<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period from March 31, 1996 to June 29, 1996
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.
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(Exact name of registrant as specified in its charter)
WASHINGTON 91-1296187
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
EAST 22705 MISSION
LIBERTY LAKE, WASHINGTON 99019
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(Address of principal executive offices) (Zip Code)
(509) 922-7031
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES x NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock:
Outstanding at
Class July 27, 1996
----- --------------
Common Stock 17,566,053
$.01 par value shares
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Refer to Exhibit 28 for the results of the limited review performed by Arthur
Andersen LLP, independent public accountants.
EGGHEAD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
JUNE 29, MARCH 30,
1996 1996
-------- ---------
CURRENT ASSETS:
Cash and cash equivalents $94,938 $49,590
Non-trade accounts receivables, net of allowance for
Doubtful accounts of $3,239 and $2,098,
respectively 30,020 24,079
Merchandise inventories, net 83,348 84,712
Prepaid expenses and other current assets 9,745 9,455
Current deferred income taxes 5,612 4,859
Discontinued operations - net current assets 7,099 71,796
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Total current assets 230,762 244,491
-------- --------
PROPERTY AND EQUIPMENT, NET 26,438 29,495
Non-current deferred income taxes 4,221 4,221
Other assets 604 1,621
Discontinued operations - net long-term assets - 1,727
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$262,025 $281,555
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-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ - $ -
Accounts payable 98,238 119,341
Accrued liabilities 13,822 15,817
Current portion of capital lease obligations 302 295
Liabilities related to cge disposal 9,761 5,650
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Total current liabilities 122,123 141,103
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Capital lease obligations, less current portion 182 280
Deferred rent 875 903
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Total liabilities 123,180 142,286
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Commitments and contingencies - -
SHAREHOLDERS' EQUITY :
Common stock, $.01 par value:
50,000,000 shares authorized; 17,562,954 and
17,546,548 shares issued and outstanding, respectively 176 176
Additional paid-in capital 124,227 124,104
Retained earnings 14,442 14,989
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Total shareholders' equity 138,845 139,269
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$262,025 $281,555
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-------- --------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
13 Weeks Ended
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(UNAUDITED)
June 29, July 1,
1996 1995
-------- --------
Net sales $78,646 $84,690
Cost of sales, including certain buying, occupancy
and distribution costs 72,036 74,718
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Gross margin 6,610 9,972
Selling, general and administrative expense 17,934 14,286
Depreciation and amortization expense, net of
amounts included in cost of sales 1,747 1,801
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Operating loss (13,071) (6,115)
Other (expense) income:
Interest expense (13) (21)
Interest income 799 693
Other, net (131) 55
-------- --------
Loss from continuing operations before
income taxes, effects of discontinued
operations and cumulative effect of change
in accounting principle (12,416) (5,388)
Income tax benefit 4,842 2,102
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Net loss from continuing operations before
effects of discontinued operations and
cumulative effect of change in accounting
principle (7,574) (3,286)
-------- --------
Discontinued operations:
Income (loss) from discontinued
operations, net of tax (14,548) 124
Gain on disposal of discontinued operations,
net of tax 22,286 -
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Income from discontinued operations 7,738 124
-------- --------
Net income before cumulative effect of change
in accounting principle 164 (3,162)
Cumulative effect of change in accounting principle,
net of tax (711) -
-------- --------
Net income (loss) $(547) $ (3,162)
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-------- --------
Earnings (loss) per share:
Continuing operations $ (0.43) $ (0.19)
Discontinued operations:
Income (loss) from discontinued operations (0.83) 0.01
Gain on disposal of discontinued operations 1.27 -
Change in accounting principle (0.04) -
-------- --------
Earnings (loss) per share $ (0.03) $ (0.18)
-------- --------
-------- --------
Weighted average common shares outstanding 17,555 17,172
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Retained
------------
Shares Amount Capital Earnings Total
---------------------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, March 30, 1996 17,547 $176 $124,104 $14,989 $139,269
Stock issued for cash,
pursuant to stock option
plan 16 - 123 - 123
Net loss (547) (547)
Balance, June 29, 1996 17,563 $176 $124,227 $14,442 $138,845
-------- -------- -------- -------- --------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
13 Weeks Ended
--------------------
(UNAUDITED)
June 29, July 1,
1996 1995
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Cash flows from operating activities:
Net loss $ (547) $ (3,162)
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Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 2,181 2,717
Deferred rent (28) (22)
Deferred income taxes (753) 337
Cumulative effect of change in accounting
principle 1,163 -
(Gain) loss on disposition of assets 2,686 (42)
(Gain) loss on sale of CGE, before taxes (36,535)
Reserves recorded in conection with CGE disposal 8,465
Changes in assets and liabilities:
Nontrade accounts receivable, net (5,941) 9,605
Merchandise inventories 1,364 (244)
Prepaid expenses and other current assets (290) (1,194)
Other assets (7) 225
Accounts payable (21,161) 17,694
Accrued liabilities (10,248) 1,905
Income taxes payable - (325)
Discontinued Operations 62,009 -
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Total adjustments 2,905 30,656
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Net cash provided by operating activities 2,358 27,494
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Cash flows from investing activities:
Additions to property and equipment (2,058) (2,613)
Proceeds from sale of equipment 16 29
Proceeds from sale of CGE 45,000
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Net cash used by investing activities 42,958 (2,584)
-------- --------
Cash flows from financing activities:
Payments on capital lease obligations (91) (159)
Proceeds from stock issuances 123 1,453
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Net cash provided by financing activities 32 1,294
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Effect of exchange rates on cash - 27
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Net increase in cash 45,348 26,231
Cash at beginning of period 49,590 42,592
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Cash at end of period $ 94,938 $68,823
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SUPPLEMENTAL DISCLOSURES OF CASH PAID:
Interest $ 13 $ 20
Income taxes $ 67 $ 110
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. While these statements reflect the
adjustments which are, in the opinion of management, necessary to fairly
state the results of the interim periods, they do not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements. These adjustments are of a
normal and recurring nature. For further information, refer to the annual
financial statements and footnotes thereto, for the 52 week period ended
March 30, 1996, contained in the Company's Form 10-K, filed pursuant to the
Securities Exchange Act of 1934. The reader is further cautioned that
operating results for the 13 weeks ended June 29, 1996, are not necessarily
indicative of the results that may be expected for the full year.
The Company uses a 52/53 week fiscal year, ending on the Saturday nearest
March 31 of each year. Each fiscal quarter consists of 13 weeks.
NOTE 2 EARNINGS (LOSS) PER SHARE
Net earnings, (loss) per share amounts are computed using the weighted
average number of common shares and dilutive common equivalent shares
outstanding during each period using the treasury stock method. Common
equivalent shares result from the assumed exercise of stock options and
from the conversion of cash related to the employee stock purchase plan
into common shares based upon the terms of the plan. The effect of common
equivalent shares was not included in computation of the loss per share
amount for the 13 week periods ended June 29, 1996, and July 1, 1995,
because it was anti-dilutive.
NOTE 3 LEASES
The Company leases retail stores and distribution facilities under
operating leases with remaining lives on most leases ranging from one to
five years. As of June 29, 1996 the future minimum rental payments under
these operating leases were as follows (in thousands):
Fiscal Year Operating
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1997 (remainder 9,342
1998 8,823
1999 4,797
2000 2,496
2001 1,445
Thereafter 63
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Total minimum payments 26,966
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<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6 DISCONTINUED OPERATIONS
Effective May 13, 1996, the Company sold its CGE division to Software Spectrum,
Inc. (SSI), a Texas Corporation for $45 million in cash pursuant to the terms of
an asset purchase agreement entered into on March 23, 1996. The sale agreement
included a Fulfillment Agreement relating to the provision by Egghead to SSI of
certain support services for a period not to exceed 120 days, a Collection
Agreement detailing the collection of Egghead's CGE related accounts receivable
for a period not to exceed 150 days and a Call Center Lease detailing the lease
to SSI for a period of three years of a portion of Egghead's Spokane facility.
The CGE sale agreement requires Egghead to maintain human and computer resources
to support the various agreements.
The sale resulted in a gain, net of tax, of $22.3 million or $1.27 per share.
The reported gain includes the sale proceeds of $45 million less fixed assets
and lease write-offs of $1.2 million, transaction, legal and accounting fees of
$2.0 million, transition period employment costs of $1.8 million, costs related
to the fulfillment period of $3.4 million, and taxes of $14.3 million.
The first quarter results of the CGE division have been reported separately as a
component of discontinued operations. Prior year financial statements have
been restated to present the CGE division as a discontinued operation.
Discontinued operations resulted in a loss, net of tax, for the first quarter
of $14.5 million or $0.83 per share. This loss includes accounts receivable and
inventory write-offs of $12.5 million, write-offs and equipment lease buyouts of
$4.9 million, warehouse closing costs of $3.2 million and operating losses,
severance and other costs of $3.2 million. These charges were offset by a tax
benefit of $9.3 million.
The net assets and liabilities relating to discontinued operations have been
segregated on the consolidated balance sheet from their historic
classifications to separately identify them as being related to the discontinued
operations. Net current assets of the discontinued operations at June 29, 1996
consisted of accounts receivable net of reserves, and merchandise inventory net
of reserves. Current liabilities at June 29, 1996 consisted of liabilities
relating to the disposal of CGE.
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6 DISCONTINUED OPERATIONS, CONTINUED
Proforma Information
The following unaudited proforma balance sheet reflects the adjustments made to
record the sale and operation of the CGE division as if the disposal had
occurred for balance sheet purposes on March 30, 1996:
March 30, Proforma Adjusted
1996 Adjustments Balance
-----------------------------
Cash and cash equivalents $49,590 $39,100 $88,690
Non-trade receivables,net 24,079 24,079
Inventories 84,712 (3,519) 81,193
Discontinued operations-net current assets 71,796 (7,200) 64,596
Prepaid expenses and other current assets 14,314 (5,751) 8,563
---------------------------
Total current assets 244,491 22,630 267,121
Property and equipment, net 29,495 (1,816) 27,679
Other assets 7,569 7,569
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Total assets $281,555 $20,814 $302,369
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---------------------------
Accounts payable $119,341 $(4,863) $114,478
Accrued liabilities 15,817 15,817
Liabilites related to CGE disposal 5,650 17,939 23,589
Other current liabilities 295 295
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Total current liabilites 141,103 13,076 154,179
Long-term liabilites 1,183 1,183
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Total liabilities 142,286 13,076 155,362
Shareholders' equity 139,269 7,738 147,007
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Total liabilities & shareholders' equity $281,555 $20,814 $302,369
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---------------------------
Information related to the effects of the discontined operation on the
consolidated statements of income are reflected in the March 30, 1996 and the
June 29, 1996 income statements as income(loss) from discontined operations.
NOTE 5 CHANGE IN ACCOUNTING PRINCIPLE
In March 1995, the Financial Accounting Standards Board (FASB) 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 long-lived assets and
certain identifiable intangible assets be evaluated to determine whether the
carrying amount is recoverable based on estimated future cash flows expected
from the use of the assets and cash to be received upon disposal of the assets.
The Company adopted this standard at the beginning of the first quarter of
fiscal year 1997. This standard required the company to record a cumulative
effect of accounting change of $711,000, after tax, for the Kalispell property,
which is held for sale, and the related goodwill. In addition, a charge of
$180,000 related to retail operations was recorded in Selling, General and
Administrative expense.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
GENERAL
Egghead, Inc. (Egghead or the Company), a reseller of personal computer
(PC) software, hardware, and related products, serves its customer through
retail outlets and mail order. As of June 29, 1996, the Company operated
159 retail stores, a direct response group, and Elekom Corporation
(ELEKOM), all of which are included in continuing operations.
The Company has also historically served corporate, government, and
education customers through its corporate, government, and education (CGE)
division. On May 13, 1996, the Company sold the CGE Division to Software
Spectrum, Inc. (SSI) a Texas corporation, for $45.0 million in cash which
did not include the CGE division's receivables and inventory that Egghead
is liquidating in an orderly manner. The sale, agreement included a
Fulfillment Agreement relating to the provision by Egghead to SSI of
certain support services for a period not to exceed 120 days and a Call
Center Lease detailing the lease for a period of three years of a portion
of Egghead's Spokane facility to SSI. Information contained in this filing
excludes, unless otherwise stated, any data relative to the discontinued
operations of the CGE division.
Egghead, a Washington corporation, was incorporated in 1988 and is the
successor to a corporation which was incorporated in Washington in 1984.
Egghead is the parent company of DJ&J Software Corporation, Eggspert
Software, Ltd. (Eggspert), EH Direct, Inc., Egghead International, Inc.
(Egghead International) and ELEKOM. Eggspert and Egghead International
became inactive subsidiaries on May 13, 1996 following the sale of the CGE
division to SSI. Unless the context indicates otherwise, references to
"the Company" and "Egghead" include Egghead and its subsidiaries.
Operating results of Eggspert and Egghead International are included in
discontinued operations.
Egghead's retail stores offer a broad selection of products at competitive
prices, as well as special order capabilities for additional products. The
Company employs a knowledgeable sales force to assist customers in
selecting software, hardware, and related products. At June 29, 1996, the
Company was operating 20 of its retail stores under a new merchandising
format which is approximately twice the size of original stores and is
arranged in a more user-friendly format. Results from the new store format
have been mixed. Experience with Egghead's new store format indicates that
relocated and remodeled stores in existing markets have shown encouraging
results. Management is continuing to revise the merchandise assortment in
new and remodeled stores with a view to further improve store revenues.
The Company will also seek additional sites in existing markets, where
appropriate.
<PAGE>
In August 1995, Egghead formed ELEKOM, a new subsidiary. ELEKOM was formed
to develop electronic commerce applications and services which link
customers and their suppliers. EleTrade, a product being developed by
ELEKOM, uses Lotus Notes and other notes networks to provide large
organizations an easy-to-use, cost-effective, secure and reliable product
ordering and order management system for non-production goods and services.
EleTrade allows companies to create customized electronic catalogs with
multi-media product information and customer-specific pricing. ELEKOM is
also developing additional enhancements which will automate the internal
requisition and approval process and which may create better
asset/inventory management and allow electronic software distribution.
ELEKOM, a development stage company, incurred selling, general and
administrative costs of approximately $400,000 during the quarter ended
June 29, 1996. Including the first quarter investment, Egghead has
invested a cumulative total of $1.9 million in ELEKOM. The Company's Board
of Directors has authorized a total investment of $3.0 million to be made
during fiscal 1997. ELEKOM formed strategic agreements with American
Express and IBM during the first quarter and continues to market its
complete electronic commerce solution to potential customers.
The Company uses a 52/53 week fiscal year, ending on the Saturday nearest
March 31 of each year. Each fiscal quarter consists of 13 weeks.
RESULTS OF OPERATIONS
OVERVIEW
Egghead reported a total net loss for continuing and discontinued
operations of $547,000 for the quarter ended June 29, 1996 compared to a
net loss of $3.2 million for the prior year comparable quarter. The net
loss during the current quarter was due primarily to an increase in the net
loss from the continuing retail operations, partially offset by the gain on
the disposal of the CGE division. Total loss per share for the quarters
ended June 29, 1996 and July 1, 1995 were $(0.03) and $(0.18),
respectively.
This document contains forward-looking statements that involve risks and
uncertainties including risks related to the highly competitive nature of
the computer software, hardware and other related products retailing
industry, the seasonality and quarterly fluctuation of financial results,
the early stage of the Company's new merchandising store format, the
dependence of the Company's sales on the purchase and use of personal
computers and software, and the development stage of the Company's
subsidiary ELEKOM, and the risks detailed in the Company's SEC reports,
including the report on Form 10-K for the year ended March 30, 1996.
Actual results may differ materially.
<PAGE>
CONTINUING OPERATIONS
Loss from continuing operations includes the results of the Company's
retail division, direct response division, and ELEKOM as well as selling,
general, and administrative expenses related to these operations. Net loss
for the first quarter from continuing operations was $7.6 million, or $0.43
per share, compared to the net loss of $3.3 million, or $0.19 per share,
for the same period of the previous year. The following table shows the
relationship of certain items relating to continuing operations included in
the Company's Consolidated Statements of Operations expressed as a
percentage of net sales:
PERCENTAGE OF NET SALES
First Quarter
13 Weeks Ended
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June 29, July 1,
1996 1995
---- ----
Net sales 100.0% 100.0%
Cost of sales, including certain buying,
occupancy, and distribution costs 91.6 88.2
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Gross margin 8.4 11.8
Selling, general, and administrative expense 22.8 16.9
Depreciation and amortization expense,
net of amounts included in cost of sales 2.2 2.1
---- ----
Operating loss (16.6) (7.2)
Other income 0.8 0.9
---- ----
Loss before income taxes (15.8) (6.3)
Income tax benefit 6.2 2.4
---- ----
Net loss from continuing operations (9.6)% (3.9)%
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NET SALES for the first quarter of fiscal 1997 were $78.6 million, a
decrease of 7% from the $84.7 million in revenue for the same period of the
previous year. Comparable store sales for the first quarter decreased 7%
from the same period last year. Comparable store sales results only
include Egghead's retail stores. Excluded from this statistic are sales
through Direct Response and the Egghead Internet Site (www.egghead.com).
Because new format stores were opened during the first quarter of fiscal
1997 and during fiscal 1996, their sales will not impact comparable store
sales statistics until they have been active during all periods evaluated.
Total retail sales were also affected by a reduction in the average number
of stores in full operations to 162 during the first quarter down from 169
during the first quarter of the previous year.
Results from the new store format have been mixed. Experience with
Egghead's new store format indicates that relocated and remodeled stores in
existing markets have shown encouraging results. Eleven remodeled and
expanded stores had sales increases of approximately 30% over their
performance in the same period of the previous year. Opening new stores in
new markets has not been as successful as remodeling and expanding stores
in existing markets. The Company will therefore continue to relocate and
remodel stores primarily in existing markets as leases expire. As of June
29, 1996, the Company had three stores on month-to-month leases, 22 stores
with leases expiring in fiscal 1997 and 75 stores with leases expiring in
fiscal 1998. Management is continuing to revise the merchandise assortment
in new and remodeled stores with a view to further improve store revenues.
The Company will also seek additional sites in existing markets, where
appropriate.
<PAGE>
During the first quarter, Egghead closed six stores and opened one new
store, for a total of 20 stores with the new store format in operation to
date. The Company has signed leases to open five new stores before the end
of the third quarter.
GROSS MARGIN (net sales minus cost of sales, including certain buying,
occupancy, and distribution costs) was $6.6 million or, as a percentage of
net sales, 8.4% for the first quarter of fiscal 1997, compared to $10.0
million or 11.8% of net sales for the first quarter of fiscal 1996. The
gross margin decline was affected by a decline in initial margin dollars of
$1.2 million from the previous year due to the 7% decline in consolidated
revenue. In addition, costs were higher in the first quarter versus the
same period of the previous fiscal year by $0.6 million for retail
occupancy costs, $0.6 million for shrinkage, $0.4 million for distribution
costs, and $0.3 million for merchandising costs. Rebate income also
declined from the comparable period by $0.4 million. The initial gross
margin for retail operations, as a percentage of net sales, was 19% during
the first quarter, an improvement over the 16% initial gross margin for the
previous quarter and consistent with results for the same period of the
previous fiscal year. The Company has made selective price adjustments in
order to improve its initial gross margin.
SELLING, GENERAL, AND ADMINISTRATIVE (SG&A) EXPENSE as a percentage of net
sales was 22.8% in the quarter ended June 29, 1996, compared to 16.9% for
the quarter ended July 1, 1995. This increase of $3.6 million over the
prior year includes several one-time restructure costs totaling
approximately $2.4 million. Included in this total is $1.4 million related
to remaining lease obligations on Egghead's former headquarters and the
relocation of the Company's headquarters, $0.6 million related to the
consolidation of distribution facilities and $0.4 million of severance
expense for the reduction of approximately 50 corporate staff. SG&A
expenses related to retail operations were $0.8 million higher in the first
quarter as compared to the same period of the previous year. The increase
was mainly due to payroll and benefits of $0.2 million, store signs of $0.3
million and other items of $0.3 million. Remaining SG&A expenses in total
were higher in the first quarter as compared to the same period of the
previous year by $0.2 million mainly as a result of higher systems costs in
the areas of contract labor and maintenance contracts.
During the first quarter, Egghead also spent approximately $0.4 million on
ELEKOM, its electronic commerce subsidiary. Including the first quarter
investment, Egghead, has invested a cumulative total of $1.9 million in
ELEKOM. The Company's Board of Directors has authorized, during fiscal
year 1997, investments of up to $3.0 million to be made in ELEKOM. ELEKOM
formed strategic agreements with American Express and IBM during the first
quarter and continues to market its complete electronic commerce solution
to potential customers.
The Statement of Financial Accounting Standards No. 121 (SFAS 121), which
Egghead adopted during the first quarter of fiscal 1997, requires the
Company to write down to fair market value any assets not contributing
positive cash flow. The impact on retail operations in the first quarter
was $0.2 million and is included in SG&A.
DEPRECIATION AND AMORTIZATION EXPENSE, NET OF AMOUNTS INCLUDED IN COST OF
SALES, of $1.7 million or 2.2% of net sales in the first quarter of fiscal
1997, compared to $1.8 million or 2.1% of net sales for the prior year
comparable period, has remained fairly constant.
<PAGE>
DISCONTINUED OPERATIONS
Due to the sale of the CGE division, all results for the operations of the
CGE division are reported as a discontinued operation. Certain general,
administrative and distribution areas have traditionally supported all of
the Company's business lines. The expenses reflected in the discontinued
operations results reflect only those activities directly related to the
CGE business.
On May 13, 1996, Egghead sold its CGE division to SSI for $45.0 million in
cash. The sale agreement included a Fulfillment Agreement relating to the
provision by Egghead to SSI of certain support services for a period not to
exceed 120 days, a Collection Agreement detailing the collection of
Egghead's CGE related accounts receivable for a period not to exceed 150
days and a Call Center Lease detailing the lease to SSI for a period of
three years of a portion of Egghead's Spokane facility. The CGE sale
agreement requires Egghead to maintain human and computer resources to
support the various agreements. After the fulfillment and collection
periods, the Company will be able to more fully adjust its cost structure
and totally focus on the remaining retail-oriented businesses.
GAIN ON DISPOSAL OF THE DISCONTINUED OPERATION during the first quarter,
was $22.3 million or $1.27 per share, net of tax. The sales price for the
CGE division was $45.0 million in cash, which did not include CGE's current
accounts receivable that are being liquidated in an orderly manner. The
reported gain included the sales proceeds of $45.0 million less fixed
assets and lease write-offs of $1.2 million, transaction, legal, and
accounting fees of $2.0 million, transition period employment costs of $1.8
million, costs related to the fulfillment period of $3.4 million, and taxes
of $14.3 million.
LOSS FROM DISCONTINUED OPERATIONS was $14.5 million or $0.83 per share, net
of tax. The major components of the loss included accounts receivable and
inventory write-offs and equipment lease buyouts of $4.9 million, warehouse
closing costs of $3.2 million and operating losses, severance and other
costs of $3.2 million. These charges were offset by a tax benefit of $9.3
million. During the first quarter, the Company closed a distribution
center in Wilmington Ohio, and implemented a 40% reduction in operations at
its distribution center in Lancaster, Pennsylvania to reduce excess
distribution capacity after the sale of the CGE division.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE was a charge of $0.7
million, after tax or $0.04 per share for the first quarter of fiscal 1997.
This charge represents the adoption of SFAS 121 and the related writedown
of the Company's held for sale Kalispell, Montana property and the related
goodwill.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $45.3 million from $49.6 million at the
end of fiscal 1996, to $94.9 million at June 29, 1996. The increase in the
cash balance was primarily due to the $45.0 million gross proceeds from the
sale of CGE and a reduction in the net current assets of discontinued
operations of $64.7 million, which primarily relates to the collection of
accounts receivable. These positive factors on the cash balance were
partially offset by a reduction in accounts payable from $119.3 million on
March 30, 1996 to $98.2 million on June 29, 1996. The decline in accounts
payable was primarily attributable to a reduction from the abnormally high
level of payables on March 30, 1996 of approximately $11.0 million and the
reduction of payables related to volume license and maintenance contracts
(VLAM) of $10.0 million. The remaining VLAM accounts payable balance of
approximately $18.0 million will be paid down as a result of the sale of
the CGE division. As a result of these first quarter activities, most of
the assets related to the CGE division have been converted to cash.
Net nontrade accounts receivable increased $5.9 million from $24.1 million
at March 30, 1996, to $30.0 million at June 29, 1996. The increase is due
primarily to receivables from SSI for certain costs incurred in connection
with the Fulfillment Agreement.
Assets of discontinued operations include all of the current assets of CGE
as of June 29, 1996 and March 30, 1996. The decrease is due primarily to
the collection of trade accounts receivable.
Net property and equipment decreased $3.1 million, from $29.5 million at
the end of fiscal 1996, to $26.4 million at June 29, 1996. The decrease is
principally due to the disposal of assets related to the CGE division.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
23 Report of Independent Public Accountants.
27 Financial Data Schedule.
b. Reports on Form 8-K
None filed
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
city of Liberty Lake, State of Washington, on August 13, 1996.
EGGHEAD, INC.
By /s/Terence M. Strom
----------------------------
Terence M. Strom
President and Chief Executive
Officer
/s/Edward S. Wozniak
----------------------------
Edward S. Wozniak
Vice President, Chief Financial
Officer (Principal Financial and
Accounting Officer)
<PAGE>
Exhibit 23
[LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Egghead, Inc.:
We have reviewed the accompanying consolidated balance sheet of Egghead, Inc.
(a Washington corporation) and subsidiaries as of June 29, 1996, and the
related consolidated statements of operations and cash flows for the 13-week
period ended June 29, 1996 and July 1, 1995. These financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Seattle, Washington
July 23, 1996
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<PAGE>
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<PERIOD-END> OCT-01-1996
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