SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended
April 1, 1995
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 No.)
22011 S.E. 51st Street
Issaquah, Washington 98027
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 391-
0800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
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 by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to
this Form 10-K _______
To the best of Egghead, Inc.'s knowledge, the aggregate market
value of the voting stock held by non-affiliates of the registrant
at April 29, 1995 was $139,080,437.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest practicable
date.
Outstanding at
Class April 29, 1995
Common Stock, $.01 par value 17,166,031 shares
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by
reference and the Part of the Form 10-K into which the document
is incorporated: Portions of the registrant's definitive Proxy
Statement relating to the Company's 1995 Annual Meeting of
Shareholders are incorporated by reference into Part III of this
Form 10-K.
PAGE 1 OF 91 PAGES
EXHIBIT INDEX APPEARS ON PAGE 41
EGGHEAD, INC.
TABLE OF CONTENTS
Page
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . 12
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for the Registrant's Common Equity and Related
Share-holder Matters . . . . . . . . . . . . . . . . . . 14
Item 6. Selected Financial Data . . . . . . . . . . . . . .15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 18
Item 8. Financial Statements and Supplementary Data. . . . 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . . 39
PART III
Item 10. Directors and Executive Officers of the Registrant 40
Item 11. Executive Compensation . . . . . . . . . . . . . . . 40
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . 40
Item 13. Certain Relationships and Related Transactions . . . 40
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . . 41
PART I
Item 1. Business
General
Egghead, Inc. (Egghead or the Company), a personal computer (PC)
software and hardware reseller, serves a diverse customer base
consisting of businesses, government agencies, educational
institutions, and individuals. As of April 1, 1995, the Company
operated 169 retail stores, four Corporate, Government, and
Education (CGE) customer service centers (two in the U.S. and two
in Canada), and two direct response groups.
Egghead, Inc., a Washington corporation, was incorporated in 1988
and is the successor to a corporation which was incorporated in
Washington in 1984. Egghead, Inc. is the parent company of DJ&J
Software Corporation, Eggspert Software, Ltd., EH Direct, Inc.,
and Egghead International, Inc. Egghead International, Inc., is
the parent company of Egghead Europe, Inc. and owns 45% of
Egghead-Uchida, Inc., a Japanese joint venture.
DJ&J Software Corporation, the Company's primary operating
subsidiary, was incorporated in Washington in 1983. Eggspert
Software, Ltd., a Canadian subsidiary, was incorporated in fiscal
year 1989. EH Direct, Inc. and Egghead International, Inc., were
incorporated in Washington in fiscal year 1994. Unless the
context indicates otherwise, references to "the Company" and
"Egghead" include Egghead, Inc., and its subsidiaries.
In fiscal years 1995, 1994, and 1993, sales to individuals and
small businesses generated by the Company's retail stores and
direct response groups, accounted for approximately 50%, 48%, and
44% of the Company's total net sales, respectively. The remaining
net sales were generated by its CGE sales group from sales to
corporations, government agencies, and educational institutions.
Egghead's retail stores offer a broad in-store selection of
products at competitive prices, as well as special order
capabilities for additional products. On April 1, 1995, the
Company operated stores located throughout the United States and
Western Canada in 50 western cities, 54 eastern cities, and 45
mid-western cities. The Company employs a knowledgeable sales
force to assist customers in selecting software, hardware, and
related products. The Company is currently designing a new
prototype store which it plans to introduce in the first half of
fiscal year 1996.
Egghead's CGE sales group targets three main types of accounts:
corporations, government agencies nationwide (federal, state, and
local), and educational institutions. These customers are served
by well-trained outside sales representatives and inside sales
support staff who provide customers with competitive prices and
individualized service.
Market Overview
The software industry is undergoing a noticeable degree of
consolidation as large software publishers acquire either other
software publishers or complete software products. Smaller
software publishers are attempting to concentrate on specialized
products in limited markets. Software resellers are also merging
with or acquiring other software resellers.
Both businesses and individual consumers have shown an increasing
preference for integrated software packages which combine word
processing, spreadsheet, presentation, and database software.
These integrated packages are appealing to the consumer for
several reasons. The purchase cost of an integrated software
package is lower than if the individual components were purchased
separately. In addition, integration reduces some of the
complexity and learning time involved in using software.
Integrated software packages also help standardize the computing
environment for Local Area Networks (LANs), which are becoming
more common in the business world. This shift toward integration
and standardization is viewed by many companies as a way to
significantly reduce the cost of supporting PC applications in
their organizations.
The growing market for workgroup computing software has also
affected the corporate, government, and education segments. This
category of software provides the ability for groups of people to
exchange messages, documents, and data easily over an electronic
network, and has become increasingly important to businesses as a
tool for increasing employee efficiency. Many software publishers
continue to develop and improve workgroup software, and view
workgroup computing as one of the most important applications of
computer technology in this decade.
The increasing complexity of software has lead many organizations
to seek additional technical, asset management, and software
distribution services. Many organizations are now outsourcing
their microcomputer software servicing, and developing
partnerships with software resellers and technical service firms.
Prices of microprocessor chips continue to fall due to increased
competition among computer manufacturers, and the introduction of
newer, faster microprocessor chips. The decrease in
microprocessor chip prices has forced PC prices down, resulting in
increased sales of PC's to businesses and individual consumers.
Sales of home computers, especially those equipped for multimedia,
have increased dramatically as consumers begin to use PC's for a
variety of things such as telecommuting, home productivity,
entertainment, communications, and education.
Price performance improvements in microcomputer hardware and the
availability of CD-ROM technology have had a dramatic impact on
the retail segment of the market. Sales of PC hardware
accessories, such as hard disk drives and modems, have increased
as consumers enhance their PCs. Multimedia capability has enabled
home users to more effectively use microcomputers for educational
and entertainment purposes.
Access to electronic communication networks, such as the Internet
and commercially available on-line services, has become
increasingly important to both businesses and individual
consumers. These electronic communication networks have grown at
a tremendous pace over the last year. The networks are expected
to provide substantial opportunities both now and in the future
for communications, commerce, and the exchange of data. Software
publishers have recognized the significance of this trend, and
have begun to integrate interfaces for these electronic
communications networks into their operating systems and workgroup
software.
Products and Services
Egghead sells PC software programs and related products, PC
hardware, computer-related magazines and books, tutorials, and
selected peripheral devices and accessories. Egghead has
approximately 2,000 software programs (including both IBM<F1>-
compatible and Apple<F1> Macintosh<F1> software packages) and other
products in its retail stores, and thousands more available for
delivery from the Company's distribution centers or through
special order.
The Company's CGE sales group also sells volume license agreements
and vendor maintenance agreements. Volume license agreements
typically entitle customers to predetermined price discounts based
on their purchase volume. Maintenance agreements entitle
customers to all upgrades of certain products during a specified
period of time. Due to the significant cost savings to corporate,
government, and education customers, the Company believes this
trend toward volume license and maintenance agreements will
continue.
The Company offers a broad array of customer support services to
assist customers in the selection and administration of their
software purchases, including the following:
Custom Updates and Eggstras (CUESM) program - a preferred
customer membership program providing discounts and other
benefits in the retail stores. CUESM also provides the Company
with a valuable database of customers, their PC equipment
profiles, and a history of their software purchases.
Customer Usage Reports - comprehensive reports for corporate,
government, and education customers that list purchasing
activity for up to the previous 30 months. These reports can
be provided in hard copy or electronic format. Electronic
reports can be customized to include over 40 different
information fields.
Electronic Bulletin Board - a comprehensive library of the most
commonly needed patches and drivers which can be down-loaded to
CGE customers.
Electronic Data Interchange (EDI) - the ability to conduct
business electronically using electronic business documents
based on published national and industry standards. As of
April 1, 1995, the Company conducted business with
approximately 65 customers and 10 suppliers using EDI.
Master Upgrade Agreement - a single agreement authorizing a
U.S. organization to upgrade products from sixteen
manufacturers without the administrative burden of collecting
the title pages, serial numbers, or other proof of ownership
for previous versions.
Price List Updates - each month the Company updates a list of
approximately 200 core products and their prices. This
standard price list is available to any CGE customer who
requests it. The company also updates and distributes custom
price lists to various customers.
Product Information Centers - a CD-ROM-based system updated
monthly with information on most software and hardware
products. Articles can be obtained from all major personal
computer publications and sent to customers as requested.
Software Asset Management (SAM) - a service which provides
corporate, government, and education customers with an
inventory of their software assets, guidance on licensing
issues, and a suggested plan for future purchases.
Technical Support - a support service to provide information or
assistance to end-users, customer "Help Desk" staff, and LAN
Administrators via a telephone hotline, network line, or on-
site visits.
Volume License and Maintenance Contract Administration -
includes contract execution, disk duplication and documentation
fulfillment, vendor reporting, and other contract
administration services for manufacturers' volume license
agreements and vendor maintenance agreements between vendors
and Egghead customers.
Workgroup Applications Development - consulting services to
define, develop, and implement more efficient workgroup
applications and workflow processes to streamline customers'
business practices.
Marketing, Advertising, and Promotion
Egghead's marketing philosophy is to position itself as the
reseller of choice by providing the customer with the best value
in terms of competitive prices, selection, service, and
convenience. In addition, Egghead strives to create primary
demand for the products it sells. The Company's strategy to meet
these objectives is to use aggressive advertising and marketing
efforts.
The Company's advertising campaign emphasizes a broad selection of
available merchandise and competitive prices. Advertising is also
used to promote major new product launches.
Egghead's primary advertising medium is direct mail, which is used
to target the highly identifiable segment of the population which
owns and/or uses computers. In addition to a database of more
than 3.3 million of its CUE customers, Egghead sends regular
direct mail product promotions to purchased lists of computer
owners. The Company also uses newspapers, both local and
national.
Egghead has entered into cooperative advertising and other
promotional and market development fund agreements with numerous
manufacturers and distributors. The funds obtained through these
agreements assist the Company in achieving high visibility in the
marketplace.
Customers
Egghead has a diverse customer base and uses specific marketing
strategies to target different customer segments. The first two
segments, individuals and small businesses, are served by
Egghead's retail store operations and direct response groups. The
other three segments, corporations, government agencies, and
educational institutions, are served mainly by Egghead's CGE sales
group.
Retail Operations
Egghead's retail stores are designed to provide a pleasant
shopping environment for walk-in customers, primarily individuals
who purchase PC software for their personal use and/or for use in
a small business. A knowledgeable sales force assists customers
in selecting software, hardware, and related products.
Egghead's retail stores offer customers competitive prices, a wide
selection of products, excellent service, and convenient store
locations. In addition to stocking approximately 2,000 SKU's in
the retail stores, Egghead customers have access to thousands more
through Egghead's distribution centers or through special order.
The Company also stocks selected PC hardware products, computer-
related magazines and books, tutorials, and selected peripheral
devices and accessories.
In January 1995, a "Mac's Place at Egghead" kiosk was installed in
every store. The kiosk has a toll-free direct phone link to the
Mac's Place direct response operation. Customers can get
information on Macintosh software or hardware products, and place
orders for products that can be delivered the next day.
A typical Egghead store contains approximately 2,500 square feet
of retail selling space. Most stores are located in strip
shopping centers. Store locations are researched and chosen to be
in areas with high distribution of personal computers, high
population density, and high mean income levels. Egghead provides
in-store demonstration of software, with most stores having three
personal computers for use by customers in evaluating software in
the stores; two IBM<F1> PC compatibles and an Apple<F1> Macintosh<F1>.
The
Company is currently designing a new prototype store which it
plans to introduce in the first half of fiscal 1996.
The Company's retail operations also include two direct response
businesses, 1-800-EGGHEAD and Mac's Place. All direct response
telephone and mail orders are processed through this combined
operation. In June 1995, this direct response operation will be
moved from Kalispell, Montana to the Company's customer service
center in Spokane, Washington.
Corporate, Government, and Education Sales Group
Corporate Customers. Egghead's CGE sales group competes for
customers in the United States and Canada by providing customers a
wide selection of products, competitive prices, convenience,
support services, and technology consulting services. The Company
also has a call center in Apeldoorn, The Netherlands to support
the needs of its corporate customers with operations in Western
Europe.
The CGE sales force provides product demonstrations and seminars,
processes orders quickly and accurately, and provides value-added
customer support services for its customers in a number of other
ways. For further information on services provided, see the
Products and Services section beginning on page 5.
Egghead's CGE sales force, supported by an on-line sales order
entry system, orders software and related products from the
Company's distribution centers for quick delivery directly to the
customer. Despite large aggregate purchases, most individual
orders by the Company's customers are for a small number of items
and require prompt delivery to different locations. The Company
also continues to be a leader in providing EDI support for its
corporate customers.
CGE outside sales representatives work out of their homes or
shared business offices to provide personal service to businesses
in their trading area. During the fourth quarter of fiscal 1995,
the Company consolidated its CGE inside sales representatives from
eleven regional support centers located throughout the U.S. to two
customer service centers located in Issaquah, Washington and
Spokane, Washington. There are also two customer service centers
in Canada. During June 1995, the Company will consolidate the
remainder of its CGE customer service operations in Issaquah,
Washington to the customer service center in Spokane.
The Company currently has thousands of corporate and government
sales accounts, including major customers such as The Boeing
Company, 3M (Minnesota Mining and Manufacturing), and Nordstrom.
In fiscal 1995, no single customer represented more than 2% of the
Company's total net sales.
Government Agencies. The Company has a government accounts
program that targets federal, state, and local governmental
entities throughout the United States. Egghead is currently in final
negotiations for award of its 1995/1996 Federal Government General
Services Administration (GSA) Schedule C vendor contract, which will
expire March 31, 1996. Government agencies
typically require competitive prices, prompt delivery to different
locations, and unique ordering and billing procedures.
Educational Institutions. The Company's educational sales group
targets educational institutions nationwide. As the number of PCs
in schools continues to grow, so does the need for software.
Merchandising
Egghead purchases most of its products through a central
merchandise buying department. Inventory levels and product mix
are based upon rates of sale, seasonality, and store demographics
and size. The Company also special orders non-inventoried
software products to satisfy customers' special needs.
Egghead's decision to buy merchandise directly from manufacturers
or through distributors is determined on a transaction-by-
transaction basis depending on cost, availability, and potential
product obsolescence. For certain products, Egghead has
sufficient sales volume to purchase directly from manufacturers at
volume discounts. The Company purchases software and other
products directly from more than 250 manufacturers. Egghead
minimizes the administrative overhead associated with buying
products from hundreds of smaller manufacturers by using a limited
number of distributors.
Egghead conducts business with major vendors including Microsoft,
Lotus, and Novell/WordPerfect. In fiscal years 1995, 1994, and
1993, sales derived from software programs supplied by Microsoft
represented approximately 28%, 28%, and 26% of total net sales,
respectively.
Egghead has certain exchange and return privileges with many of
its vendors, which typically include time, volume, and other
limitations. These exchange and return privileges allow the
Company to reduce the risk of loss resulting from obsolete and
defective merchandise.
Distribution
Most inventory that Egghead purchases is received in one of the
Company's distribution facilities before it is sent to a customer
or to a retail store. Some products are sent directly from
vendors or distributors to stores or customers. The Company's
distribution facilities also process most returned merchandise.
The Company leases a 121,000 square foot facility in Sacramento,
California, a 125,000 square foot facility in Lancaster,
Pennsylvania, and a 19,000 square foot facility in Wilmington,
Ohio. Orders from the Company's CGE sales group are filled by the
California and Pennsylvania distribution facilities every week
day. Orders from the Company's retail stores are filled by those
facilities on a weekly basis. Orders from the Company's direct
response group are filled by the Ohio distribution facility Sunday
through Friday each week.
Egghead's distribution system is ISO9003 certified. ISO
(International Standards Organization) has a series of standards
for quality assurance which are accepted by the European community
and by more than 50 nations worldwide. The Company was required
to develop, document, and define its quality assurance system and
quality management practices to become ISO9003 certified.
The manner in which microcomputer software products are sold and
distributed is changing rapidly. Other methods of distribution,
such as Volume License and Maintenance contracts and Electronic
Software Distribution (ESD), could have an impact on how the
Company distributes products in the future.
Competition
The business of selling microcomputer software and hardware is
very competitive. The Company currently competes with other
"direct sales" organizations, other software retailers, computer
and office superstores, consumer electronic superstores, mass
merchandisers, direct response companies, computer manufacturers,
and software publishers that sell directly to end-users through
traditional and electronic methods of distribution.
Egghead's primary competition from other software "direct sales"
organizations, comes from Corporate Software, Inc., Software
Spectrum, and Softmart, Inc. Egghead also competes with "value-
added resellers," such as Governmental Technical Services, Inc., a
company that focuses mainly on selling in the government
marketplace.
Other software retail competitors include mall-based stores such
as Electronics Boutique, Babbages, and Software Etc. Management
believes these stores offer a less extensive PC software product
selection than Egghead and are generally less price competitive.
Computer and office superstores, such as CompUSA, Computer City,
Micro Center, and Office Depot provide significant competition for
Egghead's retail stores in the markets in which they are located.
These stores are very price competitive. Computer superstores
typically offer a wide product selection, while office superstores
have a more limited selection. Large superstores, like Computer
City, offer on-site installation of software and hardware
upgrades. Some superstores offer training and technical services.
Management believes the customer service offered by computer and
office superstores for selection of software products is generally
limited.
Consumer electronic superstores, such as Best Buy, Future Shop,
and Circuit City, are a growing source of competition for the
Company's retail stores in the markets in which they operate.
Although they are very price competitive, management believes
these stores have a more limited software product assortment and
offer less customer service for software products than Egghead.
Mass merchandisers, such as Wal-Mart, Incredible Universe, and
Sears, and warehouse clubs such as SAM's and Price/Costco,
generally concentrate on basic software products and carry
relatively few titles. Customer service by mass merchandisers
and warehouse clubs for software products is very limited.
Direct response businesses, such as MicroWarehouse and PC
Connection, are another important retail channel for software
sales. MicroWarehouse sells their products internationally, and
has experienced significant growth in international markets.
Direct response businesses generally compete based on low prices
but provide limited customer service and do not provide
demonstration capabilities.
Many superstores and computer manufacturers sell PC's to consumers
with custom-installed hardware and pre-loaded software. This
bundling of products is very convenient for the consumer, and
eliminates many of the technical difficulties involved with the
installation of software or hardware.
Software publishers continue to directly market and sell to end-
users. There has also been a continuing trend of software
publishers offering new software products at deeply discounted
introductory prices. Management believes that software publishers
generally do not offer the breadth of product selection or scope
of services necessary to maintain corporate accounts.
It is becoming more common for small software publishers to
distribute software over electronic communications networks. Such
networks provide the convenience of allowing the customer to
purchase software products directly from their home or office.
However, this method of distribution does not provide the customer
with a tangible product (i.e. manuals and diskettes), personal
assistance from the sales force, or a full demonstration of the
product before purchase.
Because the microcomputer software market is very competitive,
software resellers typically have low gross margins and operating
income as a percentage of sales. Therefore, the Company's
profitability is highly dependent upon effective internal and cost
control and the ability to adapt quickly and efficiently to
changes in industry trends.
Employees
At April 1, 1995, Egghead had approximately 2,600 employees,
(including temporary employees) consisting of approximately 1,700
retail personnel (including direct response), 400 CGE personnel
(including both sales and administrative personnel), 200
distribution center employees, and 300 headquarters personnel.
None of the Company's employees is represented by a union.
Trademarks and Tradenames
"EGGHEAD<F1>", "EGGHEAD DISCOUNT SOFTWARE<F1>", "EGG CARTON<F1>",
"EGGSPERT<F1>", the "PROFESSOR EGGHEAD<F1>" design, and
"EGGCESSORIES<F1>",
are registered in the United States Patent and Trademark Office as
service marks or trademarks of the Company. The Company also does
business under the trade names "Egghead Software", "Egghead
Discount Software", and "Mac's Place at Egghead." In addition,
the Company is the owner of a number of common law trademarks and
service marks, including "SOFTWARE ASSET MANAGEMENTSM", "SAMSM",
"CUESM", "EGGHEAD<F1> EXPRESS*", and certain "EGG" combination
words, "MAC'S PLACESM," and "MAC'S PLACE AT EGGHEADSM." The
Company believes the strength of its trademarks and service marks
benefits its business and intends to continue to protect and
promote its registered and common law trademarks and service
marks.
Environmental Laws
Compliance with federal, state, and local laws enacted for
protection of the environment has had no material effect upon
Egghead's capital expenditures, earnings, or competitive position.
The Company does not anticipate any material adverse effects in
the future based on the nature of its operations and the current
thrust of such laws.
Item 2. Properties
At April 1, 1995, Egghead operated 169 retail stores in 29 states,
the District of Columbia, and Canada. Most of the Company's
stores are located in strip shopping centers to provide customers
convenient access. The Company has not opened, nor does it intend
to open, retail stores on a franchise basis. As of April 1, 1995,
the Company's retail stores were located as follows:
Number of
Retail
Location Outlets
Arizona 3
Canada 1
California 44
Colorado 4
Connecticut 2
District of Columbia 3
Florida 4
Georgia 2
Illinois 15
Indiana 2
Kansas 1
Maryland 7
Massachusetts 8
Michigan 5
Minnesota 4
Missouri 2
New Jersey 9
New Mexico 1
New York 10
Nevada 1
North Carolina 4
Ohio 4
Oklahoma 1
Oregon 4
Pennsylvania 6
Tennessee 1
Texas 4
Utah 1
Virginia 7
Washington 7
Wisconsin 2
_____
Total 169
The Company leases all of its retail stores under leases expiring
from fiscal 1996 to fiscal 2000. The Company expects that those
leases with terms expiring during fiscal year 1996 could be
renewed under substantially similar terms. Substantially all of
the Company's leases provide for a minimum monthly rent that is
either constant or adjusts periodically throughout the lease term,
including renewal periods.
During the fourth quarter of fiscal 1995, the Company consolidated
the operations of ten corporate, government, and education (CGE)
regional sales support centers located throughout the U.S. into
one CGE customer service center in Spokane, Washington. (The
Company has one other U.S. customer service center located in its
administrative office in Issaquah, Washington and two centers in
Canada.) The regional sales support centers, which have leases
expiring from fiscal 1996 through fiscal 1998, have been sub-
leased.
The Company leases its administrative offices in Issaquah,
Washington; distribution facilities in Lancaster, Pennsylvania,
Sacramento, California, and Wilmington, Ohio; and an additional
storage facility in Kent, Washington. The lease terms on the
Company's administrative and distribution facilities expire from
fiscal 1997 to fiscal 2000, with renewal options available.
The Company owns office buildings in Spokane, Washington and
Kalispell, Montana. The CGE customer service center is located in
the Spokane, Washington building. The Company's direct response
operations, 1-800-EGGHEAD and Mac's Place, are located in the
building in Kalispell, Montana. In June 1995, the Company's
direct response operations will be moved from the building in
Kalispell, Montana, to the customer service center in the Spokane,
Washington building. The Company plans to lease the building in
Kalispell.
See Note 4 of Notes to Consolidated Financial Statements on page
33 for additional information about the Company's leases.
Item 3. Legal Proceedings
On June 9, 1994, the Company announced that it had settled a
shareholders' lawsuit originally filed against the Company, a
current officer, and two former officers who were also directors.
The current officer had recently been dismissed from the suit.
The action, originally entitled Finucan v. Egghead, et al., was
filed in federal court in Seattle in September 1993 and was
alleged to be brought on behalf of all purchasers of the Company's
common stock between February 11, 1992, and November 18, 1992,
(other than the individual defendants and other individuals and
entities otherwise affiliated with the Company). The settlement
called for a cash payment by the Company of $2.625 million.
Payment was made during the second quarter of fiscal 1995. This
settlement was approved by the United States District Court for
the Western District of Washington on January 12, 1995. Net of
expected insurance recovery, the settlement and related attorneys'
fees resulted in a pretax charge of $1.2 million in fiscal year
1994 ($0.04 per share, net of income tax impact).
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders in
the fourth quarter of fiscal year 1995.
PART II
Item 5. Market for the Registrant's Common Equity and
Related Shareholder Matters
Market and Market Price for Common Stock
Egghead's common stock, $0.01 par value, is traded over the
counter under the symbol EGGS and is quoted as part of the NASDAQ
National Market System.
The closing market prices per share of the Company's common stock
during the fiscal years ended April 2, 1994, and April 1, 1995,
respectively, are set forth below. The prices reflect last sale
prices as reported by NASDAQ.
High Low
Quarter ended July 3, 1993 $9.88 $7.50
Quarter ended October 2, 1993 8.63 6.75
Quarter ended January 1, 1994 9.75 7.13
Quarter ended April 2, 1994 10.63 8.63
Quarter ended July 2, 1994 $8.76 $6.81
Quarter ended October 1, 1994 7.63 6.19
Quarter ended December 31, 1994 11.81 7.00
Quarter ended April 1, 1995 11.75 8.50
Holders
The approximate number of holders of record of Egghead's common
stock as recorded on the books of Egghead's Registrar and Transfer
Agent as of April 29, 1995, was 1,484.
Dividends
The Company has never paid cash dividends on its capital stock and
does not plan to pay cash dividends in the foreseeable future.
The Company's revolving line of credit restricts the payment of
dividends by the Company. See Note 3 of Notes to Consolidated
Financial Statements on page 32.
Item 6. Selected Financial Data
<TABLE>
<S> <C> <C> <C> <C> <C>
Fiscal Year
1995 1994 1993 1992 1991
(Dollars in thousands,
except per share data)
Consolidated Statements of
Operations Data:
Net sales $862,550 $778,327 $725,447 $664,850 $518,542
Cost of sales, including certain
buying, occupancy, and
distribution costs 760,431 675,377 618,618 549,850 427,840
Gross margin 102,119 102,950 106,829 115,000 90,702
Selling, general, and
administrative expense 90,677 89,496 85,070 84,262 68,332
Depreciation and amortization
expense, net of amounts
included in cost of sales
9,348 8,681 7,062 5,254 4,985
Provision for restructuring costs
- 4,400 2,700 - -
Provision for shareholder litigation
- 1,200 - - 800
Operating income (loss) 2,094 (827) 11,997 25,484 16,585
Theft Insurance Recovery 1,650 - - - -
Other (expense) income:
Interest expense (39) (82) (248) (342) (444)
Interest income 776 352 290 515 222
Other, net (108) (285) (679) (313) 166
Income (loss) before income taxes
4,373 (842) 11,360 25,344 16,529
Income tax benefit/(provision)
(1,705) 328 (4,430) (9,631) (1,166)
Net income (loss) $ 2,668 $ (514) $ 6,930 $ 15,713 $ 15,363
Per share amounts:
Primary earnings (loss) per share
$ 0.15 $ (0.03) $ 0.41 $ 0.92 $ 0.92
Fully diluted earnings (loss)
per share $ 0.15 $ (0.03) $ 0.41 $ 0.90 N/A
</TABLE>
Note: Fiscal year 1993 had 53 weeks. All other fiscal years presented
had 52 weeks.
See Notes to Consolidated Financial Statements.
Fiscal Year
<TABLE>
<S> <C> <C> <C> <C> <C>
1995 1994 1993 1992 1991
(Dollars in thousands)
Operating Data:
Number of retail stores:
Open at end of period 169 189 205 182 187
Opened during period - 3 33 5 1
Closed during period 20 19 10 10 14
Weighted average number open
during period (1) 179 197 195 182 190
</TABLE>
Number of Retail stores open at the
end of each month of fiscal years
1995 and 1994:
April 187 204
May 186 203
June 184 200
July 182 202
August 181 199
September 179 195
October 177 194
November 177 194
December 177 194
January 172 192
February 171 191
March 169 189
Balance Sheet Data:
<TABLE>
<S> <C> <C> <C> <C> <C>
Working capital $118,728 $119,838 $121,711 $115,338 $100,165
Total assets 270,141 256,010 263,216 235,349 192,329
Bank loans - - - - -
Long-term debt - - - - -
Shareholders' equity 146,416 143,416 142,990 135,233 115,170
</TABLE>
(1) Calculated by dividing the total number of store days open
during the period by the number of days in that period.
See Notes to Consolidated Financial Statements.
Selected financial data for each quarter of fiscal years 1995 and 1994
follows (in millions, except per share data). Effective the beginning
of fiscal 1995, the Company changed it's fiscal quarters such that each
quarter consists of 13 weeks. Previously, fiscal quarters were such
that the first quarter consisted of 16 weeks, the second and third
quarters were each 12 weeks, and the fourth quarter consisted of the
remaining 12 or 13 weeks. The fiscal 1994 financial information
represents the quarterly results that would have been reported if the
Company would have been using the 13-week fiscal quarter format.
<TABLE>
<S> <C> <C> <C> <C> <C>
<C> <C> <C>
First Quarter Second Quarter Third
Quarter Fourth Quarter
1995 1994 1995 1994 1995
1994 1995 1994
Net sales $193.8 $180.8 $194.3 $165.4 $254.3
$222.6 $220.1 $209.5
Gross margin 22.2 26.8 22.4 23.1 31.8
27.3 25.7 25.7
Selling, general, and
administrative expense 21.8 23.6 21.5 20.6 25.2
22.6 22.2 22.7
Provision for restructuring
costs - 4.4 - - -
- - -
Provision for shareholder
litigation - - - - -
0.1 - 1.1
Operating income (loss) (2.0) (3.1) (1.5) 0.5 4.4
2.4 1.2 (0.6)
Theft insurance recovery - - - - 1.7
- - -
Income (loss) before income
taxes (1.8) (3.0) (1.6) 0.4 6.3
2.4 1.5 (0.6)
Net income (loss) (1.1) (1.8) (1.0) 0.3 3.8
1.4 0.9 (0.4)
Earnings (loss) per share $(0.06) $(0.11) $(0.06) $0.02 $0.22
$0.08 $0.05 $(0.02)
</TABLE>
The following table shows the relationship of certain items included in
the Company's quarterly Consolidated Statements of Operations expressed
as a percentage of net sales:
<TABLE>
<S> <C> <C> <C> <C> <C>
<C> <C> <C>
First Quarter Second Quarter Third
Quarter Fourth Quarter
1995 1994 1995 1994 1995
1994 1995 1994
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
100.0% 100.0% 100.0%
Gross margin 11.4 14.8 11.5 14.0 12.5
12.3 11.7 12.3
Selling, general, and
administrative expense 11.2 13.1 11.1 12.5 9.9
10.2 10.1 10.8
Provision for restructuring
costs - 2.4 - - -
- - -
Provision for shareholder
litigation - - - - -
- - 0.5
Operating income (loss) (1.0) (1.7) (0.8) 0.3 1.7
1.1 0.5 (0.3)
Theft insurance recovery - - - - 0.7
- - -
Income (loss) before income
taxes (0.9) (1.6) (0.8) 0.3 2.5
1.1 0.7 (0.3)
Net income (loss) (0.6)% (1.0)% (0.5)% 0.2% 1.5%
0.7% 0.4% (0.2)%
</TABLE>
See Notes to Consolidated Financial Statements.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The Company uses a 52/53 week fiscal year, ending on the Saturday
nearest March 31 of each year. Fiscal years 1995 and 1994 each
had 52 weeks and fiscal year 1993 had 53 weeks. All references
herein to fiscal 1995, 1994, and 1993 relate to the fiscal years
ended April 1, 1995, April 2, 1994, and April 3, 1993,
respectively.
Subsequent Event
As discussed in Footnote 13 to the Consolidated Financial
Statements on page 38, on May 1, 1995, the Company announced plans
to consolidate its direct response operation in Kalispell, Montana
and the remainder of its CGE customer service operations and its
credit operations in Issaquah, Washington, to its customer service
center in Spokane, Washington. The changes are being made to
improve customer service and reduce costs.
Relocation, severance, and related costs will be included in the
Company's fiscal 1996 first and second quarter results. The
Company estimates the total cost to range from $1.8 million to
$2.0 million, most of which will be recorded in the first quarter.
The Company expects that these changes will result in net expense
in fiscal 1996, and net savings in future years due to lower labor
rates and occupancy costs.
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:
<TABLE>
<S> <C> <C> <C>
1995 1994 1993
Net sales 100.0% 100.0% 100.0%
Cost of sales, including certain buying,
occupancy, and distribution costs 88.2 86.8 85.3
Gross margin 11.8 13.2 14.7
Selling, general, and administrative expense 10.5 11.5 11.7
Depreciation and amortization expense, net
of amounts included in cost of sales 1.1 1.1 1.0
Provision for restructuring costs - 0.6 0.4
Provision for shareholder litigation - 0.1 -
Operating income (loss) 0.2 (0.1) 1.6
Theft insurance recovery 0.2 - -
Other income/(expense), net 0.1 - -
Income (loss) before income taxes 0.5 (0.1) 1.6
Income tax benefit/(provision) (0.2) - (0.6)
Net income (loss) 0.3% (0.1)% 1.0%
</TABLE>
Net Sales increased $84.3 million, or 11%, to $862.6 million in fiscal
1995 compared to $778.3 million in fiscal 1994. Fiscal 1994 net
sales were $72.4 million, or 10% greater than net sales of $705.9
million in fiscal 1993, excluding the 53rd week. Including the
extra week in fiscal 1993, fiscal 1994 net sales increased $52.9
million, or 7%, compared to fiscal 1993.
Net sales of $220.1 million for the fourth quarter of fiscal 1995
increased $10.6 million, or 5%, compared to $209.5 million in the
fourth quarter of fiscal 1994.
Near the end of the second quarter of fiscal 1994, the Company
lowered prices in both its retail and corporate, government, and
education (CGE) businesses to improve its competitive position.
The effect of the lower prices on sales and gross margin as a
percentage of sales is discussed on pages 20 and 21.
Retail
Retail sales operations generated $434.0 million of net sales in
fiscal 1995, a
$60.5 million, or 16% increase, compared to $373.5 million in
fiscal 1994. Fiscal 1994 retail net sales were $62.6 million, or
20% greater than net sales of $310.9 million in fiscal 1993,
excluding the 53rd week. Retail sales accounted for 50%, 48%,
and 44% of total sales in fiscal years 1995, 1994, and 1993,
respectively.
Comparable retail store sales increased 21% in fiscal 1995
compared to fiscal 1994. There was also an increase in direct
response sales in fiscal 1995, due mainly to having a full year of
sales from Mac's Place in fiscal 1995, compared to approximately
one half year in fiscal 1994. These increases were partially
offset by the closure of 20 stores during fiscal 1995.
Sales of hardware and related accessories increased from
approximately 19% of total retail sales in fiscal 1994 to
approximately 30% in fiscal 1995. The increase was due partly to
the introduction of additional hardware products, such as hard
drives and printers, beginning in the fourth quarter of fiscal
1994.
In fiscal 1994, comparable retail store sales increased 13%
compared to fiscal 1993. As previously discussed, the Company
lowered prices during the second quarter of fiscal 1994. The
number of units sold in retail increased during fiscal year 1994,
compared to fiscal 1993. There was also an increase in direct
response sales in fiscal 1994 due mainly to the acquisition of
Mac's Place during the second quarter of fiscal 1994.
Total retail sales of $112.2 million in the fourth quarter of
fiscal 1995 increased
$2.6 million, or 2%, compared to $109.6 million in the fourth
quarter of fiscal 1994. Comparable retail store sales increased
approximately 13% in the fourth quarter of fiscal 1995 compared to
the fourth quarter of fiscal 1994. This increase was partially
offset by the closure of 20 stores from the end of fiscal 1994 to
the end of fiscal 1995.
Comparable retail store sales increased 13% in the fourth quarter
of fiscal 1995, down from 14%, 36%, and 23% in the first, second,
and third quarters of fiscal 1995, respectively. Management
expects comparable retail store sales growth to be lower in the
first quarter of fiscal 1996 than in the fourth quarter of fiscal
1995.
During fiscal 1995, the Company closed 20 stores, operating a
total of 169 stores at April 1, 1995. This compares to the
addition of three retail stores and closure of 19 during fiscal
1994. The Company will continue to evaluate individual store
performance and make changes during the ordinary course of
business during fiscal 1996. The Company is currently designing a
new prototype store which it plans to introduce in the first half
of fiscal 1996.
Corporate, Government and Education Sales
Corporate, government and education (CGE) sales operations
generated $428.5 million of net sales in fiscal 1995, a $23.7
million, or 6%, increase compared to $404.8 million in fiscal
1994. Fiscal 1994 CGE net sales were $9.8 million, or 2%, greater
than net sales of $395.0 million in fiscal 1993, excluding the
53rd week. CGE sales accounted for 50%, 52%, and 56% of total net
sales in fiscal years 1995, 1994, and 1993, respectively.
The increase in CGE sales was mainly due to an increase in the
number of units sold, partially offset by a decrease in prices.
Prices for many software products have continued to decline due to
industry-wide pricing pressure, as discussed in the gross margin
section below.
During the fourth quarter of fiscal 1995, the Company consolidated
the operations of ten CGE support centers throughout the U.S. to
one customer service center in Spokane, Washington. The Company
now operates two CGE customer service centers in the U.S. and two
in Canada. Management believes its restructuring initiatives in
CGE during fiscal years 1994 and 1995 adversely affected sales
during both those years.
The Company serves as a designated reseller for volume licensing
and maintenance (VLAM) agreements between certain of its customers
and major publishers of microcomputer software. VLAM agreements
typically are used by large customers seeking to standardize
desktop software applications. Sales of VLAM agreements
represented approximately 19% of total CGE sales during fiscal
1995, compared to approximately 5% in fiscal 1994.
Fiscal 1994 CGE sales were affected by lowering prices near the
end of the second quarter of fiscal 1994. During the second half
of fiscal 1994, there was a decrease in the average selling price
per unit for CGE compared to fiscal 1993, while the number of
units sold increased slightly.
Total CGE sales of $107.9 million in the fourth quarter of fiscal
1995 increased $8.0 million, or 8%, compared to $99.9
million in the fourth quarter of fiscal 1994. Sales of VLAM
agreements represented approximately 27% of total CGE sales in the
fourth quarter of fiscal 1995, compared to approximately 9% in the
fourth quarter last year. During the first, second, and third
quarters of fiscal 1995, sales of VLAM agreements represented
approximately 13%, 15%, and 22% of total CGE sales, respectively.
Gross margin (net sales minus cost of sales, including certain
buying, occupancy, and distribution costs) as a percentage of net
sales was 11.8% in fiscal 1995, compared to 13.2% and 14.7% in
fiscal years 1994 and 1993, respectively.
As previously noted, the Company lowered prices near the end of
the second quarter of fiscal 1994. The fiscal 1995 gross margin
reflects a full year of the lower prices, compared to
approximately one half year of lower prices in fiscal 1994. As
discussed in the Company's previous Forms 10-Q and Forms 10-K for
fiscal years 1994 and 1993, gross margin as a percentage of sales
continues to be affected 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 in fiscal 1995 were partially offset by retail
occupancy costs decreasing 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.
The decline in gross margin as a percentage of sales from fiscal
1993 to fiscal 1994 was mainly due to the Company lowering prices
near the end of the second quarter of fiscal 1994 as previously
noted. These decreases in 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 and by the impact of retail sales making up a larger
percentage of total sales compared to fiscal 1993.
Selling, general, and administrative (SG&A) expense as a
percentage of net sales was 10.5% in fiscal 1995, compared to
11.5%, and 11.7% in fiscal years 1994 and 1993, respectively. The
improvement in the fiscal 1995 SG&A expense as a percentage of
sales compared to fiscal 1994 was due mainly to sales increasing
at a faster rate than expenses. During fiscal 1996, management
plans to continue to invest in strategic projects, facilities, and
technology to build infrastructure for the future.
The improvement in SG&A expense as a percentage of sales from
11.7% in fiscal 1993 to 11.5% in fiscal 1994 was mainly due to
savings resulting from restructuring actions initiated by
management to lower the Company's cost structure to improve its
ability to compete. Most of the savings associated with this
restructuring were offset by a decrease in marketing revenue and
additional expenses from Mac's Place, the Company's direct
response operation which the Company purchased in the second
quarter of fiscal 1994.
Depreciation and amortization expense, net of amounts included in
cost of sales, was $9.3 million in fiscal 1995, compared to $8.7
million and $7.1 million in fiscal years 1994 and 1993,
respectively. The increases from fiscal 1994 to fiscal 1995 and
from fiscal 1993 to fiscal 1994 resulted from additions to
property and equipment, as discussed on pages 22 and 23.
Provision for restructuring costs was $4.4 million, or 0.6% of net
sales, in fiscal 1994. During fiscal 1994, the Company lowered
its cost structure to improve its ability to compete. The $4.4
million included severance costs and early lease termination costs.
During the third and fourth quarters of fiscal 1993, the Company
established a reserve for restructuring charges totaling $2.7
million. The reserve was primarily related to reorganizing the
Company's CGE sales group to improve customer service. In
addition, other Company departments were reduced in size due to
the impact of the reorganization in CGE and for improved
efficiency.
Provision for shareholder litigation of $1.2 million in fiscal
1994 represents a charge for the settlement and related attorneys'
fees, net of an expected insurance recovery, related to the legal
proceedings described in Item 3, Legal Proceedings, on page 13.
Operating income (loss), as a result of the foregoing factors, was
$2.1 million income in fiscal 1995, compared to a loss of $0.8
million and income of $12.0 million in fiscal years 1994 and 1993,
respectively. The results for fiscal years 1995 and 1994 were
negatively affected by the results of Mac's Place. The fiscal 1994
operating loss was also negatively impacted by the $4.4 million
provision for restructuring costs and the
$1.2 million provision for shareholder litigation previously
discussed.
Theft insurance recovery of $1.65 million in fiscal 1995
represents settlement of an insurance claim, net of expenses, for
inventory stolen from numerous retail stores during fiscal years
1991, 1992, and 1993, by members of a multi-state shoplifting
ring.
Income (loss) before income taxes, was $4.4 million income in
fiscal 1995 compared to a $0.8 million loss last year. The fiscal
1995 results were positively affected by the theft insurance
recovery discussed above.
Financial Condition
Cash and cash equivalents increased $16.9 million from $25.7
million at the end of fiscal 1994, to $42.6 million at the end of
fiscal 1995. The increase was due mainly to a $14.2 million
decrease in inventory and a $13.3 million increase in accounts
payable, partially offset by $14.2 million of additions to
property and equipment and an $8.3 million increase in accounts
receivable. For further information, see the Consolidated
Statement of Cash Flows for the 52 weeks ended April 1, 1995 on
page 28.
Net accounts receivable increased $8.3 million from $76.2 million
at April 2, 1994, to $84.5 million at April 1, 1995. The increase
was due mainly to an increase in CGE sales near the end of fiscal
1995 compared to the end of fiscal 1994.
Merchandise inventories decreased $14.2 million, or 12%, from
$117.1 million at the end of fiscal 1994, to $102.9 million at
the end of fiscal 1995. The decrease was due partly to the
Company having 20 fewer stores at the end of fiscal 1995 than at
the end of fiscal 1994. The decrease also reflects an effort by
management to improve inventory turns.
Current and non-current deferred income taxes totaling $10.0
million and
$11.1 million at April 1, 1995, and April 2, 1994, respectively,
resulted from taxes paid on temporary differences which caused
taxable income to exceed financial reporting income.
Net property and equipment increased $4.0 million, from $19.4
million at the end of fiscal 1994, to $23.4 million at April 1,
1995. The increase was partly due to the purchase of land and a
building in Spokane, Washington for the new CGE customer service
center. This, and other property and equipment purchases made in
the ordinary course of business, were partially offset by
depreciation on the Company's existing base of fixed assets.
Accounts payable increased $13.3 million, from $91.1 million at
April 2, 1994, to $104.4 million at April 1, 1995. The
increase was due mainly to the increased portion of CGE sales that
came from VLAM agreements during the fourth quarter this year
compared to the fourth quarter last year, as discussed on page 20.
Increased sales resulted in an increase in accounts payable
without a corresponding increase in merchandise inventory, as VLAM
agreements are not inventoried product. This increase was
partially offset by a decrease in accounts payable for inventoried
product, which is consistent with the decrease in merchandise
inventories.
Liquidity and Capital Resources
Cash provided by operating activities was $31.0 million in fiscal
1995 compared to $8.7 million and $17.0 million in fiscal years
1994 and 1993, respectively. A decrease in inventory and an
increase in accounts payable, resulted in a $27.6 million source
of cash in fiscal 1995, compared to fiscal 1994 when a decrease in
inventory, net of a decrease in accounts payable resulted in a
$12.9 million source of cash. In addition, the company had net
income of $2.7 million in fiscal 1995, compared to a $0.5 million
loss in fiscal 1994. For further information see the Consolidated
Statements of Cash Flows on page 28.
During fiscal 1995, the Company financed its working capital
requirements and capital expenditures with proceeds from
operations. Effective October 1, 1994, the Company entered into a
revolving loan agreement with two banks providing for unsecured
borrowings of up to $50,000,000 through September 30, 1995. 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 rate for 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 minimum capital ratio, net worth,
and working capital requirements. The Company was in compliance
with all financial covenants as of the end of fiscal 1995. The
Company had no outstanding borrowings under the revolving loan
agreement at April 1, 1995.
Capital expenditures in fiscal 1995 totaled approximately $14.2
million. Capital expenditures included land and a building in
Spokane, Washington for the new CGE customer service center.
Other expenditures included computer software and communications
equipment.
Capital expenditures in fiscal 1994 totaled approximately $9.5
million. Capital expenditures consisted mainly of new personal
computers (PCs) for the stores, CGE sales, and headquarters
personnel, a new telephone system, and acquisition of certain
assets of Mac's Place, Inc.
The Company expects that cash requirements for the foreseeable
future will be satisfied by cash flow from operations and
borrowings under the lines of credit. Depending on its rate of
growth, the Company may require additional financing, including
bank borrowings and further issuances of debt and/or equity
securities.
Inflation
The Company does not believe that its business has been affected
to any significant degree by inflation.
Item 8. Financial Statements and Supplementary
Data
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Egghead, Inc.:
We have audited the accompanying consolidated balance sheets
of Egghead, Inc. (a Washington corporation) and subsidiaries
as of April 1, 1995 and April 2, 1994, and the related
consolidated statements of operations, shareholders' equity
and cash flows for each of the three fiscal years in the
period ended April 1, 1995. These financial statements are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of Egghead, Inc. and subsidiaries as of April 1,
1995 and April 2, 1994, and the results of their
operations and their cash flows for each of the three fiscal
years in the period ended April 1, 1995, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Seattle, Washington,
May 16, 1995
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
ASSETS
<TABLE>
<S> <C> <C>
April 1, April 2,
1995 1994
Current assets:
Cash and cash equivalents $42,592 $25,677
Accounts receivables, net of allowance for doubtful
accounts of $4,354 and $3,432, respectively (note 9) 84,514 76,241
Merchandise inventories 102,918 117,106
Prepaid expenses and other current assets 4,045 3,717
Current deferred income taxes (Note 5) 6,964 8,085
Total current assets 241,033 230,826
Property and equipment, net (Note 2) 23,365 19,351
Non-current deferred income taxes (Note 5) 3,051 3,014
Other assets 2,692 2,819
$270,141 $256,010
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks (Note 3) $ - $ -
Accounts payable 104,425 91,055
Accrued liabilities 17,303 19,144
Income taxes payable (Note 5) 325 494
Current portion of capital lease obligations 252 295
Total current liabilities 122,305 110,988
Capital lease obligations, less current portion (Note 4) 106 184
Deferred rent 1,314 1,422
Total liabilities 123,725 112,594
Commitments and contingencies (Note 4)
Shareholders' equity (Note 6):
Common stock, $.01 par value:
50,000,000 shares authorized; 17,166,031 and
17,121,438 shares issued and outstanding, respectively 172 171
Additional paid-in capital 120,572 120,287
Retained earnings 25,672 22,958
Total shareholders' equity 146,416 143,416
$270,141 $256,010
</TABLE>
See Notes to Consolidated Financial Statements.
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
1995 1994 1993
Net sales $862,550 $778,327 $725,447
Cost of sales, including certain buying, occupancy
and distribution costs 760,431 675,377 618,618
Gross margin 102,119 102,950 106,829
Selling, general, and administrative expense
90,677 89,496 85,070
Depreciation and amortization expense, net of
amounts included in cost of sales 9,348 8,681 7,062
Provision for restructuring costs - 4,400 2,700
Provision for shareholder litigation (Note 10) - 1,200 -
Operating income (loss) 2,094 (827) 11,997
Theft insurance recovery (note 11) 1,650 - -
Other (expense) income:
Interest expense (39) (82) (248)
Interest income 776 352 290
Other, net (108) (285) (679)
Income (loss) before income taxes 4,373 (842) 11,360
Income tax benefit/(provision) (Note 5) (1,705) 328 (4,430)
Net income (loss) $ 2,668 $ (514) $ 6,930
Earnings (loss) per share:
Primary:
Earnings (loss) per share $ 0.15 $ (0.03)$ 0.41
Weighted average common shares and
common equivalent shares outstanding 17,281 17,088 17,090
Fully Diluted:
Earnings (loss) per share $ 0.15 $ (0.03)$ 0.41
Weighted average common shares and
common equivalent shares outstanding 17,281 17,088 17,090
See Notes to Consolidated Financial Statements.
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Amounts in thousands)
<TABLE>
<S> <C> <C> <C> <C> <C>
Additional
Common Stock Paid-in Retained
Shares Amount Capital Earnings Total
Balance, March 28, 1992 16,910 $ 169 $118,336 $16,728 $ 135,233
Stock issued for cash, pursuant
to stock option plan
19 - 220 - 220
Tax benefit related to stock options
- - 82 - 82
Stock issued for cash, pursuant to
employee stock purchase plan
44 1 520 - 521
Stock granted as compensation
10 - 84 - 84
Translation adjustment
- - - (80) (80)
Net income - - - 6,930 6,930
Balance, April 3, 1993 16,983 170 119,242 23,578 142,990
Stock issued for cash, pursuant
to employee stock purchase plan
70 1 487 - 488
Tax benefit related to stock options
- - 6 - 6
Stock granted as compensation
68 - 552 - 552
Translation adjustment - - - (106) (106)
Net loss - - - (514) (514)
Balance, April 2, 1994 17,121 171 120,287 22,958 143,416
Stock issued for cash, pursuant
to employee stock purchase plan
42 1 258 - 259
Stock issued for cash, pursuant
to stock option plan
3 - 27 - 27
Translation adjustment - - - 46 46
Net income - - - 2,668 2,668
Balance, April 1, 1995 17,166 $ 172 $120,572 $ 25,672 $146,416
</TABLE>
See Notes to Consolidated Financial Statements.
27
27
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<S> <C> <C> <C>
1995 1994 1993
Cash flows from operating activities:
Net income (loss) $2,668 $ (514) $ 6,930
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 10,468 10,250 9,083
Deferred rent (108) (85) 132
Deferred income taxes 1,084 (1,322) (2,165)
Stock issued as compensation - 552 -
Loss on disposition of property and equipment
187 327 1,080
Changes in assets and liabilities:
Account receivable, net (8,284) (11,796) (2,155)
Merchandise inventories 14,183 19,948 (14,689)
Prepaid expenses & other current assets
(328) (499) (979)
Other assets (245) (2,288) (52)
Accounts payable 13,401 (7,040) 14,613
Accrued liabilities (1,837) 1,449 5,281
Income taxes payable (169) (295) (40)
Total adjustments 28,352 9,201 10,109
Net cash provided by operating activities
31,020 8,687 17,039
Cash flows from investing activities:
Additions to property and equipment (14,162) (9,483) (10,261)
Proceeds from sale of equipment 103 117 107
Net cash used by investing activities (14,059) (9,366) (10,154)
Cash flows from financing activities:
Proceeds from stock issuances 286 488 825
Payments made on capital lease obligations (308) (493) (595)
Net cash provided (used) by
financing activities (22) (5) 230
Effect of exchange rates on cash (24) (25) (29)
Net increase (decrease) in cash and cash
equivalents 16,915 (709) 7,086
Cash and cash equivalents at beginning of period
25,677 26,386 19,300
Cash and cash equivalents at end of period $ 42,592 $ 25,677 $ 26,386
See Notes to Consolidated Financial Statements.
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
1995 1994 1993
Supplemental disclosures of cash paid
during the year (in thousands):
Interest $ 39 $ 76 $ 224
Income taxes $ 668 $ 1,314 $ 6,802
</TABLE>
Supplemental disclosure of non-cash
investing and financing activities:
Capital lease obligations totaling $0.2 million and $0.9 million
were recorded in fiscal years 1995 and 1993 respectively, when the
Company acquired new equipment. In fiscal 1994, a $0.9 million
capital lease obligation was eliminated when the Company upgraded
equipment.
In fiscal years 1994 and 1993, the Company recorded tax benefits
of $6,000 and $82,000, respectively, resulting from the exercise
of non-qualified stock options and the disqualifying disposition
of shares acquired through incentive stock options and the
employee stock purchase plan. These tax benefits have been added
to additional paid-in capital.
See Notes to Consolidated Financial Statements.
EGGHEAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
All references herein to fiscal 1995, 1994, and 1993 relate to the
fiscal years ended April 1, 1995, April 2, 1994, and
April 3, 1993, respectively.
Note 1 Summary of Significant Accounting Policies
Business
Egghead, Inc. sells personal computer software, hardware,
and related products through its wholly-owned subsidiaries,
DJ&J Software Corporation (DJ&J, d/b/a Egghead Software) and
Eggspert Software, Ltd. (Eggspert, a Canadian subsidiary),
EH Direct, Inc. (EH Direct), and Egghead International, Inc.
(Egghead International). References to "the Company" and
"Egghead" include Egghead, Inc., its predecessors, and its
subsidiaries.
Consolidation
The consolidated financial statements include the accounts
of Egghead, Inc. and its wholly-owned subsidiaries, DJ&J,
Eggspert, EH Direct, and Egghead International, and include
all such adjustments and reclassifications necessary to
eliminate the effect of significant intercompany accounts
and transactions.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less at the time of purchase to
be cash equivalents. The carrying amount of cash
equivalents approximates fair value because of the short-
term maturity of those instruments.
Accounts Receivable and Revenue Recognition
Company sales made on credit generally have terms of net 30
days. The sales and corresponding trade receivables for
inventoried product are recorded upon merchandise shipment.
Revenue from the sale of maintenance agreements is
recognized ratably over the contractual period. Revenue
from the sale of services is recognized as the services are
provided. Advanced billings are recorded as deferred
revenue. The Company records provisions for doubtful
accounts and sales returns and allowances based upon
historical experience.
Certain advertising and promotional expenditures are
reimbursable from suppliers under cooperative advertising
and other promotional and market development fund
arrangements. Amounts qualifying for reimbursement are
recorded as receivables from the suppliers and as a
corresponding reduction of net advertising expense in the
period the expenditure occurs. Also included in accounts
receivable are credit card receivables and amounts due from
vendors for returned inventory and other programs. The
Company records a provision for uncollectible vendor
receivables based upon historical experience.
Merchandise Inventories
Merchandise inventories are accounted for using the moving
weighted average cost method and are stated at the lower of
cost or market.
EGGHEAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note 1 Summary of Significant Accounting Policies
(continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation of
equipment, furniture, and fixtures is provided using the
straight-line method over their estimated useful lives
ranging from two to seven years. Depreciation of the
buildings is provided using the straight-line method over
their estimated useful lives ranging from 20 to 30 years.
Amortization of leasehold improvements is provided using the
straight-line method over the lesser of the lease term or
the assets' estimated useful lives.
Accounts Payable
Outstanding checks included in accounts payable were $10.4
million and
$11.9 million at April 1, 1995, and April 2, 1994,
respectively.
Deferred Rent
Certain store lease agreements provide for scheduled rent
increases or for rent payments to commence at a date later
than the date of occupancy. In these cases, the Company
recognizes the aggregate rent expense on a straight-line
basis over the lease term beginning when the store opens.
Income Taxes
The Company determines its income tax accounts in accordance
with Statement of Financial Accounting Standards No. 109.
Deferred income taxes result primarily from temporary
differences in certain items for income tax and financial
reporting purposes.
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 fiscal year
ended April 2, 1994, because it was anti-dilutive.
Foreign Currency Translation
Balance sheet accounts of the Company's foreign operations
are translated into U.S. dollars at the exchange rate on the
balance sheet date. Results of operations are translated at
the average exchange rate prevailing during the fiscal year.
The results of unrealized exchange rate fluctuations on
translating foreign currency assets and liabilities into
U.S. dollars are recorded as a component of retained
earnings. Realized gains and losses from foreign currency
transactions are included in net income.
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 years 1995 and 1994 each had 52 weeks and fiscal year
1993 had 53 weeks.
EGGHEAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note 2 Property and Equipment
The components of property and equipment at April 1, 1995
and April 2, 1994 were as follows (in thousands):
April 1, April 2,
1995 1994
Land and buildings $6,574 $ 1,547
Equipment 33,559 31,674
Leasehold improvements 8,652 9,053
Furniture and fixtures 8,715 8,988
57,500 51,262
Less accumulated depreciation and
amortization (34,135) (31,911)
Property and equipment, net $23,365 $ 19,351
Note 3 Lines of Credit
Effective October 1, 1994, the Company entered into a
revolving loan agreement with two banks providing for
unsecured borrowings of up to $50,000,000 through September
30, 1995. 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 all financial covenants as of April 1, 1995.
A summary of borrowings under the lines of credit follows
(in thousands):
Fiscal year
1995 1994 1993
Maximum amount outstanding $ - $ 5,950 $21,600
Average amount outstanding $ - $ 350 $ 3,665
Weighted average interest rate - % 3.9% 4.2%
EGGHEAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note 4 Leases
The Company leases its retail stores, Corporate, Government,
and education (CGE) regional sales
support centers, head-quarters, and distribution facilities
under operating leases with remaining lives on most leases
ranging from one to five years. Some leases contain renewal
options of one to five years which the Company may exercise
at the end of the initial lease term. The leases generally
require the Company to pay taxes, insurance, and certain
common area maintenance costs.
Aggregate rental expense, including common area maintenance
charges, for all operating leases for the fiscal years ended
1995, 1994, and 1993 was approximately $16,769,000,
$18,012,000, and $17,939,000, respectively. As of April 1,
1995, future minimum rental payments under non-cancelable
operating and capital leases for retail stores, CGE sales
offices, headquarters and distribution facilities, and
equipment consisted of the following (in thousands):
Capital Operating
Fiscal Year leases leases
1996 $268 $13,141
1997 67 11,015
1998 44 7,622
1999 - 4,081
2000 - 1,107
Thereafter - -
Total minimum payments 379 $36,966
Less interest (21)
Present value of minimum
lease payments 358
Less current portion (252)
Capital lease obligations,
less current portion $106
EGGHEAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note 5 Income Taxes
The provision (benefit) for income taxes is comprised of the
following (in thousands):
Fiscal year
1995 1994 1993
Current:
Federal $ 432 $ 777 $ 5,316
State 189 217 1,279
621 994 6,595
Deferred:
Federal 944 (1,152) (1,888)
State 140 (170) (277)
1,084 (1,322) (2,165)
Total $ 1,705 $ (328) $ 4,430
Deferred income taxes result primarily from temporary differences
in certain items for income tax and financial reporting purposes.
The tax effects of temporary differences giving rise to the
deferred tax assets are as follows:
April 1, April 2,
1995 1994
Accounts receivable $ 1,720 $ 942
Merchandise inventories 3,068 3,532
Property and equipment 2,385 2,644
Other assets 155 54
Accrued liabilities 2,380 3,736
Deferred rent 307 191
Total deferred tax assets $ 10,015 $ 11,099
The Company's income tax provision/(benefit) differs from the
amount computed by applying the statutory Federal tax rate to
income (loss) before taxes as follows:
Fiscal year
1995 1994 1993
Statutory Federal tax rate 34.0% (34.0)% 34.0%
State taxes, net of Federal benefit 6.3 2.6 5.3
Tax exempt interest income (4.1) (11.9) (0.7)
Other, net 2.8 4.3 0.4
39.0% (39.0)% 39.0%
EGGHEAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note 6 Stock Option and Stock Purchase Plans
Employee Stock Purchase Plan
The Egghead, Inc. 1989 Employee Stock Purchase Plan
currently provides options to acquire the Common Stock of
the Company to substantially all full-time and certain other
employees at the lesser of 85% of the fair market value of
the Common Stock on August 1 of the first and second plan
years and July 1 thereafter, or 85% of the fair market value
on the following July 31 of the first plan year and June 30
of each plan year thereafter. Under the plan, a maximum of
650,000 shares were reserved for issuance. As of April 1,
1995, there were 386,938 shares available for future
issuance.
The 1993 Stock Option Plan
In September 1993, the Company's shareholders approved the
1993 Stock Option Plan (the "1993 Plan"), under which
2,000,000 shares of the Company's Common Stock were reserved
for issuance. The 1993 Plan replaced the 1986 Combined
Incentive and Non-Qualified Stock Option Plan (the "1986
Combined Plan") under which 2,000,000 shares were originally
reserved for issuance. The number of shares reserved for
issuance under the 1993 Plan was increased by the shares
reserved for issuance under the 1986 Combined Plan that were
not subject to outstanding stock options. Shares presently
subject to outstanding stock options under the 1986 Combined
Plan, which subsequently are canceled or expire, will
increase the number of shares reserved for issuance under
the 1993 Plan. No additional stock options will be granted
under the 1986 Combined Plan.
Options granted, exercised, and canceled under the above
Plans are summarized as follows:
Fiscal year
1995 1994 1993
Outstanding, beginning
of year 702,322 1,184,338 786,208
Options granted 1,140,900 250,000 548,465
Options exercised (2,625) - (19,363)
Options canceled (327,508) (732,016) (130,972)
Outstanding, end of year 1,513,089 702,322 1,184,338
Exercisable, end of year 293,139 237,497 291,702
Available for grant in
future years 1,776,066 2,589,458 107,442
Price of Options:
Granted during year $6.19-$10.25 $7.50-$8.13 $8.38-$17.00
Exercised during year $9.88 - $10.75 - $6.25-$13.75
Canceled during year $6.19 - $17.00 $8.37-17.00 $6.25-$19.50
EGGHEAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note 6 Stock Option and Stock Purchase Plans
(continued)
The Non-employee Director Stock Option Plan
In September 1993, the Company's shareholders approved the
Non-employee Director Stock Option Plan (the "Director
Plan"), under which 175,000 shares of the Company's Common
Stock were reserved for issuance. As of April 1, 1995,
121,000 shares were available for grant and 54,000 shares
were subject to outstanding options which have been granted
at prices ranging from $7.25 to $8.06. As of April 1, 1995,
options for 18,000 shares were vested.
The Executive Plan
In February 1989, the Board of Directors approved four-year
employment agreements and stock option agreements for three
executive officers who are no longer with the Company,
Stuart Sloan, Ronald Weinstein, and Matthew Griffin,
whereby the officers' compensation was based on equity
incentives. Each drew an annual salary of $1 per year
during their term of employment. Options to acquire up to
1,700,000 shares of common stock are authorized under the
Plan. As of April 1, 1995, 325,000 shares were available
for grant and 1,375,000 were subject to outstanding options
which have been granted to the above named executive
officers of the Company at prices ranging from $10.38 to
$20.00, with a weighted average exercise price of $13.21.
All outstanding options are vested and expire in February
1999. As of April 1, 1995, none of the options had been
exercised.
Note 7 401(k) Plan
The Company has a 401(k) retirement plan for the benefit of
its employees. After six months of full-time employment
(more than 1,000 hours), an employee is eligible to
participate in the plan. Employee contributions are matched
by the Company at 50% of each employee's contribution up to
4% of their compensation. The Company's contributions are
fully vested upon the completion of two years of service.
The Company's contributions were approximately $446,000,
$571,000, and $558,000, in fiscal years 1995, 1994, and
1993, respectively.
EGGHEAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note 8 Selected Quarterly Consolidated Financial
Information (Unaudited)
Selected financial data for each quarter of fiscal years
1995 and 1994 is as follows (in millions, except per share
data). Effective the beginning the fiscal 1995, the Company
changed it's fiscal quarters such that each quarter consists
of 13 weeks. Previously, fiscal quarters were such that the
first quarter consisted of 16 weeks, the second and third
quarters were each 12 weeks, and the fourth quarter
consisted of the remaining 12 or 13 weeks. The fiscal 1994
financial information represents the quarterly results that
would have reported if the Company would have been using the
13-week fiscal quarter format.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
<C>
First Quarter Second Quarter Third Quarter Fourth
Quarter
1995 1994 1995 1994 1995 1994 1995
1994
Net sal es $193.8 $180.8 $194.3 $165.4 $254.3 $222.6 $220.1
$209.5
Gross margin 22.2 26.8 22.4 23.1 31.8 27.3 25.7
25.7
Selling, general, and
administrative
expense 21.8 23.6 21.5 20.6 25.2 22.6 22.2
22.7
Provision for
restructuring costs - 4.4 - - - - -
- -
Provision for shareholder
litigation - - - - - 0.1 -
1.1
Operating income
(loss) (2.0) (3.1) (1.5) 0.5 4.4 2.4 1.2
(0.6)
Theft insurance
recovery - - - - 1.7 - -
- -
Income (loss) before
taxes (1.8) (3.0) (1.6) 0.4 6.3 2.4 1.5
(0.6)
Net income (loss) (1.1) (1.8) (1.0) 0.3 3.8 1.4 0.9
(0.4)
Earnings (loss)
per share $(0.06) $(0.11) $(0.06) $0.02 $0.22 $0.08 $0.05
$(0.02)
</TABLE>
Note 9 Concentration of Credit Risk
During fiscal years 1995 and 1994, the Company granted
credit to substantially all of its corporate, government,
and education customers on an unsecured basis.
Approximately 22% and 15% of the Company's trade accounts
receivable were from customers in various segments of the
United States government at April 1, 1995 and April 2, 1994,
respectively. The financial position of these and other
customers was considered in determining the allowance for
doubtful accounts.
EGGHEAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
Note 10 Shareholder Litigation
On June 9, 1994, the Company announced that it had settled a
shareholders' lawsuit originally filed against the Company,
a current officer, and two former officers who were also
directors. The current officer had recently been dismissed
from the suit. The action, originally entitled Finucan v.
Egghead, et al., was filed in federal court in Seattle in
September 1993 and was alleged to be brought on behalf of
all purchasers of the Company's common stock between
February 11, 1992, and November 18, 1992, (other than the
individual defendants and other individuals and entities
otherwise affiliated with the Company). The settlement
called for a cash payment by the Company of $2.625 million.
Payment was made during the second quarter of fiscal 1995.
This settlement was approved by the United States District
Court for the Western District of Washington on January 12,
1995. Net of expected insurance recovery, the settlement
and related attorneys' fees resulted in a pretax charge of
$1.2 million in fiscal year 1994 ($0.04 per share, net of
income tax impact).
Note 11 Theft Insurance Recovery
Theft insurance recovery of $1.65 million in fiscal 1995 represents
settlement of an insurance claim, net of expenses, for inventory
stolen from numerous retail stores during fiscal years 1991, 1992,
and 1993, by members of a multi-state shoplifting ring.
Note 12 New Accounting Standard
In March 1995, the Financial Accounting Stardards Board
issued Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. This new standard requires that long-lived assets and
certain identifiable intangible assets be reviewed 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.
Since the Company does not have any material long-lived
assets other than property, plant, and equipment, which are
stated at lower of cost or market, there is no material
impact on the financial position of the Company from this
Statement.
Note 13 Subsequent Event
On May 1, 1995, the Company announced plans to consolidate
its direct response operation in Kalispell, Montana, and the
remainder of its CGE customer service operations and its
credit operations in Issaquah, Washington to its customer
service center in Spokane, Washington. Relocation,
severance, and related costs will be included in the
Company's fiscal 1996 first and second quarter results. The
Company estimates the total costs to range from $1.8 million
to $2.0 million, the majority of which will be recorded in
the first quarter. The Company expects that these changes
will result in net expense in fiscal year 1996, and net
savings in future years due to lower labor rates and
occupancy costs.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the
Registrant
The information required by Part III, Item 10, is
incorporated by reference from Egghead, Inc.'s definitive
Proxy Statement relating to Egghead, Inc.'s 1995 Annual
Meeting of Shareholders, which will be filed pursuant to
Regulation 14A within 120 days of April 1, 1995.
Item 11. Executive Compensation
The information required by Part III, Item 11, is
incorporated by reference from Egghead, Inc.'s definitive
Proxy Statement relating to Egghead, Inc.'s 1995 Annual
Meeting of Shareholders, which will be filed pursuant to
Regulation 14A within 120 days of April 1, 1995.
Item 12. Security Ownership of Certain Beneficial
Owners and Management
The information required by Part III, Item 12, is
incorporated by reference from Egghead, Inc.'s definitive
Proxy Statement relating to Egghead, Inc.'s 1995 Annual
Meeting of Shareholders, which will be filed pursuant to
Regulation 14A within 120 days of April 1, 1995.
Item 13. Certain Relationships and Related
Transactions
The information required by Part III, Item 13, is
incorporated by reference from Egghead, Inc.'s definitive
Proxy Statement relating to Egghead, Inc.'s 1995 Annual
Meeting of Shareholders, which will be filed pursuant to
Regulation 14A within 120 days of April 1, 1995.
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on
Form 8-K
A) Documents filed as a part of this report:
1. Financial Statements
The Consolidated Financial Statements, Notes thereto,
Financial Statement Schedules (none), and Accountants'
Report thereon are included in Part II, Item 8, of
this report.
2a. Exhibits
(I) 3.1 Restated Articles of Incorporation of the Company
(x) 3.2 Amended Bylaws of the Company
(I) 10.1 House Account Agreement (U.S.) with Lotus
Development Corporation dated September 4,1986.
10.2 First amendment to House Account Agreement
(U.S.) with Lotus Development Corporation
dated May 12, 1989. (Previously filed with
registrant's Form 10-K for the fiscal year
ended March 31, 1990, as Exhibit 10.1a.)
10.3 (Intentionally left blank.)
10.4 (Intentionally left blank.)
(iv) 10.5 * Microsoft January - June, 1993 Reseller Rebate
and Marketing Fund Agreement.
(v) 10.6 * Microsoft 1993/1994 Channel Agreement dated
July 1, 1993.
(v) 10.7 * Rebate and Marketing Fund Addendum to the
1993/1994 Microsoft Channel Agreement dated
November 1, 1993.
(v) 10.8 * Amendment to the Microsoft 1993/1994 Channel
Agreement (appointment as a Major Chain
Reseller) dated November 10, 1993.
(v) 10.9 * Reseller agreement with WordPerfect
Corporation dated April 1, 1994.
(vi) 10.10 * Microsoft 1994/1995 Channel Agreement dated
July 1, 1994.
(vi) 10.11 * Addendum to Microsoft 1994/1995 Channel
Agreement dated July 1, 1994.
(vi) 10.11a * Amendment No. 1 to Microsoft 1994/1995 Channel
Agreement (Appointment as a Large Account Reseller)
dated July 1994.
(vi) 10.12 * Follow up letter dated August 2, 1994, from
Microsoft regarding Microsoft 1994/1995
Channel Agreement dated July 1, 1994.
10.13 (Intentionally left blank.)
10.14 (Intentionally left blank.)
10.15 Lease, as amended, dated June 9, 1988, between
Sammamish Park Place I Limited Partnership as
Landlord and DJ&J Software Corporation as
Tenant regarding the Company's administrative
headquarters. (Previously filed with
registrant's Form 10-K for the fiscal year
ended April 1, 1989, as Exhibit 10.46.)
10.16 First Amendment to June 9, 1988 lease between
Sammamish Park Place I Limited Partnership and
DJ&J Software Corporation dated
October 4, 1989. (Previously filed with
registrant's Form 10-K for the fiscal year
ended March 31, 1990, as Exhibit 10.46a.)
10.17 Lease dated March 23, 1992 between Sammamish
Park Place II Limited Partnership as Landlord
and DJ&J Software Corporation as Tenant
regarding the Company's administrative
headquarters. (Previously filed with
registrant's Form 10-K for the fiscal year
ended March 28, 1992, as Exhibit 10.47.)
10.18 Lease Termination and Rent Payment Agreement
between Sammamish Park Place II Limited
Partnership as Landlord and DJ&J Software
Corporation as Tenant regarding the Company's
administrative headquarters. (Previously
filed with registrant's Form 10-Q for the
first quarter of fiscal 1995 ended July 2,
1994.)
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K (continued)
(vi) 10.18a First Amendment to Lease Termination and Rent
Payment Agreement between Sammamish Park Place
II Limited Partnership as Landlord and DJ&J
Software Corporation as Tenant.
(vi) 10.18b Second Amendment to Lease Termination and Rent
Payment Agreement between Sammamish Park Place
II Limited Partnership as Landlord and DJ&J
Software Corporation as Tenant.
(iii) 10.19 Lease dated March 23, 1989, between The CHY
Company as Landlord and DJ&J Software as
Tenant regarding the Company's Sacramento
distribution facility.
(iii) 10.20 First amendment to lease between The CHY
Company as Landlord and DJ&J Software, as
Tenant regarding the Company's Sacramento
distribution facility.
10.21 (Intentionally left blank.)
(I) 10.22 Lease Agreement dated January 7, 1988, with
Granite Properties, a limited partnership, as
Landlord and DJ&J Software Corporation, as
Tenant regarding Lancaster distribution
facility.
(I) 10.23 Master License Agreement dated February 12,
1988, with Staples, Inc. as Licensor and DJ&J
Software Corporation as Licensee, regarding an
exclusive right to sell items in Staples'
discount stores.
10.24 First Amendment to Master License Agreement between
Staples, Inc. and DJ&J Software
Corporation dated November 14, 1990.
(Previously filed with registrant's Form 10-K
for the fiscal year ended March 30, 1991, as
same Exhibit number.)
10.25 (Intentionally left blank.)
10.26 (Intentionally left blank.)
10.27 Form of Indemnification Agreement between the
Company and its directors. (Previously filed
with registrant's Form 10-Q for the third
quarter of fiscal 1995 ended December 31,
1994.)
10.28 Form of Indemnification Agreement between DJ&J
Software Corporation and its directors.
(Previously filed with registrant's Form 10-Q
for the third quarter of fiscal 1995 ended
December 31, 1994.)
(vi) 10.29 Revolving Loan Agreement dated September 30,
1994, among Seattle-First National Bank and
U.S. Bank of Washington, National Association,
Egghead, Inc., and DJ&J Software Corporation.
10.30 Revolving Loan Agreement dated September 30,
1993 among Seattle-First National Bank and
U.S. Bank of Washington, National Association,
Egghead, Inc., and DJ&J Software Corporation.
(Previously filed with registrant's Form 10-Q
dated October 16, 1993, as same exhibit
number.)
(iv) 10.31 **Executive employment between Egghead, Inc. and
Ronald P. Erickson dated February 22, 1993.
(vi) 10.31a **Separation agreement between Egghead, Inc.
and DJ&J Software Corporation (collectively,
the "Company") and Ronald P. Erickson dated
August 1, 1994.
(iv) 10.32 **Executive employment agreement between
Egghead, Inc. and Timothy E. Turnpaugh dated
February 22, 1993.
(v)10.32a **Amended and restated executive employment
agreement between Egghead, Inc. and Timothy E.
Turnpaugh dated June 1993.
(v)10.32b **Separation agreement between Egghead, Inc. and
DJ&J Software Corporation (the "Company") and
Timothy E. Turnpaugh dated August 25,
1993.
10.33 **Executive employment agreement between
Egghead, Inc. and Terence M. Strom dated June
28, 1993. (Previously filed with registrant's
Form 10-Q dated October 16, 1993, as Exhibit
10.34.)
(ii) 10.34 **Egghead, Inc. 1989 Executive Retention
Incentive Stock Option Plan.
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K (continued)
(ii) 10.35 **Egghead, Inc. 1989 Executive Retention
Incentive Stock Option Agree-ment between
Egghead, Inc. and Stuart M. Sloan dated
February 23, 1989.
(ii) 10.36 **Egghead, Inc. 1989 Executive Retention Non-
Qualified Stock Option Agreement between
Egghead, Inc. and Stuart M. Sloan dated
February 23, 1989.
(iii)10.36a **Amendment No. 1 to Egghead, Inc. 1989
Executive Retention Non-Qualified Stock Option
Agreement between Egghead, Inc. and Stuart M.
Sloan dated April 17, 1991.
10.37 (Intentionally left blank.)
10.38 (Intentionally left blank.)
(ii) 10.39 **Egghead, Inc. 1989 Executive Retention
Incentive Stock Option Agreement between
Egghead, Inc. and Ronald A. Weinstein dated
February 23, 1989.
(iii)10.39a **Amendment No. 1 to Egghead, Inc. 1989
Executive Retention Incentive Stock Option
Agreement between Egghead, Inc. and Ronald A.
Weinstein dated April 17, 1991.
(ii) 10.40 **Egghead, Inc. 1989 Executive Retention Non-
Qualified Stock Option Agreement between
Egghead, Inc. and Ronald A. Weinstein dated
February 23, 1989.
(iii)10.40a **Amendment No. 1 to Egghead, Inc. 1989
Executive Retention Non-Qualified Stock Option
Agreement between Egghead, Inc. and Ronald A.
Weinstein dated April 17, 1991.
10.41 (Intentionally left blank.)
10.42 (Intentionally left blank.)
(ii) 10.43 **Egghead, Inc. 1989 Executive Retention
Incentive Stock Option Agreement between
Egghead, Inc. and Matthew J. Griffin dated
February 23, 1989.
(ii) 10.44 **Egghead, Inc. 1989 Executive Retention Non-
Qualified Stock Option Agreement between
Egghead, Inc. and Matthew J. Griffin dated
February 23, 1989.
(iii)10.44a **Egghead, Inc. 1989 Executive Retention Non-
Qualified Stock Option Agreement between
Egghead, Inc., and Matthew J. Griffin dated
April 17, 1991.
10.45 (Intentionally left blank.)
10.46 (Intentionally left blank.)
10.47 (Intentionally left blank.)
10.48 **Egghead, Inc. 1989 Employee Stock Purchase
plan. (Previously filed with registrant's
Form S-8 dated June 23, 1990, as Exhibit 10.)
10.49 **Egghead, Inc. 1993 Stock Option Plan.
(Previously filed with registrant's Form 10-Q
dated October 16, 1993, as Exhibit 10.31.)
10.50 **Egghead, Inc. Nonemployee Director Stock
Option Plan. (Previously filed with
registrant's Form 10-Q dated October 16, 1993,
as Exhibit 10.32.)
(x) 21.1 Schedule of subsidiaries.
(x) 23.1 Consent of Independent Public Accountants.
24.1 Power of Attorney (See Page 43).
27 Financial Data Schedule
(I) Previously filed with registrant's Registration
Statement on Form S-1, Registration No. 33-21472, as
same Exhibit number.
(ii) Previously filed with the registrant's Form 8-K dated
February 23, 1989, as Exhibit numbers 10.1 to 10.13.
(iii) Previously filed with registrant's Form 10-K for the
fiscal year ended March 28, 1992, as same Exhibit
number.
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K (continued)
(iv) Previously filed with registrant's Form 10-K for the
fiscal year ended April 3, 1993, as same Exhibit
number.
(v) Previously filed with registrant's Form 10-K for the
fiscal year ended April 2, 1994, as same Exhibit
number.
(vi) Previously filed with registrant's Form 10-Q for the
second quarter of fiscal 1995 ended October 1, 1994.
(x) Filed herewith.
* Confidential portions of this exhibit have been
omitted and filed separately with the Commission
pursuant to an Application for Confidential Treatment
under Rule 24b-2 under the Securities Exchange Act
of 1934. Each exhibit has been marked to identify the
confidential portions that are omitted.
** Designates management contract or compensatory plan or
arrangement.
2b. Form 8-K
None.
<F1> Registered trademark
<F2> Trademark
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 Issaquah, State of
Washington, on May 25, 1995.
EGGHEAD, INC.
By /s/ Terrence M. Strom
Terence M. Strom
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and
appoints Terence M. Strom and Brian W. Bender, or either of
them, his attorneys-in-fact, with the power of substitution,
for him in any and all capacities, to sign any amendments to
this report, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities
and Exchange Commission, hereby ratifying and confirming all
that said attorneys-in-fact, or their substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on
May 25, 1995, on behalf of the Registrant and in the capacities
indicated.
Signature Title
/s/ Terence M. Strom President, Chief Executive Officer, and
Terence M. Strom Director (Principal Executive Officer)
/s/ Brian W. Bender Vice President, Chief Financial
Brian W. Bender Officer (Principal Financial and Accounting Officer)
Director
Paul G. Allen
/s/ Richard P. Cooley Director
Richard P. Cooley
/s/ Steven E. Lebow Director
Steven E. Lebow
Director
Linda Fayne Levinson
SIGNATURES (continued)
Director
George P. Orban
/s/ Samuel N. Stroum Director
Samuel N. Stroum
As amended to reflect amendments up to and including June 14,1994
BYLAWS
of EGGHEAD,INC. [Name amended at Board meeting held April 18, 1988]
ARTICLE I
Offices
(1) Registered Office and Registered Agent: The registered
office of the corporation shall be located in the State of
Washington at such place as may be fixed from time to time by the
Board of Directors upon filing of such notices as may be required
by law, and the registered agent shall have a business office
identical with such registered office.
(2) Other Offices: The corporation may have other offices
within or outside the State of Washington at such place or places
as the Board of Directors may from time to time determine.
ARTICLE II
Shareholders' Meetings
(1) Meeting Place: All meetings of the shareholders shall
be held at the principal place of business of the corporation, or
at such other place as shall be determined from time to time by the
Board of Directors, and the place at which any such meeting shall
be held shall be stated in the notice of the meeting.
(2) Annual Meeting Time: The annual meeting of the
shareholders for the election of directors and for the transaction
of such other business as may properly come before the meeting
shall be held on such date and at such hour as may be determined by
the Board of Directors. [Amended by directors' consent dated May
20, 1988.]
(3) Annual Meeting - Order of Business: At the annual
meeting of shareholders, the order of business shall be as follows:
(a) Calling the meeting to order.
(b) Proof of notice of meeting (or filing waiver).
(c) Reading of minutes of last annual meeting.
(d) Reports of officers.
(e) Reports of committees.
(f) Election of directors.
(g) Miscellaneous business.
(4) Special Meetings: Special meetings of the shareholders
for any purpose may be called at any time by the President, Board
of Directors, or the holders of not less than one tenth of all
shares entitled to vote at the meeting.
(5) Notice:
(a) Notice of the time and place of the annual meeting of
shareholders shall be given by delivering personally or by mailing
a written or printed notice of the same, at least ten days, and not
more than sixty days, prior to the meeting to each shareholder of
record entitled to vote at such meeting.
(b) At least ten days and not more than sixty days prior to
the meeting, written or printed notice of each special meeting of
shareholders, stating the place, day and hour of such meeting, and
the purpose or purposes for which the meeting is called, shall be
delivered personally, or mailed to each shareholder of record
entitled to vote at such meeting.
(6) Voting Record: At least ten days before each meeting of
shareholders, a complete record of the shareholders entitled to
vote at such meeting, or any adjournment thereof, shall be made,
arranged in alphabetical order, with the address of and number of
shares held by each, which record shall be kept on file at the
registered office of the corporation for a period of ten days prior
to such meeting. The record shall be kept open at the time and
place of such meeting for the inspection of any shareholder.
(7) Quorum: Except as otherwise required by law:
(a) A quorum at any annual or special meeting of
shareholders shall consist of shareholders representing, either in
person or by proxy, a majority of the outstanding capital stock of
the corporation entitled to vote at such meeting.
(b) The votes of a majority in interest of those present at
any properly called meeting or adjourned meeting of shareholders at
which a quorum as in this paragraph defined is present shall be
sufficient to transact business.
(8) Voting of Shares: Except as otherwise provided in these
Bylaws or to the extent that voting rights of the shares of any
class or classes are limited or denied by the Articles of
Incorporation, each shareholder, on each matter submitted to a vote
at a meeting of shareholders, shall have one vote for each share of
stock registered in his name on the books of the corporation.
(9) Closing of Transfer Books and Fixing Record Date: For
the purpose of determining shareholders entitled to notice of or to
vote at any meeting of shareholders, or any adjournment thereof, or
entitled to receive payment of any dividend, the Board of Directors
may provide that the stock transfer books shall be closed for a
stated period not to exceed sixty days nor be less than ten days
preceding such meeting. In lieu of closing the stock transfer
books, the Board of Directors may fix in advance a record date for
any such determination of shareholders, such date to be not more
than sixty days and, in case of a meeting of shareholders, not less
than ten days prior to the date on which the particular action
requiring such determination of shareholders is to be taken.
(10) Proxies: A shareholder may vote either in person or by
proxy executed in writing by the shareholder or his duly authorized
attorney-in-fact. No proxy shall be valid after eleven months from
the date of its execution, unless otherwise provided in the proxy.
(11) Action by Shareholders without a Meeting: Any action
required or which may be taken at a meeting of shareholders of the
corporation may be taken without a meeting if a consent in writing,
setting forth the action so taken, shall be signed by all of the
shareholders entitled to vote with respect to the subject matter
thereof. Such consent shall have the same force and effect as a
unanimous vote of shareholders.
(12) Waiver of Notice: A waiver of any notice required to
be given any shareholder, signed by the person or persons entitled
to such notice, whether before or after the time stated therein for
the meeting, shall be equivalent to the giving of such notice.
(13) Action of Shareholders by Communications Equipment:
Shareholders may participate in a meeting of shareholders by means
of a conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear
each other at the same time, and participation by such means shall
constitute presence in person at a meeting.
ARTICLE III
Stock
(1) Certificated Shares: Shares may but need not be
represented by certificates. Unless otherwise provided by law, the
rights and obligations of shareholders are identical whether or not
their shares are represented by certificates. If shares are
represented by certificates, certificates of stock shall be issued
in numerical order, and each shareholder shall be entitled to a
certificate signed by the President, or a Vice President, and the
Secretary or an Assistant Secretary, or by such other two officers
as designated by the Board of Directors, and may be sealed with the
seal of the corporation or a facsimile thereof. The signatures of
such officers may be facsimiles if the certificate is manually
signed on behalf of a transfer agent, or registered by a registrar,
other than the corporation itself or an employee of the
corporation. If an officer who has signed or whose facsimile
signature has been placed upon such certificate ceases to be such
officer before the certificate is issued, it may be issued by the
corporation with the same effect as if the person were an officer
on the date of issue.
At a minimum each certificate of stock shall state:
(a) the name of the issuing corporation;
(b) that the corporation is organized under the laws of this
state;
(c) the name of the person to whom issued;
(d) the number and class of shares and the designation of
the series, if any, which such certificate represents; and
(e) if the corporation is authorized to issue different
classes of shares or different series within a class, the
designations, relative rights, preferences, and limitations
applicable to each class and the variations in rights, preferences
and limitations determined for each series, and the Board's
authority to determine variations for future series, summarized
either on the front or back of the certificate. Alternatively,
each certificate may state conspicuously on its front or back that
the corporation will furnish the shareholder this information upon
written request and without charge.
In case of any mutilation, loss or destruction of any
certificate of stock, another may be issued in its place on proof
of such mutilation, loss or destruction. The Board of Directors
may impose conditions on such issuance and may require the giving
of a satisfactory bond or indemnity to the corporation in such sum
as they might determine or establish such other procedures as they
deem necessary.
(2) Uncertificated Shares:
(a) Unless the Articles of Incorporation provide otherwise,
the Board of Directors may authorize the issue of any of the
corporation's classes or series of shares without certificates.
The authorization does not affect shares already represented by
certificates until they are surrendered to the corporation.
(b) Within a reasonable time after the issue of shares
without certificates, the corporation shall send the shareholder a
complete written statement of the information required on
certificates as provided in Article III (1) herein.
(3) Transfers:
(a) Transfers of stock shall be made only upon the stock
transfer books of the corporation, kept at the registered office of
the corporation or at its principal place of business, or at the
office of its transfer agent or registrar. The Board of Directors
may, by resolution, open a share register in any state of the
United States, and may employ an agent or agents to keep such
register, and to record transfers of shares therein.
(b) Shares of certificated stock shall be transferred by
delivery of the certificates therefor, accompanied either by an
assignment in writing on the back of the certificate or an
assignment separate from certificate, or by a written power of
attorney to sell, assign and transfer the same, signed by the
holder of said certificate. No shares of certificated stock shall
be transferred on the books of the corporation until the
outstanding certificates therefor have been surrendered to the
corporation.
(c) Shares of uncertificated stock shall be transferred upon
receipt by the corporation of a written request for transfer signed
by the shareholder. Within a reasonable time after the transfer,
the corporation will acknowledge to such shareholder that said
shares have been transferred on the books of the corporation.
(4) Registered Owner: Registered shareholders shall be
treated by the corporation as the holders in fact of the stock
standing in their respective names and the corporation shall not be
bound to recognize any equitable or other claim to or interest in
any share on the part of any other person, whether or not it shall
have express or other notice thereof, except as expressly provided
below or by the laws of the State of Washington. The Board of
Directors may adopt by resolution a procedure whereby a shareholder
of the corporation may certify in writing to the corporation that
all or a portion of the shares registered in the name of such
shareholder are held for the account of a specified person or
persons. The resolution shall set forth:
(a) The classification of shareholder who may certify;
(b) The purpose or purposes for which the certification may
be made;
(c) The form of certification and information to be
contained therein;
(d) If the certification is with respect to a record date or
closing of the stock transfer books, the date within which the
certification must be received by the corporation; and
(e) Such other provisions with respect to the procedure as
are deemed necessary or desirable.
Upon receipt by the corporation of a certification complying
with the procedure, the persons specified in the certification
shall be deemed, for the purpose or purposes set forth in the
certification, to be the holders of record of the number of shares
specified in place of the shareholder making the certification.
(5) Fractional Shares or Scrip: The corporation may: (a)
issue fractions of a share which shall entitle the holder to
exercise voting rights, to receive dividends thereon, and to
participate in any of the assets of the corporation in the event of
liquidation; (b) arrange for the disposition of fractional
interests by those entitled thereto; (c) pay in cash the fair value
of fractions of a share as of the time when those entitled to
receive such shares are determined; or if certificates are being
used to represent shares of such class or series, (d) issue scrip
in registered or bearer form which shall entitle the holder to
receive a certificate for a full share upon the surrender of such
scrip aggregating a full share.
(6) Shares of Another Corporation: Shares owned by the
corporation in another corporation, domestic or foreign, may be
voted by such officer, agent or proxy as the Board of Directors may
determine or, in the absence of such determination, by the
President of the corporation.
ARTICLE IV
Board of Directors
(1) Number and Powers: The management of all the affairs,
property and interest of the corporation shall be vested in a Board
of Directors. The Board of Directors shall consist of not less
than seven (7) nor more than twelve (12) persons, the specific
number to be set by resolution of the Board of Directors or the
shareholders. The directors shall be divided into three classes:
Class I, Class II and Class Ill. Such classes shall be as nearly
equal in number of directors as possible. Each director shall
serve for a term ending on the day of the third annual meeting
following the annual meeting at which such director was elected.
Notwithstanding the foregoing, directors shall serve until their
successors are elected and qualified or until their earlier death,
resignation or removal from office or until there is a decrease in
the number of directors. Directors need not be shareholders or
residents of the State of Washington. In addition to the powers
and authorities by these Bylaws and the Articles of Incorporation
expressly conferred upon it, the Board of Directors may exercise
all such powers of the corporation and do all such lawful acts as
are not prohibited by statute or by the Articles of Incorporation
or by these Bylaws or as directed or required to be exercised or
done by the shareholders. [Number of directors changed to ten (10)
at July 18, 1990 Board meeting; entire paragraph (1) amended at
November 23, 1993 Board meeting; and number of directors changed
from not less than eight (8) nor more than twelve (12) at June 14,
1994 meeting.]
(2) Change of Number: The number of directors may at any
time be increased or decreased by the shareholders or directors at
any annual or special meeting, or at any regular meeting of the
Board of Directors, provided that no decrease shall have the effect
of shortening the term of any incumbent director except as provided
in paragraphs (3) and (4) hereunder. [Amended at July 18, 1990
Board meeting.]
(3) Vacancies: All vacancies in the Board of Directors,
whether caused by resignation, death or otherwise, may be filled by
the affirmative vote of a majority of the remaining directors
though less than a quorum of the Board of Directors. A director
elected to fill any vacancy shall hold office for the unexpired
term of his predecessor and until his successor is elected and
qualified. Any directorship to be filled by reason of an increase
in the number of directors may be filled by the Board of Directors
for a term of office continuing only until the next election of
directors by the shareholders.
(4) Removal of Directors: At a meeting of shareholders
called expressly for that purpose, the entire Board of Directors,
or any member thereof, may be removed by a vote of the holders of a
majority of shares then entitled to vote at an election of such
directors.
(5) Regular Meetings: Regular meetings of the Board of
Directors or any committee may be held without notice at the
principal place of business of the corporation or at such other
place or places, either within or without the State of Washington,
as the Board of Directors or such committee, as the case may be,
may from time to time designate. The annual meeting of the Board
of Directors shall be held without notice immediately after the
adjournment of the annual meeting of shareholders.
(6) Special Meetings:
(a) Special meetings of the Board of Directors may be called
at any time by the President or by any director, to be held at the
principal place of business of the corporation or at such other
place or places as the Board of Director or the person or persons
calling such meeting may from time to time designate. Notice of
all special meetings of the Board of Directors shall be given to
each director by two (2) days' service of the same by telegram, by
facsimile transmission, by letter or personally. Such notice need
not specify the business to be transacted at, nor the purpose of,
the meeting.
(b) Special meetings of any committee may be called at any
time by such person or persons and with such notice as shall be
specified for such committee by the Board of Directors, or in the
absence of such specification, in the manner and with the notice
required for special meetings of the Board of Directors.
(7) Quorum: A majority of the whole Board of Directors
shall be necessary at all meetings to constitute a quorum for the
transaction of business; and the votes of a majority of those
directors present at any properly called meeting at which a quorum
as in this subsection defined is present shall be sufficient to
transact business.
(8) Waiver of Notice: Attendance of a director at a meeting
shall constitute a waiver of notice of such meeting, except where a
director attends for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully
called or convened. A waiver of notice signed by the director or
directors, whether before or after the time stated for the meeting,
shall be equivalent to the giving of notice.
(9) Registering Dissent: A director who is present at a
meeting of the Board of Directors at which action on a corporate
matter is taken shall be presumed to have assented to such action
unless his dissent shall be entered in the minutes of the meeting,
or unless he shall file his written dissent to such action with the
person acting as the secretary of the meeting, before the
adjournment thereof, or shall forward such dissent by registered
mail to the Secretary of the corporation immediately after the
adjournment of the meeting. Such right to dissent shall not apply
to a director who voted in favor of such action.
(10) Executive and Other Committees: The Board of
Directors, by resolution adopted by a majority of the full Board of
Directors, may designate from among its members an Executive
Committee and one or more other standing or special committees.
The Executive Committee shall have and may exercise all the
authority of the Board of Directors, and other standing or special
committees may be invested with such powers, subject to such
conditions, as the Board of Directors shall see fit; provided that,
notwithstanding the above, no committee of the Board of Directors
shall have the authority to: (1) Declare distributions, or the
issuance of shares, unless a resolution of the Board of Directors,
or the Bylaws or the Articles of Incorporation expressly so
provide; (2) approve or recommend to shareholders actions or
proposals required by law to be approved by shareholders; (3) fill
vacancies on the Board of Directors or any committee thereof; (4)
amend the Bylaws; (5) fix compensation of any director for serving
on the Board of Directors or on any committee thereof; (6) approve
a plan of merger, consolidation, or exchange of shares not
requiring shareholder approval; (7) appoint other committees of the
Board of Directors or the members thereof; or (8) amend the
Articles of Incorporation, except that a committee may, to the
extent authorized in the resolution or resolutions providing for
the issuance of shares adopted by the Board of Directors as
otherwise provided by law, fix any of the relative rights and
preferences of such shares. All committees so appointed shall keep
regular minutes of their meetings and shall cause them to be
recorded in books kept for that purpose in the office of the
corporation. The designation of any such committee and the
delegation of authority thereto shall not relieve the Board of
Directors, or any member thereof, of any responsibility imposed by
law.
(11) Remuneration: No stated salary shall be paid
directors, as such, for their service, but by resolution of the
Board of Directors, a fixed sum and expenses of attendance, if any,
may be allowed for attendance at each regular or special meeting of
such Board; provided, that nothing herein contained shall be
construed to preclude any director from serving the corporation in
any other capacity and receiving compensation therefor. Members of
standing or special committees may be allowed like compensation for
attending committee meetings.
(12) Loans and Guarantees: The corporation may not lend
money to or guarantee the obligation of a director of the
corporation unless:
(a) The particular loan or guarantee is approved by vote of
the holders of at least a majority of the votes represented by the
outstanding voting shares of all classes, except the votes of the
benefited director; or
(b) The corporation's Board of Directors determines that the
loan or guarantee benefits the corporation and either approves the
specific loan or guarantee or a general plan authorizing loans and
guarantees.
(13) Action by Directors Without a Meeting: Any action
required or which may be taken at a meeting of the directors, or of
a committee thereof, may be taken without a meeting if a consent in
writing, setting forth the action so taken or to be taken, shall be
signed by all of the directors, or all of the members of the
committee, as the case may be. Such consent shall have the same
effect as a unanimous vote.
(14) Action of Directors by Communications Equipment: Any
action required or which may be taken at a meeting of directors, or
of a committee thereof, may be taken by means of a conference
telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other at the
same time.
ARTICLE V
Officers
(1) Designations: The officers of the corporation shall be
a Chairman, a Chief Executive Officer, a President, one or more
Vice-Presidents (one or more of whom may be Executive or Senior
Vice-Presidents), a Secretary and a Treasurer, and such Assistant
Secretaries and Assistant Treasurers as the Board may designate,
who shall be elected for one year by the directors at their first
meeting after the annual meeting of shareholders, and who shall
hold office until their successors are elected and qualified. Any
two or more offices may be held by the same person. [Amended at
April 17, 1991 Board meeting.]
(2) The Chairman: The Chairman shall have such duties as
the Board of Directors shall assign to him from time to time. He
shall preside at all meetings of the Shareholders and the Board of
Directors at which he is present. The Chairman may also be the
Chief Executive Officer and/or the President of the Corporation.
During the absence or disability of the Chief Executive Officer or
the President (if the Chief Executive Officer is also absent or
disabled), the Chairman shall exercise all the powers and discharge
all of the duties of the Chief Executive Officer and/or the
president, as applicable. [Amended at April 17,1991 Board meeting.]
(3) The Chief Executive Officer: The Chief Executive
Officer shall be the principal executive officer of the
Corporation. He shall be generally responsible for the proper
conduct of the business of the Corporation. He shall possess the
power to sign all certificates, contracts and other instrument of
the Corporation. He shall have such other duties as the Board of
Directors shall assign to him from time to time. The Chief
Executive Officer may also be the Chairman and/or the President of
the Corporation. During the absence or disability of the Chairman
or the president, the Chief Executive Officer shall exercise all of
the powers and discharge all of the duties of the Chairman and/or
the President, as applicable. [Amended at April 17, 1991 Board
meeting.]
(4) The President: The President shall have such duties as
the Board of Directors or the Chief Executive Officer shall assign
to him from time to time. The President may also be the Chairman
and/or the Chief Executive Officer of the Corporation. During the
absence or disability of the- Chairman and the Chief Executive
Officer, the President shall exercise all of the powers and
discharge all of the duties of the Chairman and the Chief Executive
Officer. [Amended at April 17, 1991 Board meeting.]
(5) Vice-Presidents: During the absence or disability of
the President, the Executive Vice-Presidents, if any, the Senior
Vice-Presidents, if any, and the other Vice-Presidents, in the
order designated by the Board of Directors, shall exercise all the
functions of the president. Each Vice-President shall have such
powers and discharge such duties as may be assigned to him from
time to time by the Board of Directors.
(6) Secretary and Assistant Secretaries: The Secretary
shall issue notices for all meetings, except for notices for
special meetings of the shareholders and special meetings of the
directors which are called by the requisite number of shareholders
or directors, shall keep minutes of all meetings, shall have charge
of the seal and the corporate books, and shall make such reports
and perform such other duties as are incident to his office, or are
properly required of him by the Board of Directors. The Assistant
Secretary, or Assistant Secretaries in the order designated by the
Board of Directors, shall perform all of the duties of the
Secretary during the absence or disability of the Secretary, and at
other times may perform such duties as are directed by the
President or the Board of Directors.
(7) The Treasurer: The Treasurer shall have the custody of
all moneys and securities of the corporation and shall keep regular
books of account. He shall disburse the funds of the corporation
in payment of the just demands against the corporation or as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the Board of Directors from time
to time as may be required of him an account of all his
transactions as Treasurer and of the financial condition of the
corporation. He shall perform such other duties incident to his
office or that are properly required of him by the Board of
Directors. The Assistant Treasurer, or Assistant Treasurers in the
order designated by the Board of Directors, shall perform all of
the duties of the Treasurer in the absence or disability of the
Treasurer, and at other times may perform such other duties as are
directed by the President or the Board of Directors.
(8) Delegation: In the case of absence or inability to act
of any officer of the corporation and of any person herein
authorized to act in his place, the Board of Directors may from
time to time delegate the powers or duties of such officer to any
other officer or any director or other person whom it may select.
(9) Vacancies: Vacancies in any office arising from any
cause may be filled by the Board of Directors at any regular or
special meeting of the Board.
(10) Other Officers: Directors may appoint such other
officers and agents as it shall deem necessary or expedient, who
shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to
time by the Board of Directors.
(11) Term - Removal: The officers of the corporation shall
hold office until their successors are appointed and qualified.
Any officer or agent elected or appointed by the Board of Directors
may be removed at any time, with or without cause, by the
affirmative vote of a majority of the whole Board of Directors, but
such removal shall be without prejudice to the contract rights, if
any, of the person so removed.
(12) Bonds: The Board of Directors may, by resolution,
require any and all of the officers to give bonds to the
corporation, with sufficient surety or sureties, conditioned for
the faithful performance of the duties of their respective offices,
and to comply with such other conditions as may from time to time
be required by the Board of Directors.
ARTICLE VI
Distributions and Finance
(1) Distributions: The Board of Directors may authorize a
distribution of money or other property to the corporation's
shareholders in the form of a dividend or a purchase, redemption or
other acquisition of the corporation's shares; provided that no
distribution may be made if, after giving it effect, either:
(a) the corporation would not be able to pay its debts as
they become due in the usual course of business; or
(b) the corporation's total assets would be less than the
sum of its total liabilities plus the amount which would be needed
to satisfy any shareholder's preferential rights in liquidation if
the corporation is in the process of liquidation at the time of the
authorization of the distribution.
The stock transfer books may be closed for the making of
distributions during such periods of not exceeding sixty days, as
from time to time may be fixed by the Board of Directors. The
Board of Directors, however, without closing the books of the
corporation, may authorize distributions to only the holders of
record at the close of business, on any business day not more than
sixty days prior to the date on which distribution is made.
(2) Measure of Effect of Distribution: For purposes of
determining whether a distribution may be authorized by the Board
of Directors and paid by the corporation under Article VI,
paragraph (1) of these bylaws, the effect of distribution is
measured,
(a) in the case of a distribution by purchase, redemption or
other acquisition of the corporation's shares, as of the earlier of
(i) the date on which the money or other property is transferred to
the shareholders or the date on which the debt is incurred by the
corporation; or (ii) the date on which the shareholder ceases to be
a shareholder with respect to the acquired shares; and
(b) in any other case, (i) as of the date on which the
distribution is authorized, if payment occurs within one hundred
and twenty days thereafter; or (ii) the date of payment if such
date occurs more than one hundred and twenty days after the date of
authorization.
(3) Reserves: Before making any distribution, there may be
set aside out of the sum available to the corporation for
distribution such sum or sums as the directors from time to time in
their absolute discretion deem expedient as a reserve fund to meet
contingencies, or for equalizing distributions, or for maintaining
any property of the corporation, or for any other purpose. Any sum
in any year which is not distributed in that year shall be deemed
to have been thus set aside until otherwise disposed of by the
Board of Directors.
(4) Depositories: The moneys of the corporation shall be
deposited in the name of the corporation in such bank or banks or
trust company or trust companies as the Board of Directors shall
designate, and shall be drawn out only by check or other order for
payment of money signed by such persons and in such manner as may
be determined by resolution of the Board of Directors.
ARTICLE VII
Notices
Except as may otherwise be required by law, any notice to any
shareholder or director may be delivered personally or by mail. If
mailed, the notice shall be deemed to have been delivered when
deposited in the United States mail, addressed to the addressee at
his last known address in the records of the corporation, with
postage thereon prepaid.
ARTICLE VIII
Seal
The corporate seal of the corporation shall be in such form
and bear such inscription as may be adopted by resolution of the
Board of Directors, or by usage of the officers on behalf of the
corporation.
ARTICLE IX
Indemnification of Officers, Directors, Employees and Agents
(1) Definitions: As used in this Article:
(a) "Action" means any actual or threatened claim, suit or
proceeding, whether civil, criminal, administrative or
investigative.
(b) "Another Enterprise" means a corporation (other than the
Corporation), partnership, joint venture, trust, association,
committee, employee benefit plan or other group or entity.
(c) "Corporation" means EGGHEAD, INC. and any predecessor to
it and any constituent corporation (including any constituent of a
constituent) absorbed by the Corporation in a consolidation or
merger.
(d) "Director or Officer" means each person who is serving or
who has served as a director or officer of the Corporation or, at
the request of the Corporation, as a director, officer, partner,
trustee, employee or agent of Another Enterprise.
(e) "Indemnitee" means each person who was, is or is
threatened to be made a party to or is involved (including without
limitation, as a witness) in an Action because the person is or was
a Director or Officer of the Corporation.
(f) "Loss" means loss, liability, expenses (including
attorneys' fees), judgments, fines, ERISA excise taxes or penalties
and amounts to be paid in settlement, actually and reasonably
incurred or suffered by Indemnitee in connection with an Action.
(2) Right to Indemnification: The Corporation shall
indemnify and hold each Indemnitee harmless against any and all
Loss except for Losses arising out of: (a) the Indemnitee's acts
or omissions finally adjudged to be intentional misconduct or a
knowing violation of law, (b) the Indemnitee's approval of certain
distributions or loans which are finally adjudged to be in
violation of RCW 23A.08.450, or (c) any transaction in which it is
finally adjudged that the Indemnitee personally received a benefit
in money, property or services to which the Indemnitee was not
legally entitled. Except as provided in Section 4 of this Article,
the Corporation shall not indemnify an Indemnitee in connection
with an Action (or part thereof) initiated by the Indemnitee unless
such Action (or part thereof) was authorized by the board of
directors of the Corporation. If, after the effective date of this
Article, the Washington Business Corporation Act is amended to
authorize further indemnification of directors or officers., then
Directors and Officers of this Corporation shall be indemnified to
the fullest extent permitted by the Washington Business Corporation
Act, as so amended.
(3) Burden of Proof, Procedure for Payment and Notification
of Shareholders:
(a) The Indemnitee shall be presumed to be entitled to
indemnification under this Article upon submission of a written
claim (including a claim for expenses incurred in defending any
Action in advance of its final disposition, where the undertaking
in (b) below has been tendered to the Corporation), and thereafter
the Corporation shall have the burden of proof to overcome the
presumption that the Indemnitee is so entitled.
(b) The right to indemnification conferred in this Article
shall include the right to be paid by the Corporation all expenses
(including attorneys' fees) incurred in defending any Action in
advance of its final disposition; provided, however, that the
payment of such expenses in advance of the final disposition of an
Action shall be made upon delivery to the Corporation of an
undertaking, by or on behalf of such Director or Officer, to repay
all amounts so advanced if it shall ultimately be determined that
such Director or Officer is not entitled to be indemnified under
this Article or otherwise.
(c) Any indemnification of a Director in accordance with
this Article, including any payment or reimbursement of expenses,
shall be reported to the shareholders with the notice of the next
shareholders' meeting or prior thereto in a written report
containing a brief description of the proceedings involving the
directors being indemnified and the nature and extent of such
indemnification.
(4) Right of Indemnitee to Bring Suit: If a claim under
this Article is not paid in full by the Corporation within 60 days
after a written claim has been received by the Corporation, except
in the case of a claim for expenses incurred in defending a
proceeding in advance of its final disposition, in which case the
applicable period shall be 20 days, the claimant may at any time
thereafter bring suit against the Corporation to recover the unpaid
amount of the claim and, to the extent successful in whole or in
part, the Indemnitee shall be entitled to be paid also the expense
of prosecuting such claim. Neither the failure of the Corporation
(including its board of directors, its shareholders or independent
legal counsel) to have made a determination prior to the
commencement of such action that indemnification of or
reimbursement or advancement of expenses to the claimant is proper
in the circumstances, nor an actual determination by the
Corporation (including its board of directors, its shareholders or
independent legal counsel) that the Indemnitee is not entitled to
indemnification or to the reimbursement or advancement of expenses,
shall be a defense to the action or create a presumption that the
Indenmitee is not so entitled.
(5) Nonexclusivity of Rights: The right to indemnification
and the payment of expenses incurred in defending an Action in
advance of its final disposition conferred in this Article shall
not be exclusive of any other right which any person may have or
hereafter acquire under any statute, provision of the Articles of
Incorporation, Bylaws, agreement, vote of shareholders or
disinterested directors or otherwise.
(6) Insurance, Contracts and Funding: The Corporation may
maintain insurance, at its expense, to protect itself and any
Director, Officer, employee or agent of the Corporation or Another
Enterprise against any expense, liability or loss, whether or not
the Corporation would have the power to indemnify such person
against such expense, liability or loss under the Washington
Business Corporation Act. The Corporation may, without further
corporate action, enter into contracts with any Director or Officer
of the Corporation in furtherance of the provisions of this Article
and may create a trust fund, grant a security interest or use other
means (including, without limitation, a letter of credit) to ensure
the payment of such amounts as may be necessary to effect
indemnification as provided in this Article.
(7) Indemnification of Employees and Agents of the
Corporation: The Corporation may, by action of its board of
directors from time to time, provide indemnification and pay
expenses in advance of the final disposition of an Action to
employees and agents of the Corporation with the same scope and
effect as the provisions of this Article with respect to the
indemnification and advancement of expenses of Directors and
Officers of the Corporation or pursuant to rights granted pursuant
to, or provided by, the Washington Business Corporation Act or
otherwise.
(8) Contract Right: Rights of indemnification under this
Article shall continue as to an Indemnitee who has ceased to be a
Director or Officer and shall inure to the benefit of his or her
heirs, executors and administrators. The right to indemnification
conferred in this Article shall be a contract right upon which each
Director or Officer shall be presumed to have relied in determining
to serve or to continue to serve as such. Any amendment to or
repeal of this Article shall not adversely affect any right or
protection of a Director or Officer of the Corporation for or with
respect to any acts or omissions of such Director or Officer
occurring prior to such amendment or repeal.
(9) Severability: If any provision of this Article or any
application thereof shall be invalid, unenforceable or contrary to
applicable law, the remainder of this Article, or the application
of such provisions to persons or circumstances other than those as
to which it is held invalid, unenforceable or contrary to
applicable law, shall not be affected thereby and shall continue in
full force and effect.
ARTICLE X
Books and Records
The corporation shall keep correct and complete books and
records of account and shall keep minutes of the proceedings of its
shareholders and Board of Directors, and shall keep at its
registered office or principal place of business, or at the office
of its transfer agent or registrar, a record of its shareholders,
giving the names and addresses of all shareholders and the number
and class of the shares held by each. Any books, records, and
minutes may be in written form or any other form capable of being
converted into written form within a reasonable time.
ARTICLE XI
Amendments
(1) By Shareholders: These Bylaws may be altered, amended
or repealed by the affirmative vote of a majority of the voting
stock issued and outstanding at any regular or special meeting of
the shareholders.
(2) By Directors: The Board of Directors shall have power
to make, alter, amend and repeal the Bylaws of this corporation.
However, any such Bylaws, or any alteration, amendment or repeal of
the Bylaws, may be changed or repealed by the holders of a majority
of the stock entitled to vote at any shareholders' meeting.
(3) Emergency Bylaws: The Board of Directors may adopt
emergency Bylaws, subject to repeal or change by action of the
shareholders, which shall be operative during any emergency in the
conduct of the business of the corporation resulting from an attack
on the United States or any nuclear or atomic disaster.
Amendment No. 1 To The
Addendum To The Microsoft
1994/1995 Channel Agreement
(Appointment As A Large Account Reseller)
This Amendment No. 1 to the Addendum to the Microsoft 1994/1995
Channel Agreement (Appointment
As A Large Account Reseller) ("Amendment") entered into this 1st
day of July, 1994, modifies that
certain 1994/1995 Channel Agreement (as amended, modified and
supplemented "Agreement") between
MICROSOFT CORPORATION ("MS") having its principal place of
business at One Microsoft Way,
Redmond, Washington 98052-6399 and EGGHEAD SOFTWARE ("CUSTOMER")
having its principal
place of business at 22011 SE 51st Street, Issaquah, WA 98027.
This Agreement is hereby amended as
follows:
1. Purpose
The purpose of this Amendment is to provide for a non-exclusive,
limited-use license for all Select
Software Products contained in the Select CD-ROM provided by MS
for internal use by CUSTOMER
and only in connection with providing certain support to End Users
who are Select Customers. Such
support shall not include the right to duplicate a Select CD-ROM
or disks for Select Customers or other
End Users. Pricing and availability of such Select CD-ROM set is
attached hereto as Exhibit A.
2. Definitions
All capitalized terms used but not defined herein shall have the
meanings assigned thereto in the
Agreement. As used in this Amendment, the following terms shall
have the following meanings:
2.1 "Select Software Product" or "Select Software Products"
shall mean the MS Select
Software Products contained in the Select CD-ROM as provided by MS
from time to time.
2.2 "Select CD-ROM" shall mean that certain CD-ROM containing
the Select Software
Products as provided to CUSTOMER by MS from time to time pursuant
to the terms of this limited
license.
3. License Grant
3.1 MS grants to CUSTOMER a non-exclusive, limited use license
for all MS Products
contained in the Select CD-ROM (a) for internal use by CUSTOMER on
CUSTOMER's computers
within the United States of America and pursuant to the terms of
the Microsoft End User License
Agreement applicable to the product; and (b) only in connection
with providing CUSTOMER support to
CUSTOMER'S Select Customers within the United States of America.
For purposes of this
Amendment, such support shall be limited to: (i) CUSTOMER's review
of the contents of the Select CD-
ROM; (ii) CUSTOMER's use of the installer program to make floppies
with Select Software Products
and for purposes of using such floppies to test installation on
CUSTOMER's computers to ensure that the
Select Software Product(s) is working properly; (iii) CUSTOMER's
test on CUSTOMER's computers of
the net setup capabilities on the Select CD-ROM; (iv) CUSTOMER
obtaining any quarterly report forms
from the Select CD-ROMS; and (v) CUSTOMER's right to print any MS
marketing materials which are
included on the Select CD-ROM, subject to there restrictions set
forth below. Such support shall not
include the right to duplicate a Select CD-ROM or disks or to
preinstall Select Software Products for
Select Customers or other End Users.
3.2 Upon execution of this Amendment No. 1, MS shall delivery,
royalty free, to
CUSTOMER one complete CD-ROM set. At CUSTOMER's request as
indicated in Exhibit A,
additional CD-ROM sets shall be available through quarterly
subscription. CUSTOMER shall pay the
quarterly subscription fee set forth in Exhibit A.
3.3 MS is providing the Select CD-ROM to CUSTOMER for internal
use by CUSTOMER
in order to promote CUSTOMER's familiarity with Select Software
Products. Therefore, for
reproduction and installation of MS Products from the Select CD-
ROM for the purpose of internal use by
CUSTOMER, CUSTOMER agrees to use its best efforts to install
Microsoft <F3> MS-DOS <F3> and
Microsoft <F3> Windows, or Microsoft <F3> Windows for Workgroups,
on one hundred percent (100%) of
CUSTOMER's capable PCs, and Microsoft <F3> Excel and/or Microsoft
<F3> Word on eighty percent (80%)
of CUSTOMER's capable PCs.
3.4 CUSTOMER's use of Select Software Product(s) for internal
use shall also include the
authorization to reproduce and install, pursuant to the terms
hereof and of the applicable Microsoft End
User License Agreement, on CUSTOMER's computers within the United
States of America, product
from not-for-resale copies of MS Products legally acquired by
CUSTOMER from Microsoft at
CUSTOMER's expense.
3.5 All rights not expressly granted are reserved by MS.
4. License Restrictions
4.1 CUSTOMER shall not resell, market, distribute, sublicense or
otherwise transfer those
Select Software Products contained on the Select CD-ROM and
subject to this Amendment,
notwithstanding anything to the contrary set forth in the
Microsoft End User License Agreement
applicable to the Product.
4.2 Other than for CUSTOMER's internal use as set forth in this
Amendment,
CUSTOMER shall not copy any of the Select Software Products
provided to CUSTOMER pursuant to
the terms hereof.
4.3 CUSTOMER shall not alter, modify, or otherwise change the
Select Software Products
provided hereunder, except for any of the limited purposes
specifically set forth in Section 3.1 above.
4.4 CUSTOMER shall not reverse engineer, decompile or
disassemble any Select Software
Product.
4.5 CUSTOMER shall immediately notify MS of any problems
incurred in the use of any
Select CD-ROM.
4.6 Notwithstanding anything to the contrary in the Microsoft
End User License Agreement
applicable to the product, CUSTOMER shall not be granted any home
use rights in connection with any
license granted hereunder.
4.7 CUSTOMER shall not alter, modify or otherwise change any MS
marketing materials
included on the Select CD-ROM. If CUSTOMER prints such materials
pursuant to the terms hereof,
CUSTOMER must print any marketing piece in its entirety as it
appears on the Select CD-ROM.
CUSTOMER shall not combine MS marketing materials with any other
marketing materials or use such
MS marketing materials in any advertising. CUSTOMER's name,
trademark and/or logo shall not be
displayed in relation to the marketing materials in a manner which
suggests that CUSTOMER's name,
trademark and/or logo are a part thereof. CUSTOMER may not resell
any of the MS marketing
materials printed hereunder. CUSTOMER shall undertake no action
that will interfere with or diminish
MS' right, title and/or interest in MS' copyright(s),
trademark(s), tradename(s) or Product name(s).
5. Acceptance and Warranty
5.1 From time to time MS CUSTOMER will be provided a Select CD-
ROM containing
Select Software Products and/or upgrades to such products which
CUSTOMER agrees shall be governed
by the terms of this license.
5.2 NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THE MICROSOFT
END USER LICENSE AGREEMENT APPLICABLE TO THE PRODUCT, THE SELECT
SOFTWARE PRODUCTS CONTAINED IN THE SELECT CD-ROM LICENSED
HEREUNDER ARE
PROVIDED TO CUSTOMER "AS-IS" AND WITHOUT WARRANTY OF ANY KIND.
THE RISK
AS TO THE RESULTS OF AND PERFORMANCE OF THE SELECT SOFTWARE
PRODUCTS
AND THE SELECT CD-ROM LICENSED HEREUNDER IS ASSUMED BY CUSTOMER.
MS
EXPRESSLY DISCLAIMS ALL WARRANTIES EITHER EXPRESS OR IMPLIED,
INCLUDING
BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR
A PARTICULAR PURPOSE.
5.3 Except as expressly provided, this Amendment does not
include technical support from
MS. Such support may be available separately pursuant to
Microsoft's then-standard rates.
6. Prohibition Against Assignment and Sublicense
This Amendment, and any rights or obligations hereunder, shall not
be assigned, sublicensed, delegated
or otherwise transferred by CUSTOMER.
7. Term and Termination
7.1 Provided this Amendment has been properly executed by
CUSTOMER and by MS, the
term of this Amendment ("Term") shall run from the Effective Date
until the termination of the
Agreement, unless otherwise terminated as provided herein.
7.2 Either party may terminate this Amendment without cause upon
thirty (30) days prior
written notice to the other party. Notwithstanding the foregoing,
this Amendment may be immediately
terminated by MS, effective upon notice from MS to CUSTOMER, if
any of the following events of
default occur: (i) if CUSTOMER materially fails to perform or
comply with this Amendment or any
provision hereof; (ii) if CUSTOMER becomes insolvent or admits in
writing its inability to pay its debts
as they mature, or makes an assignment for the benefit of
creditors; or (iii) if a petition under any
foreign, state, or United States bankruptcy act, receivership
statute, or the like, as they now exist, or as
they may be amended, is filed by or against CUSTOMER.
7.3 Termination of the Amendment by itself shall not affect the
parties' rights and
obligations under the Agreement. Termination of the Agreement, or
any Addendum appointing
CUSTOMER as a Large Account Reseller for other Select Software
Products shall automatically
terminate this Amendment.
8. Obligations Upon Termination
8.1 Within five (5) days after termination or expiration of this
Amendment, CUSTOMER
shall return to MS all Select CD-ROMs delivered to CUSTOMER under
this Amendment, and, subject to
any rights granted to CUSTOMER hereunder to copy a Select CD-ROM
or any Select Software
Products, any copies thereof.
8.2 From and after termination or expiration, CUSTOMER shall not
use any Select
Software Product licensed hereunder.
8.3 Sections 4, 5, 6, 8, 9 and 10 shall survive termination or
expiration of this
Amendment.
9. Limitation of Liability and Remedy
9.1 MS' liability to CUSTOMER under any provision of this
Amendment or any
transaction contemplated by this Amendment shall be limited to
replacement of the Select CD-ROM.
CUSTOMER releases MS from all obligations, liabilities, claims,
damages, costs or demands in excess
of the limitations. The parties acknowledge that other parts of
this Amendment rely upon the inclusion
of this Section 9.
9.2 The rights and remedies granted to CUSTOMER under this
Section 9 constitute
Customer's sole and exclusive remedy against MS, its officers,
agents and employees for negligence,
inexcusable delay, breach of warranty, express or implied, or for
any default whatsoever relating to the
condition of the Select CD-ROM and/or Select Software Products
licensed under this Amendment.
9.3 As partial consideration for the rights granted to
CUSTOMER hereunder, CUSTOMER
agrees not to sue MS in connection with the Select CD-ROM and/or
Select Software Products licensed
hereunder.
9.4 CUSTOMER hereby agrees to defend, indemnify and hold MS,
its employees, officers
and directors, harmless from and against any liability, claims,
damages, costs or demands, including
reasonable attorneys' fees, arising out of or in connection with
any such claims against MS or such
parties, by its End Users arising out of any of the CUSTOMER's
support.
9.5 CUSTOMER FURTHER AGREES MS SHALL NOT BE LIABLE FOR ANY
DAMAGES, INCLUDING WITHOUT LIMITATION, ANY CONSEQUENTIAL,
INCIDENTAL,
INDIRECT, ECONOMIC OR PUNITIVE DAMAGES, EVEN IF MS HAS BEEN
ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES.
10. Non-Disclosure Agreement
CUSTOMER expressly undertakes to retain in confidence all
information and know-how transmitted to
CUSTOMER by MS that MS has identified as being proprietary and/or
confidential or that, by the nature
of the circumstances surrounding the disclosure, ought in good
faith to be treated as proprietary and/or
confidential, and will make no use of such information and know-
how except under the terms and during
the existence of this Amendment. However, CUSTOMER shall have no
obligation to maintain the
confidentiality of information that (i) it received rightfully
from another party prior to its receipt from
MS or (ii) is independently developed by CUSTOMER. Further,
CUSTOMER may disclose confidential
information as required by governmental or judicial order,
provided CUSTOMER gives MS prompt
notice of such order and complies with any protective order (or
equivalent) imposed on such disclosure.
CUSTOMER shall treat all Select Software Product licensed
hereunder adaptation materials (including
source code) as confidential information and shall not disclose,
disseminate or distribute such materials to
any third party without MS' prior written permission. CUSTOMER
shall treat the terms and conditions
of this Amendment as confidential; however, CUSTOMER may disclose
such information in confidence
to its immediate legal and financial consultants as required in
the ordinary course of CUSTOMER's
business. CUSTOMER's obligation under this Section 10 shall
extend to the earlier of such time as the
information protected hereby is in the public domain through no
fault of CUSTOMER or ten (10) years
following termination or expiration of this Amendment.
11. General
11.1 Upon execution by both parties, this Amendment shall
constitute the entire agreement
between the parties with respect to the subject matter hereof. It
shall not be modified except by a written
agreement signed on behalf of CUSTOMER and MS by their respective
duly authorized representatives.
11.2 No waiver of any breach of any provision of this Amendment
shall constitute a waiver
of any prior, concurrent or subsequent breach of the same or any
other provisions hereof, and no waiver
shall be effective unless made in writing and signed by an
authorized representative of the waiving party.
11.3 The Section headings used in this Amendment are intended
for convenience only and
shall not be deemed to supersede or modify any provisions.
11.4 To the extent any of the terms and conditions of this
Amendment conflict with the
terms and conditions of the Microsoft End User License Agreement
applicable to the product, the terms
and conditions of this Amendment shall govern.
IN WITNESS WHEREOF, the parties have executed this Amendment on
the dates indicated below. All
terms and conditions of the Agreement not amended herein shall
remain in full force and effect. This
Amendment is not binding until executed by MS.
AGREED AND ACCEPTED TO BY AGREED TO AND ACCEPTED BY
MICROSOFT CORPORATION ("MS") EGGHEAD SOFTWARE
("CUSTOMER")
By: /ss Johan Liedgren By: /ssThomas F. Quinn
Name: /ss Johan Liedgren Name: /ss Thomas F. Quinn
Title: Director, Channel Policies Name: Director General
Merchandising
Effective Date: 5/15/95 Date: 5/9/92
EXHIBIT A
SELECT CD-ROM PRICE LIST
The Microsoft Select CD-ROM set is available only from Microsoft
Easy Fulfillment ("MEF"). All
CUSTOMER prices are per quarter. MS may change the CUSTOMER price
on the CD-ROM set at any
time upon thirty (30) days written notice to CUSTOMER.
SELECT ONE CD-ROM SET OPTION:
CD-ROM SET
d
499-100-CROM - INTRODUCTORY SET
d
499-100-CROM -QUARTERLY SUBSCRIPTION
(includes first CD-ROM set free)
Amendment No. 1 to the Addendum to the
Egghead Software
Page 1
Microsoft 1994/1995 Channel Agreement
(Appointment As a Large Account Reseller)
<F3> Registered Trademark
Rebate and Marketing Fund
Addendum to The 1994/1995 Microsoft
Channel Agreement
(January - June, 1995)
This Addendum ("Agreement") entered into as of the 1st day of January,
1995, supplements that certain Microsoft 1994/1995 Channel Agreement
("Agreement") between MICROSOFT CORPORATION ("MS") having its principal
place of business at One Microsoft Way Redmond, WA 98052 and EGGHEAD
SOFTWARE ("CUSTOMER") having its principal place of business at 22011 SE
51st Street, Issaquah, WA 98027. The Agreement is hereby supplemented
as follows:
1. Purpose
The purpose of this Addendum is to set forth the framework by which
CUSTOMER may earn Rebates and Marketing Funds.
2. Term and Termination
This Addendum shall be effective as of the date indicated above,and
shall expire on June 30, 1995. Either party may terminate this
Addendum, with or without cause, upon (30) days prior written notice.
This Addendum is not valid unless both MS and CUSTOMER have executed a
Microsoft 1994/1995 Channel Agreement.
3. Definitions
For purposes of this Addendum, capitalized terms not otherwise defined
herein, shall have the same definitions as set forth in the Agreement.
Additional capitalized terms included in this Addendum are as defined in
Schedule A attached hereto.
4. Rebates
CUSTOMER is eligible to receive up to a <F4> percent <F4> Rebate on its
Qualified Purchase made during the Rebate and Marketing Fund Period. The
Rebate shall be paid provided CUSTOMER complies with the Rebate Program
Guidelines outlined in Schedule B. Notwithstanding such Rebate Program
Guidelines, MS may, at its sole discretion, pay all or any portion of
the Rebate prior to the end of the Rebate and Marketing Fund Period.
The Rebate so paid may be adjusted subsequently based upon compliance
with the Rebate Program Guidelines.
5. Marketing Funds
5.1 Base Level Funds
MS hereby grants to CUSTOMER the use of Marketing Funds calculated
monthly by the total number of each Product CUSTOMER purchased from MS
multiplied by each Product's respective Marketing Fund Accrual rate as
outlined in Schedule C attached hereto. MS reserves the right to modify
Schedule C at anytime without notice. Marketing Funds accrue monthly
and shall expire on December 31, 1995.
Marketing Funds shall not begin accruing until both CUSTOMER and MS have
executed this Addendum. Should CUSTOMER fail to execute, or should MS
be unable to execute this Addendum by January 1, 1995, for each full
month after January 1, 1995, in which this Addendum is not executed,
CUSTOMER shall not receive such month's Marketing Fund accrual.
5.2 Opportunity Funds
Periodically, MS may allow CUSTOMER to participate in other MS programs
in which CUSTOMER shall receive additional Marketing Funds.
5.3 Guidelines for Marketing Fund Use
MS shall provide CUSTOMER with a guideline of activities which MS sees
as a priority for spending the funds. The Microsoft Reseller Marketing
Fund Guidelines is attached hereto as Schedule D.
6. Reporting Requirements
CUSTOMER shall submit reports to MS as outlined in CUSTOMER's Rebate
Program Guidelines, and in Schedule F attached hereto in accordance with
the EDI Implementation Guide attached hereto as Schedule E. Failure by
CUSTOMER to comply with the terms of the Guidelines shall result in
CUSTOMER's loss of its monthly Compliance Rebate total for each month
reporting is non-compliant.
IN WITNESS WHEREOF, the parties have signed this Addendum on the date
indicated below. This Addendum is hereby made part of the Agreement.
All terms and conditions of the Agreement not supplemented herein shall
remain in full force and effect. This Addendum is not binding until
executed by MS.
AGREED AND ACCEPTED TO BY AGREED AND ACCEPTED TO BY
MICROSOFT CORPORATION ("MS"): EGGHEAD SOFTWARE
("CUSTOMER"):
By:/ss Johan Liedgren By: /ss Thomas F. Quinn
Name: (please print) Name: (please print)
Title: Direct, Channel Policies Title: Dir. Gen'l.
Merchandising
Date: 5/15/95 Date: 5/9/95
Schedule A
Definitions
"AMS Reporting" (Account Management Systems Reporting) is defined
as a monthly report of CUSTOMER's monthly Sell To sales of all MS
Product, reported in the format Attached hereto as Schedule F.
"Electronic Data Interchange" or "EDI" is defined as the ANSI-ASCII
X.12 standard, adopted by ABCD, by which CUSTOMER shall submit sales
reporting to MS.
"Inventory Reporting" is defined as the reporting of Product
specific month end inventory. If CUSTOMER has multiple locations,
inventory reporting shall be by location, and shall include the name,
street address, city, state and zip code for each location.
"Marketing Funds" is defined as the purchase credit amount accrued
by CUSTOMER as a percentage of Qualified Purchases, and used to fund
CUSTOMER's pre-approved MS marketing activities.
"Marketing Fund Accrual" is defined as the dollar amount MS grants
CUSTOMER for each Product purchased from MS.
"Microsoft Marketing Funds Guidelines" is defined as MS' then
current terms and conditions attached hereto as Attachment D, available
from the Microsoft Reseller Account Representative, for the use of
Marketing Funds.
"Qualified Purchases" is defined as net purchases made during the
Rebate and Marketing Fund Period; provided, however, that Qualified
Purchases shall include only those purchases which are shipped to
CUSTOMER during the Rebate and Marketing Fund Period, less returns, and
credits for which payment in full has been received by MS from CUSTOMER
within thirty (30) days after the end of the Rebate and Marketing Fund
Period, and shall not include Microsoft Select.
"Rebate" is defined as the dollar amount paid to CUSTOMER by MS in
the form of a purchase credit for achieving of specific rebate program
goals and reporting requirements as set forth herein.
"Rebate and Marketing Fund Period" is defined as the six (6)
calendar months, from January 1, 1995 through June 30, 1995, during
which CUSTOMER shall earn Rebates and Marketing Funds.
"Salesout" or "Sell Through Reporting" is defined as the reporting
of the number of Product units that CUSTOMER location distributes to its
customers.
"Sell To" is defined as Product specific (per MS SKU) sales to all
End Users.
Schedule B
Rebate Program Guidelines
REBATE PROGRAM OVERVIEW
Programs: The January-June, 1995, Rebate period offers five rebate
programs. Rebate percentages available are listed in the table below.
Details on each program are also included in this document.
Maximum Percentage
Outlined on
Rebate Incentive Available
Page(s)
Compliance Program <F4> B2-4
Total Sales-out Program <F4> B5
BackOffice Sales-out Program <F4> B6-7
Win Office and Mac Office Sales-out Program <F4> B8-9
Consumer Sales-out Program <F4> BIO-11
Total <F4>
Rebate Calculations and Payments: Rebates will be paid in the form of
Microsoft purchase credits forty-five (45) days after the end of each
quarterly rebate period (i.e. May 15th for January - March, 1995
quarter). Rebates are calculated by multiplying the achieved rebate
percentage by the total Qualified Purchases for the rebate period.
Revenue generated from Microsoft Select Enrollment Agreements executed
by MS on or after July 1, 1994, shall be included in calculating
Egghead's achievement toward the Sales-out goal, but shall not be
included in Egghead's final total Qualified Purchases for purposes of
Rebate payment. Revenue generated from Microsoft Select Enrollment
Agreements executed by MS prior to July 1, 1994 will be included in
calculating Egghead's achievement towards the sales-out goal and will
also be eligible for a rebate. Rebate payment for such Select
Enrollment Agreements shall be in the form of a purchase credit forty-
five (45) days after the end of each quarterly rebate period.
Product Availability: If Microsoft is unable to ship a current version
of a product for any ten (10) consecutive business days, Egghead's
purchases through distribution of those SKUs will count toward Egghead's
Qualified Purchases for the semester.
All copies of eligible purchase orders placed through distribution along
with a copy of the Microsoft Stock Out Report must be sent to Microsoft
no later than fifteen (15) days following the semester end. Please send
purchase order copies and the Microsoft Stock Out Report to the
following address:
Microsoft Corporation
One Microsoft Way
Bldg. 22/4051
Redmond, WA 98052
Attn: Kristin Weeber, Rebate Specialist
Compliance Rebate Payment: Provided that Egghead fulfills all of the
compliance requirements, the Compliance Rebate will be paid monthly, on
the 20th of following month in the form of a purchase credit for use
toward purchasing Microsoft products.
Any issues regarding rebates should be sent in writing to Kristin
Weeber, Rebate Specialist, no later than thirty (30) days following
receipt of rebate payment. If such written notice is not provided
within thirty (30) days, Egghead shall have no further right to dispute
rebate payment.
COMPLIANCE REBATE PROGRAM
Program Objectives: The objective of the Compliance Rebate Program is to
incent Egghead to comply with Microsoft contractual requirements for
payments, Street Dates, and reporting.
Non-compliance: During any given month, failure to comply with any or
all of the current compliance criteria will result in the forfeiture of
the entire compliance rebate for that month.
1. Microsoft Payment Requirements:
Microsoft requires it's customers to pay it's invoices within terms. In
order to maintain compliance, 100% of the gross invoice value for non-
Select and 85% of the gross invoice value for Select must be current as
of Microsoft's fiscal month-end. Unapplied credits will be excluded
from the calculation.
2. Microsoft Street Date Requirements:
From time to time, Microsoft may announce a new product or new versions
of an existing product for which Microsoft shall set a Street Date. In
order to comply with the Street Date requirements, Egghead shall not:
Ship or deliver the product to any end-user customer
prior to the Street Date.
Accept any end user payment for the product prior to the Street
Date. Checks and/or credit card numbers may be accepted by
Egghead, but can only be processed when product is delivered to the
end user on or after the Street Date.
Advertise, merchandise, or promote the product to end user
customers until it is officially announced by Microsoft. Usually,
the product announcement is on the Street Date. If the product
announcement is earlier than the Street Date, Microsoft will
clearly communicate the announce date to the channel. If product
is announced by Microsoft before the Street Date, the product can
be advertised, merchandised and/or promoted immediately after such
announcement, provided that all such promotions clearly state that
the product is not yet available for purchase.
Allow it's distribution centers and/or warehouses to distribute,
for a period of up to twelve months, a Street Date product to any
individual sales office, retail store, or outlet which Microsoft in
its sole discretion has determined to be in violation of the Street
Date Requirements.
In the event Egghead violates the Street Date for any special products
specified in a Microsoft Street Date letter (including, but not limited
to Microsoft<F1> Windows<F1>), Egghead shall forfeit up to the entire
Compliance Rebate for the Rebate period in which the violation occurred.
Should Egghead fail to comply with the Street Date Requirements,
Microsoft may also, for a period of up to twelve (12) months, withhold
shipments to Egghead of future product until the Street Date of such
product.
Microsoft shall penalize all Street Date violators. Should Egghead wish
to report a Street Date violation, Egghead may fax a copy of a dated
sales receipt to Melanie Eberle at Microsoft at (206) 936-5141. Once a
violation has been reported, Microsoft shall investigate the violation,
apply penalties as appropriate, and inform the violating reseller of the
penalty, Please note, in order to confirm a suspected violation,
Microsoft must receive a dated sales receipt.
3. Microsoft Reporting Requirements
All reports outlined below must be Timely, Accurate, and Complete. For
purposes of the Microsoft Channel Agreement, "Timely" is defined as MS
receipt of reporting by the due date and time indicated, "Accurate" is
defined as the correct population of all reporting fields, and
"Complete" is defined as the population of all required reporting
fields.
FAST TRACK REPORTING
Fast Track Reporting is defined as a weekly report sent to Microsoft via
Electronic Data Interchange format ("EDI") of weekly Sell To sales,
Inventory, and Internal Market Share. Egghead must report sales from
Egghead to End Users. Egghead must make the EDI reports available to
MS' EDI mailbox each Monday by 12:00 noon (Pacific time). These reports
shall cover the seven-day period ending the prior Friday night Please
refer to the EDI Implementation Guide for details on reporting
requirements.
Microsoft reserves the right to conduct audits on Egghead's market share
data at any time. If the results of the audit show that Egghead is
reporting one or more market share categories incorrectly, Egghead must
correct the specified categories and provide the corrected back data
through the beginning of January before Egghead is eligible to receive a
compliance rebate.
Reporting Requirements
Each unit of single license Full Package Product should be
reported as one unit. This applies for both Microsoft products
and for competitive products.
Any single Microsoft product that includes multiple licenses
should be reported as one unit. Microsoft win then convert the
quantity of multiple license units sold to the number of licenses
they represent. Examples of these products include MMLP 20 Pack,
MMLP 100 Pack, and AE 10 Pack.
Each competitive multiple license product should be reported as
the number of licenses represented.
All volume licensing agreements (such as MOLP, MVLP, and MELP)
should be reported as one unit for each license sold.
Example: If Egghead sold a quantity of five (5) units of a Microsoft 20
user MMLP, Egghead would report a quantity of five units of that SKU.
However, if Egghead sold a quantity of five units of a competitor's 20
user MMLP, Egghead would report a quantity of 100 licenses.
MARKET SHARE REPORTING
The following table outlines the Market Share product categories for EDI
reporting. The table also specifies the top competitive products that
must be included in the aggregated market share reporting for the Fast
Track Rebate Program. All other competitive products in each category
should also be included in the market share reporting.
<TABLE>
<S> <C> <C>
Category Microsoft Product Competitive Products
Windows word Microsoft Word for <F4>
processors Windows<F1>
Windows Microsoft<F1> Excel <F4>
spreadsheets for Windows<F1>
Windows bundles Microsoft<F1>Office <F4>
for Windows<F1>
Window Microsoft Access<F1> <F4>
Databases for Windows<F1>
FoxPro<F1> for
Windows<F1> <F4>
Mail Servers Microsoft<F1> Mail <F4>
Network Microsoft<F1> <F4>
Operating Windows NT<F1>
Systems Advanced Server
LAN Manager
</TABLE>
COMPLIANCE REBATE PROGRAM
Accounts are required to report sell-to units and inventory units for
each Microsoft SKU, but are required only to report the total license
count for competitive product sell-to for each category. All SKUs for
these titles should be counted, including full packaged product,
upgrades, Microsoft license packs, education, and government SKUs.
Please refer to the EDI Implementation Guide for details on reporting
requirements.
Example: If Egghead sold-through fifty (50) units of <F4>
in one week, then Egghead would report a total of seventy
(70) Sales-out licenses of competitor's products in the Windows
Spreadsheet category.
AMS/MBS REPORTING
Egghead must submit AMS or MBS reporting by the 10th of each month for
the prior month in the format outlined in Schedule D of the January -
June, 1995 Rebate and Marketing Fund Addendum to the Microsoft Channel
Agreement. Reporting shall be transmitted in electronic format and sent
via modem to 1-800-831-6316, or on tape or diskette to MS at the
following address:
Microsoft Corporation
Reseller Reporting Group
Bldg. 8N/2
One Microsoft Way Redmond, WA 98052
Should Egghead provide both monthly AMS and MBS and weekly Fast Track
Reporting on a compliant basis for three (3) consecutive months, MS may
at its sole discretion grant a written waiver of Egghead monthly AMS and
NBS Reporting requirements.
TOTAL SALES-OUT REBATE PROGRAM
Program Objective: The objective of the Total Sales-out Rebate Program
is to increase sales of Microsoft products.
Rebate Percentages: The total possible rebate percentage achievable for
Total Sales-out Rebate Program is <F4> percent <F4> of Qualified
Purchases for January - June, 1995.
Goal Definitions: The program goals are based upon the following:
- - Egghead's historical sales-out of Microsoft products by Microsoft
business division.
- - Microsoft's United States total sales-out goals.
- - Egghead's contribution to Microsoft's historical sales.
Rebate Goals: Egghead has a first quarter sales-out goal and a total
semester sales-out goal. Egghead's performance for the first three
months of the January - June, 1995 semester will be measured against the
first quarter sales-out goal. At the end of the first quarter, Egghead
will receive the percentage of the eligible rebate earned based on
performance against the first quarter goal. At the end of the semester,
Egghead will be measured on their six-month performance against the
total semester goal. Even if Egghead does not meet <F4> of the first
quarter goal, Egghead can still achieve <F4> of the semester goal
provided that the semester goal is met at the end of the six-month
period.
Egghead's Total Sales-out Rebate Program goals are as follows:
- - Quarter 1 Goal (January-March, 1995): <F4>
- - Semester Goal (January-June, 1995): <F4>
Sales-out Definitions/Measurement: Microsoft Product Sales-out is
defined as all Microsoft net product units sold through Egghead outlet
locations. Egghead's full packaged product, MOLP, and upgrade sales-out
units will be measured from the sales-out reported by Egghead to
Microsoft. Revenue from licensing sales is captured and generated by
Microsoft's financial systems and included in total sales-out used to
measure product sales-out rebate performance.
License revenue (Select and Microsoft Maintenance) credit is granted as
Microsoft recognizes the revenue. This occurs when Microsoft has
received the customer's license reporting. Following receipt of
reporting, Microsoft bills the customer/reseller and simultaneously
recognizes the revenue.
Payment: At the end of the semester, Egghead will be paid a sales-out
rebate based on performance against the semester goal. If Egghead
achieves greater than <F4> percent <F4> of the semester sales-out
goal, Egghead will receive the exact achieved percentage of the eligible
sales-out rebate up to one <F4> percent <F4>. If Egghead
achieves less than <F4> percent <F4> of the sales-out rebate goal,
Egghead will not receive any portion of the sales-out rebate. The
purpose of this scale is to offer an incentive for accounts to meet a
portion of their goal in the event they cannot achieve the full
Microsoft sales-out goal.
Although Microsoft pays the sales-out rebate ultimately based on
performance against the semester sales-out goal, Microsoft also pays a
sales-out rebate at the end of the first quarter based on performance
against the first quarter goal. The scale for the first quarter payment
is the same as the scale for the semester payment. The first quarter
payment amount will be subtracted from the final semester payment for
the sales-out rebate.
Example: If Egghead has a quarterly sales-out goal of $10,000,000 and a
total semester goal $25,000,000, and Egghead sells $8,000,000 over the
first quarter period and $27,500,000 over the entire semester period,
Egghead will receive the following rebate payments:
PERIOD GOAL SELL-THROUGH PAYMENT
ACHIEVED
First Quarter $10,000,000 $8,000,000 <F4> of <F4> eligible rebate =
<F4> of January-March
Qualified Purchases.
Semester $25,000,000 $27,500,000 <F4> of <F4> eligible rebate=
<F4> of January-June Qualified
Purchases less first quarter
payment.
BACKOFFICE PRODUCT SALES-OUT REBATE PROGRAM
Program Objective: The objective of the BackOffice Sales-Out Rebate
Program is to increase the sales and support the efforts of Microsoft
BackOffice products. The Microsoft BackOffice products consist of any
license type of the following products: Windows NT Server operating
system version 3.5, Microsoft SQL Server database server 4.21, Microsoft
SNA Server 2.1, Microsoft Systems Management Server 1.0, and Microsoft
Mail 3.2.
Rebate Percentages: The total possible rebate percentage achievable for
the BackOffice Sales-out Rebate Program is <F4> percent <F4> of
Qualified Purchases for January - June, 1995.
Goal Definitions: The program goals are based upon the following:
- Egghead's historical Sales-out of BackOffice Products.
- Microsoft's North America BackOffice Product Sales-out goals.
- Egghead's contribution to Microsoft's historical BackOffice
product sales.
Rebate Goals: Egghead has a first quarter sales-out goal and a total
semester sales-out goal. Egghead's performance for the first three
months of the January - June, 1995 semester will be measured against the
first quarter sales-out goal. At the end of the first quarter, Egghead
will receive the percentage of the eligible rebate earned based on
performance against the first quarter goal. At the end of the semester,
Egghead will be measured on their six-month performance against the
total semester goal. Even if Egghead does not meet <F4> of the first
quarter goal, Egghead can still achieve <F4> of the semester goal
provided that the semester goal is met at the end of the six-month
period.
Egghead's BackOffice Sales-out Rebate Program goals are as follows:
- Quarter 1 Goal (January - March, 1995): <F4>
- Semester Goal (January - June, 1995): <F4>
Sales-out Definitions/Measurement: Microsoft BackOffice Product Sales-
out is defined as those BackOffice product units sold through reseller
outlet locations. Egghead's full packaged product and upgrade sales-out
units will measured from the sales-out reported by Egghead to Microsoft,
which includes MOLP sales. Licensing sales (Select, and Microsoft
Maintenance) are captured and generated by Microsoft's financial systems
and included in total Sales-out used to measure BackOffice product
sales-out rebate performance.
Special Agreement product units will be excluded from product sales-out
measurement.
License revenue (Select and Microsoft Maintenance) credit is granted as
Microsoft recognizes the revenue. This occurs when Microsoft has
received the customer's license reporting. Following receipt of
reporting, Microsoft bills the customer/reseller and simultaneously
recognizes the revenue. Prepaid Maintenance licenses are
recognized monthly over the maintenance period. For example, if a
reseller prepays maintenance for two (2) year coverage, then the
reseller will receive one twenty fourth (1/24th) sales-out credit each
month over the course of the two years.
Payment: At the end of the semester, Egghead will be paid a sales-out
rebate based on performance against the semester goal. If Egghead
achieves greater than <F4> percent <F4> of the semester sales-out
goal, Egghead will receive the exact achieved percentage of the eligible
sales-out rebate up to <F4> percent <F4>. If Egghead achieves
less than <F4> percent <F4> of the sales-out rebate goal, Egghead will
not receive any portion of the sales-out rebate. The purpose of this
scale is to offer an incentive for accounts to meet a portion of their
goal in the event they cannot achieve the full Microsoft sales-out goal.
BACKOFFICE PRODUCT SALES-OUT REBATE PROGRAM
Although Microsoft pays the sales-out rebate ultimately based on
performance against the semester sales-out goal, Microsoft also pays a
sales-out rebate at the end of the first quarter based on performance
against the first quarter goal. The scale for the first quarter payment
is the same as the scale for the semester payment. The first quarter
payment amount will be subtracted from the final semester payment for
the sales-out rebate.
Example: If Egghead has a quarterly sales-out goal of $1,000,000 and a
total semester goal $2,500,000, and Egghead sells $800,000 over the
first quarter period and $2,600,000 over the entire semester period,
Egghead will receive the following rebate payments.
PERIOD GOAL SELL-THROUGH PAYMENT
ACHIEVED
First Quarter $1,000,000 $800,000 <F4> of <F4> eligible
rebate = <F4> of January -
March Qualified Purchases.
Semester $2,500,000 $2,600,000 <F4> of <F4> eligible
rebate = <F4> of January -
June Qualified Purchases
less first quarter payment.
The maximum allowable
is <F4>.
BackOffice Product SKUs: The BackOffice SKU list can be found on pages
B12-B20 of this document.
OFFICE SALES-OUT REBATE PROGRAM
Program Objective: The objective of the Office Sales-out Rebate Program
is to increase sales and support the efforts of Microsoft Office for
Windows Standard and Professional products and Microsoft Office for the
Macintosh products.
Rebate Percentages: The total possible rebate percentage achievable for
the Office Sales-out Rebate Program is <F4> percent <F4> of net
qualified purchases for January - June, 1995.
Goal Definitions: The program goals are based upon the following:
- Egghead's historical Sales-out of Office.
- Microsoft's North America Office Sales-out goals.
- Egghead's contribution to Microsoft's historical Office
sales.
Rebate Goals: Egghead has a first quarter sales-out goal and a total
semester sales-out goal. Egghead's performance for the first three
months of the January - June, 1995 semester will be measured against the
first quarter sales-out goal. At the end of the first quarter, Egghead
will receive the percentage of the eligible rebate earned based on
performance against the first quarter goal. At the end of the semester,
Egghead will be measured on their six-month performance against the
total semester goal. Even if Egghead does not meet <F4> of the first
quarter goal, Egghead can still achieve <F4> of the semester goal
provided that the semester goal is met at the end of the six-month
period.
Egghead's Office Sales-out Rebate Program goals are as follows:
Quarter 1 Goal (January - March, 1995): <F4>
Semester Goal (January - June, 1995): <F4>
Sales-Out Definitions/Measurement: Microsoft Office Product Sales-out is
defined as those Office net product units sold through reseller outlet
locations. Egghead's full packaged product and upgrade sales-out units
will measured from the sales-out reported by Egghead to Microsoft, which
includes MOLP sales. Licensing sales (Select, and Microsoft
Maintenance) are captured and generated by Microsoft's financial systems
and included in total Sales-out used to measure Office product sales-out
rebate performance.
Special Agreement product units will be excluded from product sales-out
measurement
License revenue (Select and Microsoft Maintenance) credit is granted as
Microsoft recognizes the revenue. This occurs when Microsoft has
received the customer's license reporting. Following receipt of
reporting, Microsoft bills the customer/reseller and simultaneously
recognizes the revenue. Prepaid Maintenance licenses are recognized
monthly over the maintenance period. For example, if a reseller prepays
maintenance for two year coverage, then the reseller will receive one
twenty fourth (1/24th) Sales-out credit each month over the course of
the two years.
Payment: At the end of the semester, Egghead will be paid a sales-out
rebate based on performance against the semester goal. If Egghead
achieves greater than <F4> percent <F4> of the semester sales-out
goal, Egghead will receive the exact achieved percentage of the eligible
sales-out rebate up to <F4> percent <F4>. If Egghead achieves
less than <F4> percent <F4> of the sales-out rebate goal, Egghead will
not receive any portion of the sales-out rebate. The purpose of this
scale is to offer an incentive for accounts to meet a portion of their
goal in the event they cannot achieve the full Microsoft sales-out
goal.
OFFICE SALES-OUT REBATE PROGRAM
Although Microsoft pays the sales-out rebate ultimately based on
performance against the semester sales-out goal, Microsoft also pays a
sales-out rebate at the end of the first quarter based on performance
against the first quarter goal. The scale for the first quarter payment
is the same as the scale for the semester payment. The first quarter
payment amount will be subtracted from the final semester payment for
the sales-out rebate.
Example: If Egghead has a quarterly sales-out goal of $1,000,000 and a
total semester goal $2,500,000, and Egghead sells $800,000 over the
first quarter period and $2,600,000 over the entire semester period,
Egghead will receive the following rebate payments:
PERIOD GOAL SELL-THROUGH PAYMENT
ACHIEVED
First Quarter $1,000,000 $800,000 <F4> of <F4> eligible
rebate = <F4> of January -
March Qualified Purchases.
Semester $2,500,000 $2,600,000 <F4> of <F4> eligible
rebate = <F4> of January -
June Qualified Purchases
less first quarter payment.
The maximum allowable
is <F4>.
Office SKU List: The Office SKU list can be found on pages B21 - B23
of
this document.
CONSUMER SALES-OUT REBATE PROGRAM
Program Objective: The objective of the Consumer Sales-out Rebate
Program is to increase sales and support the efforts of Microsoft
Consumer products.
Rebate Percentages: The total possible rebate percentage achievable
for
the Consumer Sales-out Rebate Program is <F4> percent <F4> of net
qualified purchases for January - June, 1995.
Goal Definitions: The program goals are based upon the following:
- Egghead's historical Sales-out of Microsoft Consumer products.
- Microsoft's North America Consumer Sales-out goals.
- Egghead's contribution to Microsoft's historical Consumer
sales.
Rebate Goals: Egghead has a first quarter sales-out goal and a total
semester sales-out goal. Egghead's performance for the first three
months of the January - June, 1995 semester will be measured against
the
firm quarter sales-out goal. At the end of the first quarter,
Egghead
will receive the percentage of the eligible rebate earned based on
performance against the first quarter goal. At the end of the
semester,
Egghead will be measured on their six-month performance against the
total semester goal. Even if Egghead does not meet <F4> of the first
quarter goal, Egghead can still achieve <F4> of the semester goal
provided that the semester goal is met at the end of the six-month
period.
Egghead's Consumer Sales-out Rebate Program goals are as follows:
Quarter 1 Goal (January - March, 1995): <F4>
Semester Goal (January - June, 1995): <F4>
Sales-out Definitions/Measurement: Microsoft Consumer Product Sales-
out
is defined as those Consumer net product units sold through reseller
outlet locations. Egghead's full packaged product and upgrade sales-
out
units will measured from the sales-out reported by Egghead to
Microsoft,
which includes MOLP sales. Licensing sales (Select, and Microsoft
Maintenance) are captured and generated by Microsoft's financial
systems
and included in total Sales-out used to measure Consumer product
sales-
out rebate performance.
Special Agreement product units will be excluded from product sales-
out
measurement
License revenue (Select and Microsoft Maintenance) credit is granted
as
Microsoft recognizes the revenue. This occurs when Microsoft has
received the customer's license reporting. Following receipt of
reporting, Microsoft bills the customer/reseller and simultaneously
recognizes the revenue. Prepaid Maintenance licenses are recognized
monthly over the maintenance period. For example, if a reseller
prepays
maintenance for two year coverage, then the reseller will receive one
twenty fourth (1/24th) Sales-out credit each month over the course of
the two years.
Payment: At the end of the semester, Egghead will be paid a sales-out
rebate based on performance against the semester goal. If Egghead
achieves greater than <F4> percent <F4> of the semester sales-out
goal, Egghead will receive the exact achieved percentage of the
eligible
sales-out rebate up to <F4> percent <F4>. If Egghead
achieves
less than <F4> percent <F4> of the sales-out rebate goal, Egghead
will
not receive any portion of the sales-out rebate. The purpose of this
scale is to offer an incentive for accounts to meet a portion of
their
goal in the event they cannot achieve the full Microsoft sales-out
goal.
Although Microsoft pays the sales-out rebate ultimately based on
performance against the semester sales-out goal, Microsoft also pays
a
sales-out rebate at the end of the first quarter based on performance
against the first quarter goal. The scale for the first quarter
payment
is the same as the scale for the semester payment. The first quarter
payment amount will be subtracted from the final semester payment for
the sales-out rebate.
Example: If Egghead has a quarterly sales-out goal of $1,000,000 and
a
total semester goal of $2,500,000, and Egghead sells $800,000 over
the
first quarter period and S2,600,000 over the entire semester period,
Egghead will receive the following rebate payments:
PERIOD GOAL SELL-THROUGH PAYMENT
ACHIEVED
First Quarter $1,000,000 $800,000 <F4> of <F4> eligible
rebate = <F4> of January -
March Qualified Purchases.
Semester $2,500,000 $2,600,000 <F4> of <F4> eligible
rebate = <F4> of January -
June Qualified Purchases
less first quarter payment.
The maximum allowable
is <F4>.
Office SKU List: The Office SKU list can be found on pages B24 - B26
of
this document.
<F1> Registered Trademark
<F4> Confidential Treatment Requested
SCHEDULE OF SUBSIDIARIES
DJ & J Software Corporation, a Washington corporation.
Eggspert Software, Ltd., a Canadian federal corporation.
EH Direct, Inc., a Washington corporation.
Egghead International, Inc., a Washington corporation.
MPI Corporation, a Washington corporation and subsidiary of EH
Direct, Inc.
Egghead International, Inc., a Washington corporation
Egghead Europe, Inc., a Washington corporation and subsidiary of
Egghead International, Inc.
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to
the incorporation of our reports included in this Form 10-
K, into the Company's previously filed Registration
Statements No. 33-29453, (Egghead, Inc. 1989 Employee
Stock Purchase Plan) and
No. 33-33101, (Egghead, Inc. 1989 Executive Retention
Incentive Stock Option Plan).
/s/ Arthur Andersen LLP
Seattle, Washington
May 26, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-01-1995
<PERIOD-END> APR-01-1995
<CASH> 42,592
<SECURITIES> 0
<RECEIVABLES> 88,868
<ALLOWANCES> 4,354
<INVENTORY> 102,918
<CURRENT-ASSETS> 241,033
<PP&E> 57,500
<DEPRECIATION> 34,135
<TOTAL-ASSETS> 270,141
<CURRENT-LIABILITIES> 122,305
<BONDS> 0
<COMMON> 172
0
0
<OTHER-SE> 146,244
<TOTAL-LIABILITY-AND-EQUITY> 270,141
<SALES> 862,550
<TOTAL-REVENUES> 862,550
<CGS> 760,431
<TOTAL-COSTS> 760,431
<OTHER-EXPENSES> 100,025
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39
<INCOME-PRETAX> 4,373
<INCOME-TAX> (1,705)
<INCOME-CONTINUING> 2,668
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,668
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
