SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period from June 30, 1996 to September 28, 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.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Washington 91-1296187
------------------------------ ----------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
East 22705 Mission
Liberty Lake, Washington 99019
------------------------------ ----------------------
(Address of principal executive offices) (Zip Code)
(509) 922-7031
---------------------------------------------------
(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 October 26, 1996
Common Stock 17,591,020 shares
$.01 par value
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements and Supplementary Data
Refer to Exhibit 23 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)
(Unaudited)
September 28, March 30,
1996 1996
------------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 81,920 $ 49,590
Non-trade accounts receivables, net
of allowance for doubtful accounts
of $3,472 and $2,098, respectively 17,534 24,079
Merchandise inventories, net 99,232 84,712
Prepaid expenses and other current
assets 13,129 9,455
Current deferred income taxes 5,612 4,859
Discontinued operations - net current
assets 2,392 74,473
-------- --------
Total current assets 219,819 247,168
Property and equipment, net 24,950 29,495
Non-current deferred income taxes 4,221 4,221
Other assets 512 1,621
Discontinued operations - net long-term
assets 1,727
-------- --------
$249,502 $284,232
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 82,722 $119,341
Accrued liabilities 12,895 15,817
Current portion of capital lease
obligations 307 295
Liabilities related to CGE disposal 18,559 8,327
-------- --------
Total current liabilities 114,483 143,780
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
(Dollars in thousands)
(Unaudited)
September 28, March 30,
1996 1996
------------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY,
CONTINUED
Capital lease obligations, less current
portion $ 95 $ 280
Deferred rent 709 903
-------- --------
Total liabilities 115,287 144,963
-------- --------
Commitments and contingencies
Shareholders' equity :
Common stock, $.01 par value:
50,000,000 shares authorized;
17,573,920 and 17,546,548 shares issued
and outstanding, respectively 176 176
Additional paid-in capital 124,295 124,104
Retained earnings 9,744 14,989
-------- --------
Total shareholders' equity 134,215 139,269
-------- --------
$249,502 $284,232
======== ========
See Notes to Consolidated Financial Statements.
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
13 Weeks Ended 26 weeks Ended
(unaudited) (unaudited)
---------------------------- ----------------------------
September 28, September 30, September 28, September 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 79,971 $100,617 $158,617 $185,307
Cost of sales, including
certain buying, occupancy,
and distribution costs 71,786 89,418 143,822 164,136
-------- -------- -------- --------
Gross margin 8,185 11,199 14,795 21,171
Selling, general, and
administrative expense 15,015 15,256 32,949 29,542
Depreciation and amortization
expense, net of amounts
included in cost of sales 1,766 1,815 3,513 3,616
-------- -------- -------- --------
Operating loss (8,596) (5,872) (21,667) (11,987)
Other income (expense):
Interest income 992 890 1,791 1,583
Interest expense (9) (16) (22) (37)
Other, net (23) 13 (154) 68
-------- -------- -------- --------
Loss from continuing operations
before income taxes (7,636) (4,985) (20,052) (10,373)
Income tax benefit 2,978 1,933 7,820 4,035
-------- -------- -------- --------
Net loss from continuing
operations before effects of
discontinued operations and
cumulative effect of change
in accounting principle (4,658) (3,052) (12,232) (6,338)
Discontinued operations:
Income (loss) from discontinued
operations, net of tax (462) (14,548) (338)
Gain on disposal of discontinued
operations, net of tax 22,286
-------- -------- -------- --------
Income (loss) from discontinued
operations (462) 7,738 (338)
-------- -------- -------- --------
Net loss before cumulative effect
of change in account principles (4,658) (3,514) (4,494) (6,676)
-------- -------- -------- --------
Cumulative effect of change in
account principles net of tax (711)
-------- -------- -------- --------
Net loss $ (4,658) $ (3,514) $ (5,205) $ (6,676)
======== ======== ======== ========
</TABLE>
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Statements of Operations, Continued
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
13 Weeks Ended 26 weeks Ended
(unaudited) (unaudited)
---------------------------- ----------------------------
September 28, September 30, September 28, September 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Loss per share:
Continuing operations (0.27) (0.17) (0.70) (0.37)
Discontinued operations:
Loss from discontinued
operations (0.03) (0.83) (0.02)
Gain on disposal of
discontinued operations 1.27
Change in accounting
principle (0.04)
Loss per share $ (0.27) $ (0.20) $ (0.30) $ (0.39)
Weighted average common shares
and common equivalent shares
outstanding 17,567 17,490 17,561 17,331
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Amounts in thousands)
<TABLE>
<CAPTION>
(Unaudited)
Common Stock Additional
------------------ 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 27 191 191
Translation adjustment (41) (41)
Net loss (5,204) (5,204)
------- -------- -------- -------- --------
Balance, September 28, 1996 17,574 $ 176 $124,295 $ 9,744 $134,215
======= ======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
26 Weeks Ended
(unaudited)
-----------------------------
September 28, September 30,
1996 1995
------------- -------------
Cash flows from operating activities:
Net loss $ (5,205) $ (6,676)
-------- --------
Adjustments to reconcile net loss
to net cash provided (used) by
operating activities:
Depreciation and amortization 4,300 5,385
Deferred rent (194) (111)
Deferred income taxes (753) 337
Cumulative effect of change in
accounting principle 1,163
(Gain) loss on disposition of
assets 2,730 (35)
(Gain) loss on sale of CGE,
before taxes (36,535)
Reserves recorded in connection
with CGE disposal 8,465
Changes in assets and liabilities:
Nontrade accounts receivable,
net 6,545 (2,916)
Merchandise inventories (14,520) (53,036)
Prepaid expenses and other
current assets (3,674) (4,185)
Other assets 56 502
Accounts payable (36,682) 75,260
Accrued liabilities (2,581) 2,791
Income taxes payable - (325)
Discontinued Operations 67,049 -
-------- --------
Total adjustments (4,631) 23,667
-------- --------
Net cash provided by (used
in)operating activities (9,836) 16,991
-------- --------
Cash flows from investing activities:
Additions to property and equipment (2,845) (7,039)
Proceeds from sale of equipment 28 57
Proceeds from sale of CGE 45,000
-------- --------
Net cash provided by (used
in) investing activities 42,183 (6,982)
-------- --------
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(Dollars in thousands)
26 Weeks Ended
(unaudited)
-----------------------------
September 28, September 30,
1996 1995
------------- -------------
Cash flows from financing activities:
Payments on capital lease
obligations $ (173) $ (293)
Proceeds from stock issuances 191 3,493
-------- --------
Net cash provided by
financing activities 18 3,200
-------- --------
Effect of exchange rates on cash (35) 108
Net increase in cash 32,330 13,317
Cash at beginning of period 49,590 42,592
-------- --------
Cash at end of period $ 81,920 $ 55,909
======== ========
Supplemental disclosures of cash paid:
Interest $ 22 $ 36
Income taxes 67 334
See Notes to Consolidated Financial Statements.
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. While these statements reflect
the adjustments which are, in the opinion of management, necessary to
fairly state the results of the interim periods, they do not include
all the information and footnotes required by generally accepted
accounting principles for complete financial statements. These
adjustments are of a normal and recurring nature. For further
information, refer to the annual financial statements and footnotes
thereto, for the 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 and 26 weeks ended September 28, 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
September 28, 1996, and September 30, 1995, because it was anti-
dilutive.
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
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 September 28, 1996 the future minimum rental
payments under these operating leases were as follows (in thousands):
Fiscal Year
----------------
1997 (remainder) $6,110
1998 8,823
1999 4,819
2000 2,550
2001 1,509
Thereafter 1,840
-------
Total minimum payments $25,651
=======
NOTE 4 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 required Egghead to maintain
personnel 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.
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
NOTE 4 DISCONTINUED OPERATIONS, CONTINUED
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 September 28, 1996 consisted of accounts
receivable and merchandise inventory, net of reserves. Current
liabilities at September 28, 1996 consisted of liabilities relating to
CGE and additional reserves deemed necessary to complete the disposal
of remaining CGE assets and complete certain CGE activities.
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 that long-lived assets and certain identifiable intangible
assets be evaluated to determine whether the carrying amount is
recoverable based on estimated future cash flows expected from the use
of the assets and cash to be received upon disposal of the assets.
The Company adopted this standard at the beginning of the first
quarter of fiscal year 1997. Cumulative effect of change in
accounting principle was a charge of $0.7 million, after tax or $0.04
per share for the six months ended September 28, 1996. This charge
represents the adoption of SFAS 121 and the related writedown of the
Company's held for sale Kalispell, Montana property and the related
goodwill. The impact on retail operations during the six months
ending September 28, 1996 was $0.2 million and is included 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
customers through retail outlets and mail order. As of September
28, 1996, the Company operated 154 retail stores, a direct response
group, an Internet site (www.egghead.com) 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 included a Fulfillment Agreement relating to the
provision by Egghead to SSI of certain support services through
September 13, 1996 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. During the second quarter Egghead formalized
plans to remodel twelve of the Company's previous new format (C-3)
stores to an updated format (C-4), convert one store to the C-4
format, and open three new C-4 format stores in existing markets.
The C-4 format is a more open store whose fixture arrangement holds
more merchandise and affords greater flexibility in displaying and
organizing each category. The Company is also modifying an
<PAGE>
additional twelve stores, ten of which are existing C-3 stores in
new markets. All twenty eight of these stores will carry broader
merchandise assortments, including hardware, than the Company's
traditional stores. Several of them will also serve as pilot sites
for upgrade and installation departments and walk-in sales from
surrounding businesses. The hardware assortments include computer
systems, notebook computers, monitors, printers, scanners, and
digital imaging devices. Management expects to effect these
changes prior to the upcoming holiday selling season. As
management has previously stated, the performances of the remodeled
and expanded stores in existing markets are better on balance than
that of new stores in new markets. Management is continuing to
assess the whether the overall contribution of the new
merchandising formats will have a positive effect on the Company's
net income. Management is focusing attention on the new format
stores which may serve as the model for redeveloping the rest of
the chain as the majority of the Company's store leases come up for
renewal in the next eighteen months.
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 similar
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
$784,000 during the six months ended September 28, 1996. ELEKOM is
not expected to have significant sales or distribute products in
fiscal year 1997. Egghead has invested a cumulative total of $2.2
million in ELEKOM. The Company's Board of Directors has authorized
additional investments of up to $2.2 million to be made during the
remainder of fiscal 1997.
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.
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 need for significant
presence and market concentration in metropolitan areas in which
the Company has store locations to achieve economies of scale for
<PAGE>
advertising and certain overhead costs, the seasonality and
quarterly fluctuation of financial results, the early stage of the
Company's new 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 and the Form 10-Q for the
quarter ended June 29, 1996. Actual results may differ materially.
RESULTS OF OPERATIONS
Overview
--------
Egghead reported a total net loss for continuing and discontinued
operations of $4.7 million for the quarter ended September 28, 1996
and $5.2 million for the six months then ended compared to a net
loss of $3.5 million and $6.7 million, respectively, for the prior
year comparable periods. The larger net loss during the current
quarter was due primarily to an increase in the net loss from the
continuing operations. The decrease in loss for the six month
comparable periods is due primarily to the gain on the disposal of
the CGE division. Total loss per share for the quarters ended
September 28, 1996 and September 30, 1995 were $0.27 and $0.20,
respectively. Total loss per share for the six month periods ended
September 28, 1996 and September 30, 1995 were $0.30 and $0.39,
respectively.
Continuing Operations
---------------------
Loss from continuing operations includes the results of the
Company's retail division, direct response division, and ELEKOM.
Net loss from continuing operations for the second quarter was $4.7
million, or $0.27 per share, compared to the net loss of $3.1
million, or $0.17 per share, for the same period of the previous
year. Net loss from continuing operations for the six months ended
September 28, 1996 was $12.2 million or $0.70 per share as compared
to a net loss of $6.3 million or $0.37 per share for the same
period of the previous year.
<PAGE>
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>
<CAPTION>
Percentage of Net Sales
----------------------------------------------------------
Second Quarter Year to Date
13 Weeks Ended 26 Weeks Ended
---------------------------- ----------------------------
September 28, September 30, September 28, September 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, including
certain buying, occu-
pancy, and distribution
costs 89.8 88.9 90.7 88.6
Gross margin 10.2 11.1 9.3 11.4
Selling, general, and
administrative expense 18.8 15.2 20.8 15.9
Depreciation and amorti-
zation expense, net of
amounts included in
cost of sales 2.2 1.8 2.2 2.0
Operating loss (10.8) (5.8) (13.7) (6.5)
Loss from continuing
operations before income
taxes (9.5) (5.0) (12.6) (5.6)
Income tax benefit 3.7 1.9 4.9 2.2
Net loss from continuing
operations (5.8) (3.0) (7.7) (3.4)
</TABLE>
NET SALES for the second quarter of fiscal 1997 were $80.0 million, a
decrease of 21% from the $100.6 million in revenue for the same period
of the previous year. For the six months, the Company's total sales
were $158.6 million, a decrease of 14% from the $185.3 million for the
prior year. Comparable store sales decreased 22.2% and 15.1% for the
second quarter and six month periods from the same periods of the
prior year. Comparable store sales results only include Egghead's
retail stores. Excluded from this statistic are sales through 1-800
EGGHEAD and the Egghead Internet Site (www.egghead.com). Total and
comparable store sales performance for the second quarter were
adversely affected by the launch of Windows 95 last year and a
reduction in the average number of stores in operation this year. For
the second quarter, comparable store sales decreased 17.2% excluding
the sales of Windows 95 in both periods. This calculation did not
exclude the effects of Windows 95 related products introduced during
the Windows 95 launch period. Analagously, for the six month period
comparable store sales decreased 12.2% excluding the sales of Windows
<PAGE>
95 from both years. The average number of stores in operation during
the second quarter this year was 157, down from 164 stores during the
second quarter of last year. During the first six months of fiscal
year 1997, Egghead closed thirteen stores and opened three new stores.
In addition to the reduction in stores, management believes sales have
also been negatively affected by the decline in the development of new
personal computer software, increased competition from resellers, some
of which offer a greater assortment than the Company, manufacturers
who sell directly to the consumer, and other new methods of
distribution. Management is repositioning some key stores in time for
the holiday season to carry broader merchandise assortments, including
hardware.
GROSS MARGIN (net sales minus cost of sales, including certain buying,
occupancy, and distribution costs) was $8.2 million or, as a
percentage of net sales, 10.2% for the second quarter of fiscal 1997,
compared to $11.2 million or 11.1% of net sales for the second quarter
of fiscal 1996. For the six months, gross margin was $14.8 million or
9.3% of sales compared to $21.2 million or 11.4% of sales last year.
Gross margin percentages for the quarter and six months were lower due
primarily to the decrease in sales. The overall gross margin
percentage increase was partially offset by an increase in the initial
margin (final sales price less the original cost of the product). The
initial margin ratio was higher by 1.4 and 0.8 percentage points,
respectively. Initial margin ratios in the prior year were negatively
affected by the low gross margin associated with sales of Windows 95.
SELLING, GENERAL, AND ADMINISTRATIVE (SG&A) EXPENSE was $15.0 million
or, as a percentage of net sales, 18.8% for the quarter ended
September 28, 1996, compared to $15.3 million or 15.2% for the quarter
ended September 30, 1995. This increase is primarily due to a
decrease in sales. The Company has reduced its administrative and
corporate headquarters expenses. However, cooperative advertising
reimbursements decreased compared to the prior year comparable period.
For the six months ended September 28, 1996, the SG&A expense was
$32.9 million or 20.8% of sales as compared to $29.5 million or 15.9%
of sales for the prior year comparable period. These results include
several one-time restructure costs which were recorded in the first
quarter of fiscal 1997. These costs include $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. The
increase in the six month comparable periods is also attributable to
lower cooperative advertising reimbursements and higher systems costs.
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 six months ended September 28, 1996 was $0.2 million and is
included in SG&A.
<PAGE>
DEPRECIATION AND AMORTIZATION EXPENSE, NET OF AMOUNTS INCLUDED IN COST
OF SALES, of $1.8 million and $3.5 million for the three and six month
periods ended September 28, 1996, respectively, as compared to $1.8
million and $3.6 million for the prior year comparable periods, has
remained fairly constant.
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 through September 13, 1996, a Collection Agreement detailing
the collection of Egghead's CGE related accounts receivable through
October 10, 1996, 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
personnel and computer resources to support the various agreements.
Since the end of the fulfillment and collection periods, the Company
is focusing on adjusting its cost structure and focusing on the
remaining retail-oriented businesses.
GAIN ON DISPOSAL OF THE DISCONTINUED OPERATION during the six months
ended September 28, 1996 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 for the six months ended September 28, 1996. 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.
<PAGE>
Cumulative Effect of Change in Accounting Principle
---------------------------------------------------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE was a charge of
$0.7 million, after tax or $0.04 per share for the six months ended
September 28, 1996. This charge represents the adoption of SFAS 121
and the related writedown of the Company's held for sale Kalispell,
Montana property and the related goodwill.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $32.3 million from $49.6 million
at the end of fiscal 1996, to $81.9 million at September 28, 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 $75.5 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
$82.7 million on September 28, 1996.
The decline in accounts payable was primarily attributable to a
reduction from the abnormally high level of payables on March 30, 1996
and the reduction of payables related to CGE volume license and
maintenance contracts (VLAM) of approximately $27.2 million.
Net nontrade accounts receivable decreased $6.5 million from $24.1
million at March 30, 1996, to $17.5 million at September 28, 1996.
The decrease is due to a decrease in vendor rebates receivable.
Merchandise inventories increased approximately $14.5 million
primarily due to preparation for the upcoming Christmas shopping
season.
Assets of discontinued operations include all of the current assets of
CGE as of September 28, 1996 and March 30, 1996. The decrease is due
primarily to the collection of trade accounts receivable.
Net property and equipment decreased $4.5 million, from $29.5 million
at the end of fiscal 1996, to $25.0 million at September 28, 1996.
The decrease is principally due to the disposal of assets related to
the CGE division and normal depreciation.
<PAGE>
Part II. OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on September 25,
1996 ("Meeting"), at which the following directors were elected to
three year terms; Linda Faye Levinson, Steven E. Lebow and Melvin A.
Wilmore. Eric P. Robison was elected to a one year term and the
following individuals terms as directors continued after the meeting;
George P. Orban, Richard P. Cooley, Terence M. Strom, and Samuel N.
Strom.
The election of directors was the only matter voted upon at the
Meeting. The votes cast were as set forth below:
Nominee For Withheld
------------------- ---------- ---------
Steven E. Lebow 13,573,135 1,860,487
Linda Faye Levinson 13,630,828 1,802,794
Melvin A Wilmore 15,145,118 288,504
Eric P. Robison 15,144,668 288,954
ITEM 6. Exhibits and Reports On Form 8-K
a. Exhibits
------------
28 Report of Independent Public Accountants.
27 Financial Data Schedule.
b. Reports on Form 8-K
-----------------------
A form 8-K was filed by the Company on August 3, 1996 to
report under Item 5, the resignation of Director Paul G.
Allen and the appointment of Melvin A. Wilmore and Eric P.
Robison to the Board of Directors.
<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
<PAGE>
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<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-29-1997
<PERIOD-END> SEP-28-1996
<CASH> 81920
<SECURITIES> 0
<RECEIVABLES> 21006
<ALLOWANCES> 3472
<INVENTORY> 99232
<CURRENT-ASSETS> 219819
<PP&E> 62222
<DEPRECIATION> 37272
<TOTAL-ASSETS> 249502
<CURRENT-LIABILITIES> 114483
<BONDS> 0
0
0
<COMMON> 176
<OTHER-SE> 134039
<TOTAL-LIABILITY-AND-EQUITY> 249502
<SALES> 158617
<TOTAL-REVENUES> 158617
<CGS> 143822
<TOTAL-COSTS> 143822
<OTHER-EXPENSES> 34825
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22
<INCOME-PRETAX> (20052)
<INCOME-TAX> 7820
<INCOME-CONTINUING> (12232)
<DISCONTINUED> 7738
<EXTRAORDINARY> 0
<CHANGES> (711)
<NET-INCOME> (5205)
<EPS-PRIMARY> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
EXHIBIT 23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Egghead, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet
of Egghead, Inc. (a Washington corporation) and subsidiaries as of
September 28, 1996 and the related condensed consolidated statements
of operations for the 13-week and 26-week periods ended September 28,
1996 and September 30, 1995 and statement of cash flows for the 26-
week period ended September 28, 1996 and September 30, 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.
Arthur Andersen
Seattle, Washington
October 22, 1996
<PAGE>
