal 1993, to lower its cost structure
to improve its ability to compete.
Savings associated with this restructuring were offset by a change in
marketing revenue. SG&A expense also includes expenses from Mac's Place, the
Company's new mail order subsidiary.
Provision for restructuring costs were $4.4 million, or 0.7% of year-to-date
fiscal 1994 net sales, and $1.7 million, or 0.3% of year-to-date fiscal 1993
net sales.
Income tax benefit (provision) was a $0.9 million provision for the third
quarter fiscal 1994, compared to $1.5 million in the third quarter a year
ago. In the third quarter and year-to-date for fiscal years 1994 and 1993,
the Company's effective tax rate was 39%.
FINANCIAL CONDITION
Cash and cash equivalents decreased $5.4 million, from $26.4 million at the
end of fiscal 1993 to $21.0 million at January 8, 1994. There was a reduction
in net income and a larger increase in accounts receivable during the first
three quarters of fiscal 1994 compared to the first three quarters last year,
as presented in the Consolidated Statement of Cash Flows for the 40 weeks
ended January 8, 1994, on page 3.
Accounts receivable, net increased $12.6 million, from $64.7 million at April
3, 1993 to $77.3 million at the end of the third quarter of fiscal 1994.
Third party credit card receivables and vendor rebate receivables increased
due to the timing of receiving payments.
Merchandise inventories increased $24.4 million, from $137.2 million at April
3, 1993, to $161.6 million at the end of the third quarter of fiscal 1994.
During the third quarter of fiscal 1994, the Company added to existing
inventory levels for the Christmas season. Inventory of $161.6 million at the
end of the third quarter of fiscal 1994 is comparable to $157.2 million at the
end of the third quarter last year.
Current and non-current deferred income taxes totaling $9.7 million and $9.8
million at January 8, 1994, and April 3, 1993, respectively, resulted from
taxes paid on temporary differences which caused taxable income to exceed
financial reporting income.
Accounts payable increased $30.9 million, from $100.0 million at the end of
fiscal 1993, to $130.9 million at January 8, 1994. The increase was due
mainly to the increase in inventory discussed above. As a percentage of total
inventory, accounts payable (leveraging) was 73% at the end of fiscal 1993 and
81% at January 8, 1994. Leveraging was relatively high at the end of fiscal
1993, partly because inventory for new product introductions had just been
received with terms that did not required payment until after that date.
Leveraging was even higher at January 8, 1994 due mainly to extended credit
terms from some vendors for seasonal purchases.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $2.7 million for the 40 weeks
ended January 8, 1994, compared to $11.5 million provided by operating
activities during the same period a year ago. Contributing to the decrease
were a reduction in net income and a larger increase in accounts receivable
during the first three quarters of fiscal 1994 compared to the first three
quarters last year. Third party credit card receivables increased due to
favorable renegotiation of fees in exchange for a slower payment schedule.
For further information on net cash provided by operating activities, see the
Consolidated Statement of Cash Flows for the 40 weeks ended January 8, 1994,
on page 3.
The average amount of debt outstanding during the third quarter of fiscal 1994
was $0.1 million, compared to $1.3 million during the same quarter a
year ago. During the third quarter of fiscal 1994, working capital
requirements and capital expenditures were financed from operations and short-
term borrowings.
Effective October 1, 1993, the Company entered into a revolving loan agreement
with two banks providing for unsecured borrowings up to $50 million through
September 30, 1994. Each bank provides a $25 million line of credit and one
bank serves as agent for the agreement. The agreement contains a number of
covenants, including a restriction on the payment of dividends and certain
financial ratio requirements. The Company was in compliance with all
financial covenants and had no outstanding borrowings on January
8, 1994.
The Company expects that working capital requirements in the foreseeable
future will be satisfied by cash flow from operations and borrowings under
these lines of credit. Depending on its rate of growth, the Company may in
future years require additional financing, including bank borrowings and
further issuances of debt and/or equity securities.
<PAGE>
Part II. OTHER INFORMATION
ITEM 1. Legal Proceedings
See Note 7 to the Consolidated Financial Statements on page 7 of this
report on Form 10-Q for information concerning certain litigation.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 6. Exhibits and Reports On Form 8-K
a. Exhibits
None.
b. Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EGGHEAD, INC.
(Registrant)
Date: February 10, 1994 By /s/Carolyn J. Tobias
Carolyn J. Tobias
Senior Vice President,
Chief Financial Officer
<PAGE>
Exhibit 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Egghead, Inc.:
We have made a review of the accompanying condensed consolidated balance sheet
of Egghead, Inc. (a Washington corporation) and subsidiaries as of January 8,
1994, and the related consolidated statements of operations and cash flows for
the 12 and 40 week periods ended January 8, 1994, and January 2, 1993, in
accordance with standards established by the American Institute of Certified
Public Accountants. These financial statements are the responsibility of the
Company's management.
A review of interim financial information consists principally of obtaining an
understanding of the system for the preparation of interim financial
information, applying analytical review procedures to the financial data and
making inquiries of persons responsible for financial and accounting matters.
It is substantially less in scope than an audit in accordance with generally
accepted auditing standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
Seattle, Washington,
February 3, 1994.
