<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 September 29, 1996 to December 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)
22705 EAST 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 January 24, 1997
----- -----------------
Common Stock 17,590,986 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)
<TABLE>
<CAPTION>
ASSETS (UNAUDITED)
DECEMBER 28, MARCH 30,
1996 1996
------------ ---------
<S> <C> <C>
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $69,694 $49,590
NON-TRADE ACCOUNTS RECEIVABLES, NET OF ALLOWANCE FOR
DOUBTFUL ACCOUNTS OF $4,157 AND $2,098, RESPECTIVELY 29,045 24,079
MERCHANDISE INVENTORIES, NET 92,396 84,712
PREPAID EXPENSES AND OTHER CURRENT ASSETS 12,247 9,455
CURRENT DEFERRED INCOME TAXES 5,612 4,859
DISCONTINUED OPERATIONS - NET CURRENT ASSETS 909 74,473
--------- --------
TOTAL CURRENT ASSETS 209,903 247,168
--------- --------
PROPERTY AND EQUIPMENT, NET 24,687 29,495
NON-CURRENT DEFERRED INCOME TAXES 4,221 4,221
OTHER ASSETS 715 1,621
DISCONTINUED OPERATIONS - NET LONG-TERM ASSETS - 1,727
--------- --------
$ 239,526 $284,232
--------- --------
--------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $71,263 $119,341
ACCRUED LIABILITIES 16,621 15,817
CURRENT PORTION OF CAPITAL LEASE OBLIGATIONS 307 295
LIABILITIES RELATED TO CGE DISPOSAL 14,823 8,327
--------- --------
TOTAL CURRENT LIABILITIES 103,014 143,780
CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION 42 280
DEFERRED RENT 637 903
--------- --------
TOTAL LIABILITIES 103,693 144,963
--------- --------
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY :
COMMON STOCK, $.01 PAR VALUE:
50,000,000 SHARES AUTHORIZED; 17,591,020 AND
17,546,548 SHARES ISSUED AND OUTSTANDING, RESPECTIVELY 176 176
ADDITIONAL PAID-IN CAPITAL 124,456 124,104
RETAINED EARNINGS 11,201 14,989
--------- --------
TOTAL SHAREHOLDERS' EQUITY 135,833 139,269
--------- --------
$239,526 $284,232
--------- --------
--------- --------
</TABLE>
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 39 weeks Ended
------------------ ---------------------
(UNAUDITED) (UNAUDITED)
December December December December
28, 30, 28, 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $113,207 $121,695 $271,824 $307,002
Cost of sales, including certain
buying, occupancy, and
distribution costs 97,599 107,192 241,421 271,328
-------- -------- -------- --------
Gross margin 15,608 14,503 30,403 35,674
Selling, general, and
administrative expense 12,363 14,863 45,311 44,405
Depreciation and amortization
expense, net of amounts
included in cost of sales 1,585 1,851 5,098 5,467
-------- -------- -------- --------
Operating income (loss) 1,660 (2,211) (20,006) (14,198)
Other income (expense):
Interest income 739 350 2,530 1,933
Interest expense (7) (37) (29) (74)
Equity in loss from Joint Venture (67) - (67) -
Other, net 170 84 16 152
-------- -------- -------- --------
Income (loss) from continuing operations
before income taxes 2,495 (1,814) (17,556) (12,187)
-------- -------- -------- --------
Income (tax) benefit (999) 718 6,820 4,753
-------- -------- -------- --------
Net income (loss) from continuing operations
before effects of discontinued
operations and cumulative effect
of change in accounting principle 1,496 (1,096) (10,736) (7,434)
-------- -------- -------- --------
Discontinued operations:
Income (loss) from discontinued
operations, net of tax - 155 (14,548) (183)
Gain on disposal of discontinued
operations, net of tax - - 22,286 -
-------- -------- -------- --------
Income (loss) from discontinued operations - 155 7,738 (183)
-------- -------- -------- --------
Net income (loss) before cumulative effect of
change in account principles 1,496 (941) (2,998) (7,617)
Cumulative effect of change in
account principles, net of tax - - (711) -
-------- -------- -------- --------
Net income (loss) $1,496 $(941) $(3,709) $(7,617)
-------- -------- -------- --------
-------- -------- -------- --------
Income (loss) per share:
Continuing operations 0.09 (0.06) (.61) (0.43)
Discontinued operations: - - - -
Income (loss) from discontinued
operations - .01 (.83) (.01)
Gain on disposal of discontinued
operations - - 1.27 -
Change in accounting principle - - (.04) -
-------- -------- -------- --------
Income (loss) per share $0.09 $(.05) $(0.21) $ (0.44)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common shares
and common equivalent
shares outstanding 17,591 17,541 17,577 17,401
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
Consolidated Statements of Shareholders' Equity
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
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
Stock issued for cash,
pursuant to employee
stock purchase plan 17 - 161 - 161
Translation adjustment - - - (79) (79)
Net loss - - - (3,709) (3,709)
------ ------ ---------- -------- ---------
Balance, December 28, 1996 17,591 $ 176 $ 124,456 $11,201 $ 135,833
------ ------ ---------- -------- ---------
------ ------ ---------- -------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
39 Weeks Ended
----------------------------
(UNAUDITED)
December 28, December 30,
1996 1995
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,709) $ (7,671)
---------- ---------
Adjustments to reconcile net loss to
net cash provided (used) by operating activities:
Depreciation and amortization 6,074 8,355
Deferred rent (266) (47)
Deferred income taxes (753) 337
Cumulative effect of change in accounting principle 1,163 -
(Gain) loss on disposition of assets 2,565 (39)
(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 (4,966) (16,890)
Merchandise inventories (7,684) (66,640)
Prepaid expenses and other current assets (2,792) (4,638)
Other assets (156) 502
Accounts payable (48,137) 68,257
Accrued liabilities 1,393 3,730
Income taxes payable - (325)
Discontinued Operations 64,796 -
---------- ---------
Total adjustments (16,833) (7,398)
---------- ---------
Net cash provided by (used in)operating activities (20,542) (15,015)
---------- ---------
Cash flows from investing activities:
Additions to property and equipment (4,473) (14,331)
Proceeds from sale of equipment 72 61
Proceeds from sale of CGE 45,000 -
---------- ---------
Net cash provided by (used in) investing activities 40,599 (14,270)
---------- ---------
Cash flows from financing activities:
Borrowings on notes payable to banks - 103,600
Payments on notes payable to banks - (103,600)
Payments on capital lease obligations (226) (445)
Proceeds from stock issuances 352 3,513
---------- ---------
Net cash provided by financing activities 126 3,068
---------- ---------
Effect of exchange rates on cash (79) 33
---------- ---------
Net increase (decrease) in cash 20,104 (26,184)
Cash at beginning of period 49,590 42,592
---------- ---------
Cash at end of period $ 69,694 $ 16,408
---------- ---------
---------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH PAID:
Interest $ 29 $ 74
Income taxes $ 75 $ 334
</TABLE>
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 Report on Form 10-K, as amended
pursuant to Amendment No. 1 thereto, filed pursuant to the Securities
Exchange Act of 1934. The reader is further cautioned that operating
results for the 13 and 39 weeks ended December 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 earnings (loss)
per share amounts for the 13 and 39 weeks periods ended December 28, 1996,
and December 30, 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 December 28, 1996 the future minimum rental payments
under these operating leases were as follows (in thousands):
Fiscal Year
-----------
1997 (remainder) $3,003
1998 9,108
1999 4,935
2000 2,617
2001 1,679
Thereafter 1,890
-----
Total minimum payments $23,232
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-------
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (CONTINUED)
(UNAUDITED)
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 requires 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.
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 December 28,
1996 consisted of merchandise inventory, net of reserves. Current liabilities
at December 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 nine months ended
December 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 nine months
ending December 28, 1996 was $0.2 million and is included in Selling, General
and Administrative expense.
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (CONTINUED)
(UNAUDITED
NOTE 6 SUBSEQUENT EVENT
On January 31, 1997, management of the Company announced a strategic realignment
of the business organization. The reorganization will involve closing 77 of the
156 Egghead retail stores which were open as of December 28, 1996. These
closures will reduce the number of markets in which the Company operates from 54
to 24. In connection with the reduction in retail stores, the Company is also
substantially reducing its headquarters personnel, closing its Lancaster,
Pennsylvania distribution center and offering for sale certain real estate
assets including its headquarters building located in Spokane, Washington. The
headquarters personnel will relocate to a leased facility in Spokane. The
Company expects to record one-time expenses related to the restructure of
approximately $30.0 million, before income taxes, during the fourth quarter.
The expenses include approximately $12.2 million in inventory liquidation
expenses, $5.4 million in retail store lease termination costs, $3.1 million in
severance payments, $2.5 million in disposals and lease terminations, related to
fixed assets and $1.7 million in expenses related to the Lancaster distribution
center closure. Additional costs of approximately $5.1 million consist of
losses on real estate sales, retail store closing costs, fees for professional
services and other miscellaneous expenses.
Senior management changes related to the reorganization include the departure of
Terence Strom, President, Chief Executive Officer and Director, Kurt Conklin,
Senior Vice-President, and Ron Smith, Senior Vice-President, who will be
leaving the Company after a transitional period during which they will assist
with the reorganization. George Orban, Chairman of the Board, has been elected
as the new Chief Executive Officer.
<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 December 28, 1996, the Company
operated 156 Egghead retail stores, a direct response group, an Internet
site (www.egghead.com) and Elekom Corporation (ELEKOM), all of which are
included in continuing operations.
On January 31, 1997, management of the Company announced a strategic
realignment of the business organization. The reorganization will involve
closing 77 of the 156 Egghead retail stores which were open as of December
28, 1996. These closures will reduce the number of markets in which the
Company operates from 54 to 24. The Company expects to complete
substantially all of these closures prior to fiscal year end. Revenues for
the nine months ended December 28, 1996, from the 79 remaining Egghead
stores accounted for $164.7 million or 64% of Egghead's fiscal year-to-date
retail store revenue. Comparable store revenues for this group decreased
4% for the nine-month period as compared to a decrease of 12% for the
entire retail chain. The 79 remaining retail stores also contributed store
profits in excess of the total year-to-date retail store profits, before
distribution and corporate overhead expenses. In fiscal year 1998, the
Company plans to have an additional 15 new format stores which emphasize
broader merchandise assortments, computer upgrades and installation
services. In the third quarter of fiscal 1997, the 11 stores which had
been previously relocated and upgraded in existing markets generated
comparable increases in revenue of 20% and retail store profit increases of
47%. There can be no assurance, however, that similar results will be
obtained in the future with respect to these or other stores. Management
also plans to invest additional resources in the Company's Internet site.
In November, Egghead became the first major computer products retailer to
deliver software programs over the Internet directly to customers'
computers.
In connection with the reduction in retail stores, the Company is also
substantially reducing its headquarters personnel, closing its Lancaster,
Pennsylvania distribution center and offering for sale certain real estate
assets including its headquarters building located in Spokane, Washington.
The headquarters personnel will relocate to a leased facility in Spokane.
The reorganization is expected to reduce headquarters and distribution
expenses to approximately $16.0 million on an annualized basis from its
anticipated level of $35.0 million in fiscal year 1997, excluding
discontinued operations.
The Company expects to record a one-time charge during the fourth quarter
of fiscal 1997 of approximately $30.0 million, before income taxes related
to this restructure. The expense includes approximately $12.2 million in
inventory liquidation expenses, $5.4 million in retail store lease
termination costs, $3.1 million in severance payments, $2.5 million in
disposals and lease terminations related to fixed assets, and $1.7 million
in expenses related to the Lancaster distribution center closure.
Additional costs of approximately $5.1 million consist of anticipated
losses on real estate sales, retail store closing costs, fees for
professional services and other miscellaneous expenses. By taking these
actions, management expects to improve the Company's operating performance
as well as improve the Company's inventory turn ratio.
Senior management changes related to the reorganization include the
departure of Terence Strom, Chief Executive Officer, President and
Director, Kurt Conklin, Senior Vice-President, and Ron Smith, Senior Vice-
President , who will be leaving the Company after a transitional period
during which they
<PAGE>
will assist with the reorganization. George Orban, Chairman of the Board,
has been elected as the new Chief Executive Officer.
<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 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 to 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 $1.4 million during the nine months
ended December 28, 1996. ELEKOM is not expected to have significant sales
in fiscal year 1997. Egghead has invested a cumulative total of $4.2
million in ELEKOM.
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
liquidated 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.
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 advertising and certain overhead costs, the
seasonality and quarterly fluctuation of financial results, the early stage
of the Company's new store format, the early stage of implementation of the
strategic realignment of the company's business organization, 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 quarters ended June 29, 1996 and September 28, 1996.
Actual results may differ materially.
<PAGE>
RESULTS OF OPERATIONS
OVERVIEW
Egghead reported a total net income from continuing and discontinued
operations of $1.5 million for the quarter ended December 28, 1996 and a
net loss of $3.7 million for the nine months then ended compared to a net
loss of $941,000 and $7.6 million, respectively, for the prior year
comparable periods. The decrease in loss for the nine month comparable
periods is due primarily to the gain on the disposal of the CGE division.
Total income (loss) per share for the quarters ended December 28, 1996 and
December 30, 1995 were $0.09 and $(0.05), respectively. Total loss per
share for the nine month periods ended December 28, 1996 and December 30,
1995 were $(.021) and $(0.44), respectively.
CONTINUING OPERATIONS
Income (loss) from continuing operations includes the results of the
Company's retail division, direct response division, Internet site and
ELEKOM. Net income from continuing operations for the third quarter was
$1.5 million, or $.09 per share, compared to the net loss of $1.1 million,
or $(.06) per share, for the same period of the previous year. Net loss
from continuing operations for the nine months ended December 28, 1996 was
$10.7 million or $.61 per share as compared to a net loss of $7.4 million
or $.43 per share for the same period of the previous year.
The following table shows the relationship of certain items included in the
Company's Consolidated Statements of Operations expressed as a percentage
of net sales:
PERCENTAGE OF NET SALES
Third Quarter Year to Date
13 Weeks Ended 39 Weeks Ended
Dec. 28, Dec. 30, Dec. 28, Dec. 30,
1996 1995 1996 1995
----------------- -------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, including certain
buying, occupancy, and
distribution costs 86.2 88.1 88.8 88.4
Gross margin 13.8 11.9 11.2 11.6
Selling, general, and
administrative expense 10.9 12.2 16.7 14.5
Depreciation and amortization
expense, net of amounts
included in cost of sales 1.4 1.5 1.9 1.8
Operating income (loss) 1.5 (1.8) (7.4) (4.7)
Income (loss) from continuing
operations before income taxes 2.2 (1.5) (6.5) (4.0)
Income (tax) benefit (0.9) 0.6 2.5 1.5
Net income (loss) from continuing
operations 1.3 (0.9) (4.0) (2.5)
<PAGE>
NET SALES for the third quarter of fiscal 1997 were $113.2 million, a
decrease of 7% from the $121.7 million in revenue for the same period of
the previous year. For the nine months, the Company's total sales were
$271.8 million, a decrease of 11% from the $307.0 million for the prior
year. Comparable store sales decreased 8% and 12% for the third quarter
and nine 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). The decrease in total sales is partially
attributable to the closure of fourteen stores and opening of six new
stores during the first nine months of fiscal year 1997 as well as a
decrease in overall sales volume. Management intends to close an
additional 77 stores during the fourth quarter of fiscal 1997. Revenues
for the nine months ended December 28, 1996, from the 79 remaining Egghead
stores accounted for $164.7 million or 64% of Egghead's fiscal year-to-date
retail store revenue. Comparable store revenues for this group decreased
4% for the nine-month period as compared to a decrease of 12 % for the
entire retail chain. The 79 remaining retail stores also contributed store
profits in excess of the total year-to-date retail store profits, before
distribution and corporate overhead expenses. See - "General."
GROSS MARGIN (net sales minus cost of sales, including certain buying,
occupancy, and distribution costs) was $15.6 million or, as a percentage of
net sales, 13.8% for the third quarter of fiscal 1997, compared to $14.5
million or 11.9% of net sales for the third quarter of fiscal 1996. For
the nine months, gross margin was $30.4 million or 11.2% of sales compared
to $35.6 million or 11.6% of sales last year. The overall gross margin
percentage increase for the third quarter was primarily due to an increase
in initial margin (final sales price less the original cost of the product)
partially offset by a decrease in sales. The year-to-date gross margin
decrease is due to the decrease is sales partially offset by an increase in
initial margin. The initial margin ratio was higher by 76 percentage
points for the third quarter and the year-to-date periods.
SELLING, GENERAL, AND ADMINISTRATIVE (SG&A) EXPENSE was $12.4 million or,
as a percentage of net sales, 10.9% for the quarter ended December 28,
1996, compared to $14.9 million or 12.2% for the quarter ended December 30,
1995. The Company has reduced its administrative and corporate
headquarters expenses. For the nine months ended December 28, 1996, the
SG&A expense was $45.3 million or 16.7% of sales as compared to $44.4
million or 14.5% 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 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 nine months
ended December 28, 1996 was $180,000 and is included in SG&A.
DEPRECIATION AND AMORTIZATION EXPENSE, NET OF AMOUNTS INCLUDED IN COST OF
SALES, of $1.6 million and $5.1 million for the three and nine month
periods ended December 28, 1996, respectively, as compared to $1.9 million
and $5.5 million for the prior year comparable periods, 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 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 required 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 nine months ended
December 28, 1996 was $22.2 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 $.83 per share, net
of tax for the nine months ended December 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.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE was a charge of
$711,000, after tax or $.04 per share for the nine months ended December
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.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $20.1 million from $49.6 million at the
end of fiscal 1996, to $69.7 million at December 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 $64.8 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 $71.3 million on December 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 increased $4.9 million from $24.1 million
at March 30, 1996, to $29.0 million at December 28, 1996. The increase is
primarily due to an increase in co-op marketing receivables due to
Christmas advertising.
Merchandise inventories increased approximately $7.7 million primarily due
to the Christmas shopping season.
Assets of discontinued operations include all of the current assets of CGE
as of December 28, 1996 and March 30, 1996. The decrease is due primarily
to the collection of trade accounts receivable.
Net property and equipment decreased $4.8 million, from $29.5 million at
the end of fiscal 1996, to $24.7 million at December 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
None.
ITEM 5. OTHER INFORMATION
On January 31, 1997, The Company announced a substantial reorganization of
it business involving the closing of 77 of its 156 stores and reducing the
number of markets in which the Company operates retail stores from 54 to
24. In addition, the Company is closing its Lancaster, Pennsylvania
distribution center and selling certain real estate assets, including the
Company's headquarters building located in Spokane, Washington.
Headquarters' personnel will be substantially reduced and those remaining
will be relocated to another Spokane location. The departure of Terence M.
Strom, Chief Executive Officer, President and Director, Kurt Conklin,
Senior Vice-President, and Ron Smith, Senior Vice-President. George Orban,
Chairman of the Board was elected as President and Chief Executive Officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
23.1 Report of Independent Public Accountants.
27 Financial Data Schedule.
b. Reports on Form 8-K
None.
<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 February 10, 1997.
EGGHEAD, INC.
By George Orban
-------------------------------------
George Orban
Chief Executive Officer
By Brian Bender
-------------------------------------
Brian Bender
Chief Financial Officer
<PAGE>
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 December 28,
1996 and the related condensed consolidated statements of operations for the 13-
week and 39-week periods ended December 28, 1996 and December 30, 1995, and
statements of cash flows for the 39-week period ended December 28, 1996 and
December 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.
Seattle, Washington
January 17, 1997
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