<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 28, 1997 to December 27, 1997
---------------------------------------
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 January 24, 1998
----- ----------------
Common Stock 23,032,022
$.01 par value shares
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EGGHEAD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 27, MARCH 29,
1997 1997
------------ ---------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 57,000 $ 83,473
Accounts receivable, net of allowance for
doubtful accounts of $3,760 and $4,680, respectively 9,979 13,917
Receivable from Joint Venture - 4,000
Merchandise inventories, net 67,908 49,087
Prepaid expenses and other current assets 3,307 4,116
Property held for sale 7,852 7,692
-------- --------
Total current assets 146,046 162,285
-------- --------
Property and equipment, net 13,170 12,018
Goodwill, net 33,658 -
Other assets 844 1,217
-------- --------
$193,718 $175,520
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 50,202 $ 43,027
Accrued Liabilities 13,879 12,996
Liabilities related to disposition of CGE division 4,982 7,754
Reserves and liabilities related to restructuring 6,746 11,258
-------- --------
Total current liabilities 75,809 75,035
-------- --------
Other long-term liabilities 106 438
-------- --------
Total liabilities 75,915 75,473
-------- --------
Commitments and contingencies - -
Shareholders' equity :
Preferred stock, $.01 par value: 10,000,000 authorized
no shares issued and outstanding
Common stock, $.01 par value:
50,000,000 shares authorized; 23,029,863 and
17,591,087 shares issued and outstanding, respectively 230 176
ADDITIONAL PAID-IN CAPITAL 157,350 124,457
Retained deficit (39,777) (24,586)
-------- --------
Total shareholders' equity 117,803 100,047
-------- --------
$193,718 $175,520
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
2
<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 27, December 28, December 27, December 28,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales:
Egghead Computer $77,247 $113,207 $188,375 $271,824
Surplus Direct 21,872 - 30,195 -
------- -------- -------- --------
Net sales 99,119 113,207 218,570 271,824
Cost of sales, including certain buying,
occupancy, and distribution costs 88,132 97,599 194,393 241,421
------- -------- -------- --------
Gross margin 10,987 15,608 24,177 30,403
Selling, general, and
administrative expense 12,679 14,619 31,825 44,750
Marketing (income)expense 4,184 (2,256) 6,540 561
Amortization of goodwill 393 - 577 -
Depreciation expense, net
of amounts included in cost of sales 923 1,585 2,719 5,098
------- -------- -------- --------
Operating loss (7,192) 1,660 (17,484) (20,006)
Other income (expense) 564 835 2,293 2,450
------- -------- -------- --------
Loss from continuing operations before income taxes,
effects of discontinued operations and cumulative
effect of change in accounting principle (6,628) 2,495 (15,191) (17,556)
------- -------- -------- --------
Income tax benefit - (999) - 6,820
------- -------- -------- --------
Net loss from continuing operations before effects
of discontinued operations and cumulative
effect of change in accounting principle (6,628) 1,496 (15,191) (10,736)
------- -------- -------- --------
Discontinued operations:
Income (loss) from discontinued
operations, net of tax - - - (14,548)
Gain on disposal of discontinued
operations, net of tax - - - 22,286
------- -------- -------- --------
Income (loss) from discontinued operations - - - 7,738
------- -------- -------- --------
Net loss before cumulative effect of
change in accounting principle - 1,496 - (2,998)
Cumulative effect of change in
accounting principle net of tax - (711)
------- -------- -------- --------
Net loss $(6,628) $ 1,496 $(15,191) $ (3,709)
======= ======== ======== ========
Loss per share:
Continuing operations $(0.29) $0.09 $(0.75) $(0.61)
Discontinued operations:
Loss from discontinued
operations - - - (0.83)
Gain on disposal of discontinued
operations - - - 1.27
Change in accounting principle - - - (0.04)
------- -------- -------- --------
Basic loss per common share $(0.29) $0.09 $(0.75) $(0.21)
======= ======== ======== ========
Weighted average common shares outstanding 23,005 17,591 20,241 17,577
======= ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
3
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EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Common Stock Additional
-------------- Paid-in Retained
Shares Amount Capital Earnings Total
------ ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, March 29, 1997 17,591 $176 $124,457 $(24,586) $100,047
Stock issued for cash, pursuant
to employee stock purchase plan 23 - 78 78
Stock issued for cash, pursuant
to stock option plan 105 1 293 294
Stock issued for acquisition of
Surplus Software, Inc. 5,311 53 32,522 32,575
Net loss (15,191) (15,191)
------ ---- -------- -------- --------
Balance, December 27, 1997 23,030 $230 $157,350 $(39,777) $117,803
====== ==== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
39 Weeks Ended
----------------------------
(unaudited)
December 27, December 28,
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(15,191) $ (3,709)
-------- --------
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 3,963 6,074
Deferred rent (332) (266)
Deferred income taxes - (753)
Cumulative effect of change in accounting principle - 1,163
(Gain) loss on disposition of assets (6) 2,565
(Gain) on sale of CGE, before taxes - (36,535)
Reserves recorded in connection with CGE disposal (2,666) 8,465
Changes in assets and liabilities:
Accounts receivable, net 7,938 (4,966)
Merchandise inventories (18,821) (7,684)
Prepaid expenses and other current assets (2) (2,792)
Other assets (727) (156)
Accounts payable 8,959 (48,137)
Accrued liabilities 3,433 1,393
Income taxes payable - -
Restructure reserves (4,967) 64,796
-------- --------
Total adjustments (3,228) (16,833)
-------- --------
Net cash (used) provided by operating activities (18,419) (20,542)
-------- --------
Cash flows from investing activities:
Additions to property and equipment (2,247) (4,473)
Proceeds from sale of equipment 7 72
Proceeds from sale of CGE - 45,000
-------- --------
Net cash (used) provided by investing activities (2,240) 40,599
-------- --------
Cash flows from financing activities:
Payments on capital lease obligations (125) (226)
Payments on notes payable of acquired subsidiary (6,000)
Proceeds from stock issuances 311 352
-------- --------
Net cash (used) provided by financing activities (5,814) 126
-------- --------
Effect of exchange rates on cash - (79)
-------- --------
Net increase (decrease) in cash (26,473) 20,104
Cash and cash equivalents at beginning of period 83,473 49,590
-------- --------
Cash and cash equivalents at end of period $ 57,000 $ 69,694
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH PAID (RECEIVED):
Interest expense $ 32 $ 29
Income taxes $ (669) $ 75
</TABLE>
See Notes to Consolidated Financial Statements.
5
<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 29, 1997, 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 39 weeks ended December 27, 1997, 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
Basic earnings (loss) per common share are computed by dividing the net income
(loss) by the weighted average number of shares of common stock outstanding
during the year. Diluted earnings per common share are not disclosed as
potentially dilutive securities would have been anti-dilutive to the loss per
share calculation for the 13 and 39 week periods ended December 27, 1997, and
December 28, 1996. Effective December 27, 1997, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." Prior
earnings per common share amounts were not affected by the adoption of SFAS No.
128.
NOTE 3 -- 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 asset purchase
agreement required Egghead to provide SSI with certain support services for a
period not to exceed 120 days on Egghead's behalf, SSI's collection of Egghead's
CGE related accounts receivable for a period not to exceed 150 days and a lease
to SSI for a minimum period of three years of a portion of Egghead's Liberty
Lake corporate facility.
Gain on disposition of the discontinued operation was $36.5 million ($22.3
million after tax). The sale price for the CGE division was $45 million, which
did not include the accounts receivable, which were collected during fiscal
1997. The reported gain is net of 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 and costs related to the fulfillment of
post-sale obligations as noted above.
The net liabilities relating to discontinued operations have been segregated on
the consolidated balance sheet from their historic classifications. Liabilities
related to the disposition of the CGE division at December 27, 1997 and March
29, 1997 included
6
<PAGE>
liabilities from CGE activities and additional reserves deemed necessary to
complete the disposition of remaining CGE assets, including the settlement of
any remaining claims.
Information related to the effects of the discontinued operation on the
consolidated statements of income are reflected in the income statement as
income(loss) from discontinued operations. Discontinued operations for the
fiscal year-to-date period ended December 28, 1996, resulted in a loss, net of
tax, of $14.5 million. This loss includes accounts receivable and inventory
write-offs, equipment lease buyouts and write-offs, warehouse closing costs,
severance, operating costs and other expenses.
NOTE 4 -- INCOME TAXES
Egghead determines its income tax accounts in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS No. 109). Deferred income taxes
result primarily from temporary differences in the recognition of certain items
for income tax and financial reporting purposes.
Given the recent losses, Egghead determined that its deferred tax assets no
longer meet the realization criteria of SFAS No. 109. The realization of the
deferred tax assets depends on generating future taxable income. Until Egghead
has determined that all of its existing net operating losses, which expire 15
years after origination, are realizable, it will not record a tax charge or
benefit for any future operating results.
NOTE 5 -- LEASES
The Company leases retail stores and a distribution facility under operating
leases with remaining lives on most leases ranging from one to five years. As of
December 27, 1997 the future minimum rental payments under these noncancelable
operating leases for retail stores, the distribution facility and equipment were
as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1998 $ 1,611
1999 5,135
2000 3,012
2001 2,131
2002 1,087
Thereafter 4,066
-------
Total minimum payments $17,042
=======
</TABLE>
7
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
NOTE 6 -- CHANGE IN ACCOUNTING PRINCIPLE
Egghead adopted Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" at the beginning of the first quarter of fiscal 1997. The cumulative effect
of the change in accounting principle, which was recognized in the first quarter
of fiscal 1997, was a charge of $0.7 million, after tax, or $0.04 per share.
This charge represents the writedown of Egghead's property held for sale in
Kalispell, Montana and the related goodwill. In connection with its adoption of
SFAS No. 121, Egghead also recorded a pretax charge of approximately $0.1
million related to retail assets, the carrying amounts of which were not likely
to be recovered through future cash flows.
NOTE 7 -- STOCK OPTION REPRICING
On April 4, 1997, the Compensation Committee of the Egghead Board approved a
plan pursuant to which employees other than executive officers were offered an
opportunity to exchange options having per share exercise prices in excess of
the then current fair market value per share of Egghead common stock for new
options having an exercise price of $4.375 per share of Egghead stock. The
Compensation Committee approved a similar option repricing for certain executive
officers on April 23, 1997. Recipients of the repriced replacement options
received credit for vesting under the original options, but generally cannot
exercise the new options for a one-year period following the date of grant of
the new options. The total number of options repriced under the option repricing
described above was 465,014.
8
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(Unaudited)
NOTE 8 -- ACQUISITION
On August 14, 1997, the Company acquired Surplus Software, Inc. d/b/a Surplus
Direct, of Hood River, Oregon, by issuing 5,310,888 shares of common stock and
289,112 options to purchase common stock of Egghead, Inc. The transaction
included payment of $6.0 million of Surplus Direct debt. Surplus Direct is
engaged in the direct marketing of previous version computer hardware and
software. This acquisition was recorded under the purchase method of
accounting and operating results of Surplus Direct are included in the statement
of operations from the date of acquisition. An excess purchase price of
approximately $34.3 million, over identifiable assets, has been determined based
on the fair values of assets acquired and liabilities assumed. A final
allocation of purchase price to goodwill will be made during fiscal 1998 when
appraisals and other studies are completed. Amortization of goodwill will be
over a period not to exceed 20 years.
NOTE 9 -- SUBSEQUENT EVENT
On January 28, 1998, management of the Company announced a shift in business
emphasis to Internet commerce and plans to close its 80 store retail network and
its Sacramento, California distribution center due to declining revenues and
continuing losses in the retail channel. In addition, the Company will combine
its management and operations with those of Surplus Direct. The Company expects
to recognize a one-time charge of approximately $42 million in the fourth
quarter ending March 28, 1998 for costs and write-offs related to exiting the
retail store division and closing its distribution center in Sacramento,
inventory liquidation and severance payments.
NOTE 10 -- RECAPITALIZATION OF SUBSIDIARY
Effective November 10, 1997, the Company recapitalized its subsidiary ELEKOM
Corporation ("Elekom"). As part of the recapitalization, Humer Winblad Venture
Partners, based in San Francisco California, and Olympic Venture Partners, based
in Kirkland Washington, invested capital in Elekom, reducing the Company's
ownership percentage to approximately 30% from the previous 100% ownership.
Prior to the recapitalization, income and expenses of Elekom were recorded in
the Company's operating results. After the recapitalization, the Company's
share of the results of operations of Elekom were included on the equity basis
of accounting and are reflected in the other income (expense) in the Company's
consolidated statements of operations.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
GENERAL
RESULTS OF OPERATIONS
Overview
- --------
Egghead, Inc. ("Egghead" or the "Company") is a national reseller of personal
computer ("PC") hardware, software, peripherals and accessories. The Company
currently offers a broad selection of current hardware and software products as
well as previous version hardware and software through its Internet websites, a
direct response division, and through a retail store network, which the Company
has announced it will close. Egghead began operations in 1984 primarily as a
software reseller, but has recently expanded its product offerings to include a
greater percentage of hardware, other non-software products, electronic software
downloads, as well as off-price and previous version merchandise, build to order
computers and liquidation items. On August 14, 1997, Egghead acquired Oregon
based Surplus Software, Inc. d/b/a Surplus Direct ("Surplus Direct") for 5.6
million newly issued shares of Egghead common stock (the "Merger"). The
transaction included repayment of $6.0 million of Surplus Direct debt. Surplus
Direct specializes in sales of previous version computer hardware and software.
On January 28, 1998, Egghead announced that it will change its name to
Egghead.com, Inc. and shift its business emphasis to Internet commerce, close
its 80 store retail network due to declining revenues and continuing losses in
the retail channel and close its distribution center in Sacramento, California.
In addition, the Company will combine its management and operations with those
of Surplus Direct a subsidiary of the Company acquired on August 14, 1997.
The Company anticipates recording a one-time charge against earnings of
approximately $42 million in the fourth quarter ending March 28, 1998, related
to this restructuring. The expense includes approximately $11.0 million in
inventory liquidation costs, $10.2 million in retail store and distribution
center lease termination costs, $9.1 million in disposals and lease terminations
related to fixed assets, $5.5 million of operating expenses related to the
process of closing the retail store network and distribution center , and $2.6
million in severance payments. Additional costs of approximately $3.6 million
consist of marketing expenses, retail store closing costs, fees for professional
services and other miscellaneous expenses.
The closing of the Company's retail store network and the loss of ongoing
revenue from its retail stores, the combination of the management and operations
of the Company with those of Surplus Direct and the shift of the Company's
business emphasis to Internet commerce involve substantial risks. These
activities may cause management distraction and operational disruption. The
retail division of the Company contributed $69.5 million and $172.2 million in
net sales for the three-month and nine-month periods ended December 27, 1997.
Internet sales for the third quarter of fiscal 1998 of $11.8 million represented
an increase of $9.3 million from the prior year comparable period. Direct
response sales remained constant between the third quarters of fiscal 1998 and
1997. Although the Company's retail store division contributed a majority of
the net revenues of the Company during the three-month and nine-month periods
ended December 27, 1997, the closure of the Company's retail store network will
eliminate the possibility of ongoing revenues and related operating expenses
associated with the Company's retail store channel. There can be no assurance
that the elimination of the Company's retail store network as a source of
revenue will not have a material adverse effect on the Company's business,
prospects, financial condition and results of operations. Although the
Company's Internet commerce site sales have grown significantly in recent
periods, these sales represent a relatively small percentage of the Company's
historical total sales and there can be no assurance that similar growth, if
any, will be obtained in the future.
In connection with the closure of the retail store division, the Company is also
combining management and operations with the objective of reducing its
headquarters personnel and
10
<PAGE>
distribution costs. These actions are anticipated to reduce headquarters and
distribution expense to approximately $13.4 million on an annualized basis from
its anticipated level of $22.9 million in fiscal 1998. There can be no
assurance, however, that such expense reductions will be achieved or that
expenses will not increase as a percentage of revenue.
The market for Internet commerce has begun to develop only recently and is
rapidly evolving, and the Company's Internet commerce model is still under
development. The Company has a limited operating history in Internet commerce on
which to evaluate its Internet commerce business and prospects. The overall
market for computer products, including the Internet commerce channel of such
market, is highly competitive with relatively low barriers to entry. Other
resellers and manufacturers of computer products that are much larger than the
Company and have greater economies of scale operate websites and compete with
Egghead's pricing and its merchandise offer. The Company believes that the
ability to compete in Internet commerce will depend on several factors,
including, without limitation, the quality, number and extent of marketing
arrangements, achievement of low operating expense ratios, ability to acquire
product at competitive or advantageous pricing, quality and value of online
offering of products and services, brand and name recognition, pricing of its
offered products, web site design, effectiveness of Internet commerce security
measures, quality and reliability of technological systems, ability to attract
and retain qualified personnel with technological or web commerce expertise, and
intensity of management focus. In light of the Company's limited operating
history in Internet commerce and the difficulties attendant to the shift of its
primary business focus from retail store operations to Internet commerce, there
can be no assurance that the Company will be able to compete successfully with
respect to any of these factors, and the failure to do so could have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations.
In addition, the Company intends to integrate and combine the technological
systems, which operate its current Web sites. The satisfactory performance,
reliability and availability of the Company's Web sites are critical to the
Company's ability to attract and retain customers and generate revenues from
Internet commerce. Any systems interruptions that result in the unavailability
of the Company's Web sites would likely reduce the volume of goods sold and the
attractiveness of the Company's product offering. In addition, a substantial
increase in the volume of traffic on these Web sites may require the Company to
expand or upgrade its technology, transaction processing systems and network
infrastructure. There can be no assurance that the Company will successfully
integrate the technological systems which operate its Web sites or that the
Company will be able to, if required, successfully or timely expand and upgrade
its systems and infrastructure to accommodate increases, if any, in traffic to
its Web sites, and the failure to do so could have a material adverse effect on
the Company's business, prospects, financial condition and results of
operations.
The Company's success in the Internet market will depend, in part, on its
ability to extend brand and name recognition, provide its customers with
outstanding value and a high quality online offering of products and services
and achieve sufficient sales volumes to realize economies of scale. Accordingly,
the Company expects to incur substantial expenses related to marketing,
promotion and advertising costs associated with Internet customer acquisition,
and site development and technology. In addition, the gross margin on products
sold through Internet commerce sites is typically lower than gross margin on
comparable products offered in retail outlets. As a result, the Company
anticipates that its Internet commerce business will incur substantial operating
losses for at least the next two years. Future operating results will be
dependent on the Company's ability to generate and sustain substantially
increased Internet revenue levels. There can be no assurance that the marketing,
promotion and advertising of the Web sites, although intended to increase the
visits to the Web sites and increase the Company's customer base, will result in
an increase in the Company's revenues from Internet commerce, and the failure to
increase such revenues could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
11
<PAGE>
The Company anticipates raising additional funds during the next twelve months
primarily to fund customer acquisition and development of its Internet commerce
business. There can be no assurance that such financing will be available in
amounts or on terms acceptable to the Company, if at all.
When used in this report and elsewhere by management, from time to time, the
words "believes", "anticipates" and "expects" and similar expressions are
intended to identify forward-looking statements. Certain important factors could
cause actual results to differ materially from those expressed in the forward-
looking statements. These factors are detailed in the preceding paragraphs, in
Egghead's Report on Form 8-K filed on January 28, 1998 and in Egghead's Annual
Report on Form 10-K for the fiscal year ended March 29, 1997, and include, but
are not limited to, risks associated with the fluctuations in, and the
uncertainty of, future operating results, the intensely competitive nature of
the business of selling PC software, hardware and related products, Egghead's
dependence on certain supply sources, risks associated with the closing of the
Company's retail store network and the combination of the management and
operations of the Company with those of Surplus Direct, including, without
limitation, potential management distraction and operational disruption and the
loss of ongoing revenue from its retail stores, and risks associated with the
shift of the Company's business emphasis to Internet commerce, including,
without limitation, the rapid evolution of Internet commerce, the Company's
limited operating history in Internet commerce and that the Company's Internet
commerce model is still underdevelopment. Readers are cautioned not to place
undue reliance on the forward-looking statements, which speak only as of the
date made. The Company undertakes no obligation to publicly release the results
of any revision to the forward-looking statements that may be made to reflect
subsequent events or circumstances or to reflect the occurrence of unanticipated
events.
Egghead uses a 52/53-week fiscal year, ending on the Saturday nearest March 31
of each year. Each fiscal quarter consists of 13 weeks. Information contained in
this report excludes, unless otherwise stated, any data relative to the
discontinued operations of the CGE division.
RESULTS OF OPERATIONS
Egghead reported a total net loss for the quarter ended December 27, 1997 of
$6.6 million compared to a total net income of $1.5 million for the quarter
ended December 28, 1996. On a pretax basis, the loss from continuing operations
for the third quarter of fiscal 1998 was $6.6 million as compared to net income
of $2.5 million for the comparable period of fiscal 1997. The pretax loss from
continuing operations for the nine months ended December 27, 1997 and December
28, 1996 were $15.2 million and $17.6 million, respectively. Had the company
recorded comparable tax benefits for the quarters, the net loss from continuing
operations after tax would have been $4.1 million for the third quarter of
fiscal 1998 as compared to net income of $1.5 million for the third quarter of
fiscal 1997. Until Egghead has determined that all of its existing net operating
loss carryforwards are realizable, it will not record a tax charge or benefit
for any future operating results. For comparative purposes, Egghead's results of
operations are discussed below on a pretax basis.
Continuing Operations
- ---------------------
PRETAX LOSS. Loss from continuing operations includes the results of Egghead
Computer's retail stores, 1-800EGGHEAD direct response unit and Internet catalog
operations as well as selling, general, and administrative expenses related to
these operations. In addition, the fiscal 1998 results include the operations
of Surplus Direct from the date of acquisition of August 14, 1997. The pretax
net loss for the third quarter from continuing operations was $6.6 million
12
<PAGE>
compared to the net income of $2.5 million for the same period of the previous
year. The following table shows the relationship of certain items relating to
continuing operations included in Egghead's Consolidated Statements of
Operations expressed as a percentage of net sales:
PERCENTAGE OF NET SALES
<TABLE>
<CAPTION>
Third Quarter Year to Date
13 Weeks Ended 39 Weeks Ended
Dec. 27, Dec. 28, Dec. 27, Dec. 28,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, including certain
buying, occupancy, and
distribution costs 88.9 86.2 88.9 88.8
Gross margin 11.1 13.8 11.1 11.2
Selling, general, and
administrative expense 12.8 12.9 14.5 16.5
Marketing (income)expense 4.2 (2.0) 3.0 0.2
Amortization of goodwill 0.4 - 0.3 -
Depreciation expense, net of
amounts included in cost of
sales 0.9 1.4 1.2 1.9
Operating loss (7.2) 1.5 (7.9) (7.4)
Loss from continuing operations
before income taxes (6.6) 2.2 (6.9) (6.5)
</TABLE>
NET SALES. Net sales for the third quarter of fiscal 1998 were $99.1 million, a
decrease of 12.4% from the $113.2 million in revenue for the same period of the
previous year. Surplus Direct contributed $21.9 million in sales for the
quarter. Surplus Direct's sales increased approximately 62.4% over its prior
year comparable period prior to the acquisition. The sales results reflect a
decline in Egghead Computer's comparable store sales for the third quarter ended
December 27, 1997 of 14.3%. Comparable store sales measure sales for stores that
were open in both periods being evaluated. For the nine months ended December
27, 1997, the Company's consolidated revenues from continuing operations were
$218.6 million, a decrease of 19.6% from $271.8 million last year.
GROSS MARGIN. Consolidated gross margins (net sales minus cost of sales,
including certain buying, occupancy, and distribution costs) dropped from 13.8 %
of sales for the third quarter of fiscal 1997 to 11.1% for the third quarter of
fiscal 1998. Gross margin dollars declined to $11.0 million for the third
quarter of fiscal 1998, compared to $15.6 million for the prior year comparable
period. The gross margin percentage and dollar decreases for the third quarter
ended December 27, 1997 were primarily due to a decrease in sales volume and a
decrease in the initial margin rate primarily due to the increased proportion of
hardware products as a percentage of total sales; such products typically have
lower gross margin rates than other products offered by the Company. In
addition, rebates from vendors' declined approximately $2.7 million partially
offset by a decrease in retail occupancy costs of $1.4 million.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expenses declined to $12.7 million and $24.2 million for the
three-month and nine-month periods ended December 27, 1997 compared to $14.6
million and $44.8 million for the prior year periods. The improvements in the
three month period are primarily attributable to reductions in Egghead
Computer's retail payroll costs of approximately $2.4 million, partially offset
by an increase in direct response and Internet operating costs of $0.7 million
and $0.4
13
<PAGE>
million, respectively, due to the addition of Surplus Direct operating results.
The improvements in the nine-month period also reflect a reduction in
headquarters expenses.
MARKETING (INCOME) EXPENSE. Marketing revenues for the 3rd quarter of fiscal
1998 declined $9.5 million compared to marketing revenues for the third quarter
of fiscal 1997, partially offset by a decrease in expense of $3.1 million. The
decline in revenue reflects the shift in the Company's product mix to a larger
hardware assortment and the related reduction in co-op advertising funds. The
decrease in expense reflects changes in advertising methods and frequencies,
partially offset by an increase in Internet advertising over the prior year.
The increase in net marketing expense for the nine months ended December 27,
1997 also reflects a decrease in marketing revenues partially offset by a
decrease in marketing expense.
AMORTIZATION OF GOODWILL, reflects the amortization of the goodwill associated
with the August 14, 1997 acquisition of Surplus Direct. This acquisition was
recorded under the purchase method of accounting and operating results of
Surplus Direct are included in the statement of operations from the date of
acquisition. An excess purchase price of approximately $34.3 million has been
determined based on the fair values of assets acquired and liabilities assumed.
A final allocation of purchase price to goodwill will be made during fiscal 1998
when appraisals and other studies are completed. Amortization of goodwill will
be over a period not to exceed 20 years.
DEPRECIATION EXPENSE, NET OF AMOUNTS INCLUDED IN COST OF SALES. Depreciation
and amortization was $0.9 million or 0.9% of net sales in the third quarter of
fiscal 1998, compared to $1.6 million or 1.4% of net sales for the prior year
comparable period. The decrease in depreciation and amortization expense is
primarily attributable to the reduction in the average number of stores open
during the quarter.
Discontinued Operations
- -----------------------
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 Egghead's business lines. The expenses
included in the results of the discontinued operations reflect only those
activities directly related to only the CGE division.
GAIN ON THE DISPOSITION OF THE DISCONTINUED OPERATION during the nine months
ended December 28, 1996, was $36.5 million ($22.3 million after tax). The sales
price for the CGE division was $45.0 million in cash, which did not include the
inventory or the accounts receivable, which were collected during fiscal 1997.
The reported gain is net of 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 and costs of $3.4 million related to the
fulfillment of post-sale obligations.
LOSS FROM THE DISCONTINUED OPERATION was $23.8 million ($14.5 million after tax)
for the nine months ended December 28, 1996. The major components of the loss
were inventory write-offs of $6.9 million, accounts receivable write-offs of
$5.1 million, fixed asset dispositions and equipment lease buyouts of $3.2
million, warehouse closing costs of $1.9 million and operating losses, severance
and other costs of $6.7 million.
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 nine months ended December 28,
1996. This charge represents the adoption of SFAS 121 and the related writedown
of Egghead's property held for sale in Kalispell, Montana and the related
goodwill.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $26.5 million from $83.5 million at March
29, 1997, to $57.0 million at December 27, 1997. The decrease in the cash
balance was primarily due to the increase in inventory, due to seasonality and
the acquisition of Surplus Direct, and the net loss. The Company anticipates
that of the anticipated $42.0 million fourth quarter fiscal 1998 restructure
charge, approximately $33.5 million will result in cash payments during the
fourth quarter of fiscal 1998 and throughout fiscal 1999. The Company
anticipates that these cash charges will be partially offset by an estimated
$29.0 million in cash proceeds during fourth quarter of fiscal 1998 from
liquidation of inventory and fixed assets. There can be no assurance, however,
that the cash expenditures will not exceed anticipated levels or that the cash
proceeds realized, will not be lower than anticipated cash proceeds.
The Company anticipates raising additional funds during the next twelve months
primarily to fund customer acquisition and development of its Internet commerce
business. There can be no assurance that such financing will be available in
amounts or on terms acceptable to the Company, if at all.
Accounts receivable, net increased with an increase in trade accounts receivable
related to the Surplus Direct business acquisition and an increased advertising
emphasis on business accounts and an increase credit card receivables related to
the holiday selling season.
Merchandise inventory, net increased $18.8 million from March 29, 1997. This
increase includes $11.3 million of inventory to support the acquisition of
Surplus Direct on August 14, 1997.
Reserves and liabilities related to the CGE division and the restructuring
decreased $2.7 million and $5.0 million, respectively, from March 29, 1997 with
the ongoing settlement of these liabilities.
15
<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
Terence M. Strom resigned from the Board of Directors of the Company,
effective January 14, 1998. Concurrent with this resignation, the Board of
Directors approved reduction in the number of directors to seven.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<C> <S>
10.1 Employment Agreement, effective January 22, 1998, between
Egghead, Inc. and Brian Bender (filed herewith)
10.2 Employment Agreement, effective January 22, 1998, between
Egghead, Inc. and Tommy Collins(filed herewith)
10.3 Employment Agreement, effective January 22, 1998, between
Egghead, Inc. and Norman Hullinger(filed herewith)
10.4 Employment Agreement, effective January 22, 1998, between
Egghead, Inc. and Jim Kalasky (filed herewith)
27 Financial Data Schedule.
</TABLE>
b. Reports on Form 8-K
A Form 8-K was filed by the Company on January 28, 1998 to report the
proposed change of the Company's name to Egghead.com, Inc., the shift of
the Company's business emphasis to Internet commerce, the closure of its 80
store retail network, the closure of its distribution center in Sacramento,
California, and the combination of the Company's management and operations
with those of Surplus Software, Inc. d/b/a Surplus Direct, a subsidiary of
the Company.
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 9, 1998.
EGGHEAD, INC.
By /s/ George P. Orban
-------------------
George P. Orban
Chief Executive Officer,
Chairman of the Board
/s/ Brian W. Bender
------------------
Brian W. Bender
Chief Accounting Officer,
Chief Financial Officer
16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Title
- -------------- -----
<C> <S>
10.1 Employment Agreement, effective January 22, 1998, between
Egghead, Inc. and Brian Bender
10.2 Employment Agreement, effective January 22, 1998, between
Egghead, Inc. and Tom Collins
10.3 Employment Agreement, effective January 22, 1998, between
Egghead, Inc. and Norm Hullinger
10.4 Employment Agreement, effective January 22, 1998, between
Egghead, Inc. and Jim Kalasky
27 Financial Data Schedule
</TABLE>
17
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
BETWEEN EGGHEAD, INC. AND BRIAN BENDER
--------------------------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made effective the
22nd day of January, 1998 (the "Effective Date"), between EGGHEAD, INC.
(the "Company"), and Brian Bender ("Executive").
Executive is currently serving as an officer of the Company. The
parties now wish to secure their future relationship. Accordingly, and in
consideration of the mutual covenants and conditions set forth in this
Agreement, the parties agree as follows:
ARTICLE 1 - TERM
1.1 Term
----
This Agreement will extend from the Effective Date for a period of three (3)
years; provided that this Agreement will be renewed automatically for a period
of three (3) years following its termination unless, prior to the date six
months from the end of any such three-year period, either party provides notice
to the other of its desire not to renew the Agreement.
ARTICLE 2 - COMPENSATION
2.1 Salary
------
Executive will receive an annual gross salary not less than the annual gross
salary Executive was receiving immediately prior to the Effective Date.
2.2 Additional Benefits
-------------------
During the term of this Agreement, the Company will provide Executive with
insurance, vacation, sick leave and other benefits as are approved by the
Company's Board of Directors and as are generally provided to other management-
level executives holding similar positions with the Company.
ARTICLE 3 - DUTIES OF EXECUTIVE
3.1 Duties
------
During the term of this Agreement a.) Executive's title shall be at least
commensurate in all material respects with the most significant of those held at
any time during the 90-day period immediately preceding the Effective Date and
b.) Executive's status, duties and responsibilities
<PAGE>
shall be reasonably commensurate with title; Executive will serve as an officer
of the Company and shall perform such duties as lawfully assigned to Executive.
The Executive shall report to the Chief Executive Officer of the Company.
ARTICLE 4 - TERMINATION
4.1 Termination Prior to the End of Term
------------------------------------
a) Either party may terminate this Agreement without cause.
(i) In the event that Executive exercises his right under this
subsection, he shall provide notice of his intent to terminate the Agreement not
less than one (1) month before the effective date of the termination. Regardless
of whether the Company elects to have Executive work through the notice period,
or elects to make Executive's resignation effective prior to the end of that
notice period, Executive shall be paid all compensation and benefits earned
through the notice period.
(ii) In the event that the Company exercises its right under this
subsection, the termination shall be effective immediately, or at such later
time as set forth in the notice (but in no event more than thirty days after the
date of the notice) and the Company shall pay to Executive the Severance
Benefits specified in Section 4.2.
The Company may, at its option, terminate this Agreement prior to the end of the
term for Cause. For purposes of this Agreement, "Cause" means the occurrence of
one or more of the following events: (a) failure or refusal to carry out any
lawful duties assigned to him by the Company's Board of Directors or the Chief
Executive Officer or any directions of the Board of Directors of the Company
reasonably consistent with such duties; (b) the conviction of the Executive of,
or the entrance by or on behalf of the Executive of a plea of nolo contendere
with respect to, violation of a state or federal criminal law (excluding non-
felony driving or traffic offenses) or other criminal act involving moral
turpitude; (c) any fraud, dishonesty or deception by the Executive that is
related to his duties for the Company; (d) any incident materially compromising
the Executive's ability to represent the Company with the public; (e) current
illegal use of drugs by the Executive; (f) any act or omission by the Executive
which substantially impairs the Company's business, goodwill or reputation; or
(g) any other material violation by the Executive of any provision of this
Agreement. In the event of a termination under this subsection, Executive shall
be paid all compensation and benefits earned through the date of termination,
but shall not be entitled to receive any further compensation or benefits other
than payments already due him as of that date. Upon notice by the Company of
any action or failure to act constituting Cause under any of clauses (a), (d) or
(f) or (g) of the second sentence of this paragraph (but excluding notice of
Cause pursuant to clause (g) based on any violation of Section 5 of this
Agreement, for which there is no cure period), the Company will provide the
Executive a reasonable opportunity to cure such act or failure to act, which
period shall be ten (10) work days.
<PAGE>
b) Executive may, at his option, terminate this Agreement prior to
the end of the term for Good Reason. For purposes of this subsection, Executive
will have Good Reason to terminate this Agreement if the Company violates
Section 3.1 above; Executive is relocated to a facility other than the Company's
headquarters in Spokane, Washington; or the Company has materially breached its
obligations under the Agreement (provided that the Company has been given
warning and notice of its alleged material breach and a reasonable opportunity
to correct the alleged material breach).
c) This Agreement shall terminate in the event that Executive dies,
or is unable to perform his duties as a result of a physical or mental
disability at any time during the term of this Agreement. In the event of a
termination under this subsection, Executive or his estate shall be paid all
compensation and benefits earned through the date of such termination, but shall
not be entitled to receive any compensation or benefits other than payments
already due him as of that date; provided that Executive's right to exercise
stock options awarded pursuant to the EGGHEAD, INC. 1993 STOCK OPTION PLAN shall
be governed by the terms of that plan. For purposes of this Agreement, Executive
will be considered unable to perform his duties as a result of a physical or
mental disability if that disability exists, or is reasonably expected to exist,
for more than ninety (90) days in any twelve consecutive calendar months.
4.2 Severance Benefits; Change in Control
-------------------------------------
In the event that the Company exercises its rights under Section 4.1(a)(ii)
(termination without Cause) or Executive exercises his rights under Section
4.1(b) (resignation for Good Reason), Executive will receive the following
severance benefits:
a) Commencing on the date of termination or resignation (the
"Termination Date"), the Company shall pay the Executive his then current base
salary for a period of twelve months (the "Initial Period"), less any lawful
withholding (such amount of twelve months' salary, in aggregate, the "Initial
Severance Amount"). The Initial Severance Amount shall be paid in a lump sum
payment within ten days of the Termination Date.
b) If the Executive has failed to commence alternative employment at
any time prior to the end of the Initial Period, the Company will continue to
pay the Executive at the rate of his base salary as of the Termination Date,
less any lawful withholding, in monthly installments for a period (the
"Extension Period") that will terminate on the earlier of: (i) the end of the
sixth month after the end of the Initial Period, or (ii) the date that the
Executive commences alternative employment. From time to time during the
Extension Period, but in no event more frequently than monthly, the Executive
will be available by telephone to update the Chief Executive Officer of the
Company on the status of his efforts to obtain alternative employment, and he
will notify the Company in writing within ten days after accepting alternative
employment. Upon accepting new employment, the Executive will not unreasonably
delay commencing work for his new employer in order to continue receiving
payments during the Extension Period. For purposes of this Agreement,
"alternative employment" is defined as any business relationship (excluding
consulting relationships of less than one month) from which the Executive
receives monthly W-
<PAGE>
2/1099 wages of at least 50% of his monthly salary as of the Termination Date.
If at any time during the Initial Period, or the Extension Period, George Orban
should no longer be Chief Executive Office of the Company, an amount equal to
the payments due during the Extension Period shall be placed in escrow, on
reasonable terms to be agreed upon by the Company and the Executive, for the
benefit of Executive.
c) Any stock option(s) issued to Executive pursuant to the EGGHEAD,
INC. 1993 STOCK OPTION PLAN (the "Plan") and the EGGHEAD, INC. NONQUALIFIED
STOCK OPTION LETTER AGREEMENT AND PLAN SUMMARY that are outstanding and
unexercised as of the Termination Date shall vest on a prorated basis as of
immediately prior to the Executive's termination or resignation on the
Termination Date (except as otherwise provided in the final sentence of this
subsection (c)). For purposes of the preceding sentence, "prorated basis" shall
mean, with respect to each such stock option, that it shall be deemed to be
vested as to that percentage of shares originally subject to the option equal to
the quotient of the number of weeks that the Executive was employed by the
Company during that stock option's entire vesting period (rounded up to the
nearest week) divided by the total number of weeks in the stock option's entire
vesting period (e.g. if a stock option has a three year vesting period, and the
Executive has worked 52 weeks of that vesting period as of the Termination Date,
the stock option would be deemed 33% vested as of immediately prior to
Executive's resignation or termination on the Termination Date.).
d) Continued coverage under the Company's medical, dental and vision
benefit programs at the same level that Executive received prior to the
termination for a period of eighteen months, or until Executive finds employment
which provides comparable benefits, whichever comes first. This period of paid
benefits will be in addition to any COBRA rights Executive may have under
applicable law.
e) In the event of a change in control, as defined in Attachment A
hereto, all of the Executive's stock options issued pursuant to the Plan, shall
vest immediately prior to such change in control.
ARTICLE 5 - RESTRICTIVE AGREEMENTS
5.1 Confidentiality. The Executive agrees not to use or disclose any
---------------
confidential information except as required to fulfill his duties and
responsibilities as an employee of the Company. As used herein, "confidential
information" means all trade secrets, non-public information, methods,
strategies, practices, computer programs and systems, research and related
documentation, customer lists and other data, marketing plans, financial
information, and all other compilations of information that relate in any matter
to the business of the Company or any of the direct or indirect subsidiaries of
the Company (such subsidiaries, the "Affiliate Entities") or any of them. The
Executive acknowledges that all confidential information is the proprietary and
confidential property of the Company or the Affiliate Entities. The Executive
further agrees to return all tangible items containing such confidential
information, wherever located and in whatever form,
<PAGE>
in addition to all other property belonging to the Company or the Affiliate
Entities, on or before the Termination Date.
5.2 Non-Solicitation. The Executive agrees that during the Severance
----------------
Period and Extension Period (if any) he will not individually, or in conjunction
with any other person, corporation or other entity, in any capacity, directly or
indirectly, (i) solicit or recruit any employee of or consultant to the Company
or any of the Affiliate Entities or (ii) cause or seek to cause (A) any employee
of or consultant to the Company or any of the Affiliate Entities to terminate
his or her employment or consulting relationship with the Company or any of the
Affiliate entities or (B) any customer, client or vendor of the Company or any
of the Affiliate Entities to alter or terminate any business relationship with
the Company or any Affiliate Entities.
5.3 Non-Competition. For a period of eighteen months from the Termination
---------------
Date, the Executive shall not, directly or indirectly, be employed by, own,
manage, join, control or participate in the ownership, management, operation or
control of or be connected with, (as that phrase is described below), any person
or entity engaged in any operations in competition with the Company or any of
the Affiliate entities in the retail sale of computer software or computer
hardware, or both, through stores, mail order, telephonic means or electronic
commerce, including, without limitation, through the Internet. For purposes of
this Section 5.3, the following shall be deemed to be persons or entities not
engaged in operations in competition with Egghead or any if its Affiliated
Entities: any person or entity if the sale of computer software and computer
hardware generates less than ten (10) percent of its total annual revenue, and
less than ten (10) percent of the total annual revenue of the division of such
person or entity, if any, which Executive is connected with. The Board of
Directors of the Company may, in its sole discretion, release the Executive from
any or all of his obligations pursuant to this Section 5.3, provided that such
release shall not be effective unless in writing. The Executive shall be deemed
to "be connected with" such business if such business is carried on by a
partnership, corporation or association of which he is an officer, director,
employee, partner, member, consultant or agent; provided, however, that nothing
herein shall prevent the purchase or ownership by the Executive of shares which
constitute less than 2% of the outstanding equity securities of a publicly or
privately held corporation.
5.4 Violation. The Executive acknowledges that his confidentiality,
---------
nonsolicitation and non-competition obligations under this Article 5 are
material inducements to the Company entering into this Agreement, that his
violation thereof shall constitute a material breach of this Agreement and that
any disclosure or action by the Executive in violation of this Article 5 will
cause serious and irreparable injury to the Company for which there is no
adequate remedy at law. If, upon investigation, the Company determines that the
Executive is in violation of this Article 5, then the Company will give the
Executive written notice of the violation, and if the Executive shall not have
cured such violation within four business days of such notice, then the Company
may retain as liquidated damages the balance of the payments coming due to the
Executive under Section 4.2 hereof, if any, and may obtain immediate and
permanent injunctive relief in any court of competent jurisdiction. The rights
and remedies set forth in this Article 5 are in addition to all other legal,
equitable and contractual rights and remedies available to the Company.
<PAGE>
ARTICLE 6 - GENERAL
6.1 Further Assurances
------------------
Each party will, at its own expense and without expense to the other party,
execute and deliver such further agreements and other documents and do such
further acts and things as the other party reasonably requests to evidence,
carry out or give full force and effect to the intent of this Agreement. In
particular, the Company will modify or amend option letters as necessary to
permit the accelerated vesting of options under the circumstances described in
Section 4.2.
6.2 Severability
------------
If any provision of this Agreement is unenforceable or invalid for any reason it
will be severable from the remainder of this Agreement and, in its application
at that time, this Agreement will be construed as though such provision was not
contained herein and the remainder will continue in full force and effect and be
construed as if this Agreement had been executed without the invalid or
unenforceable provision.
6.3 Waiver and Consent
------------------
No consent or waiver, express or implied, by either party to or of any breach or
default by the other party of any or all of its obligations under this Agreement
will be valid unless it is in writing and stated to be a consent or waiver
pursuant to this section.
6.4 Notice
------
Every notice to be given pursuant to this Agreement by one party to the other
will be in writing and will be delivered or sent by registered or certified mail
or by personal delivery. Notices shall be effective upon receipt.
6.5 Binding Effect
--------------
This Agreement will inure to the benefit of and be binding upon the respective
legal representatives and successors.
6.6 Counterparts
------------
This Agreement may be executed in any number of counterparts with the same
effect as if all parties to this Agreement or such other writing had signed the
same document and all counterparts will be construed together and will
constitute one and the same instrument.
<PAGE>
6.7 Headings
--------
The section headings in this Agreement are for reference and shall not by
themselves determine the construction or interpretation of the Agreement.
6.8 Arbitration
-----------
All disputes between the parties relating to this Agreement shall be submitted
to binding arbitration in the City of Spokane, Washington. Either party may
commence the arbitration by delivery of a written notice to the other,
describing the issue in dispute and its position with regard to the issue. If
the parties are unable to agree on an arbitrator within thirty (30) days
following delivery of such notice, the arbitrator shall be selected by using the
selection procedures established by the American Arbitration Association.
Discovery shall be allowed in connection with any such arbitration to the same
extent permitted by the Washington Rules of Civil Procedure but either party may
petition the arbitrator to limit the scope of such discovery, in which event the
arbitrator shall determine the extent of discovery allowable in connection with
the dispute in question. Except as otherwise provided in this Agreement, the
arbitration shall be conducted in accordance with the rules of the American
Arbitration Association then in effect. The award of the arbitrator shall be
final and binding, and judgment upon an award may be entered in any court of
competent jurisdiction. In any such arbitration, the substantially prevailing
party shall pay the costs and reasonable attorneys' fees of the other party.
6.9 Governing Law.
-------------
This Agreement shall be governed by and construed in accordance with the laws of
the State of Washington without application of the principles of conflicts of
laws.
6.10. Effect on Other Agreements
--------------------------
Except as specified above, this Agreement does not modify, amend or supersede
the terms of the EGGHEAD, INC. NONQUALIFIED STOCK OPTION LETTER AGREEMENT AND
PLAN SUMMARY between the parties, which shall remain in full force and effect
according to their respective terms. In consideration of the mutual agreements
herein, the Change of Control Agreement dated December 18, 1996, and previously
entered into between the parties, is hereby terminated in all respects.
EXECUTED as of the day and year first written above.
EGGHEAD, INC.
By________________________________ _______________________________
Its_______________________________ EXECUTIVE
<PAGE>
ATTACHMENT A
For purposes of this Agreement, a "Change of Control" control shall
mean:
(a) A "Board Change" which, for purposes or this Agreement, shall
have occurred if a majority (excluding vacant seats) of the seats on the
Company's Board of Directors (the "Board") are occupied by individuals who were
neither (i) nominated by a majority of the Incumbent Directors nor (ii)
appointed by directors so nominated. An "Incumbent Director" is a member of the
Board who has been either (i) nominated by a majority of the directors of the
Company then in office or (ii) appointed by directors so nominated, but
excluding for this purpose any such individual whose initial assumption of
office occurs as a result of either an actual or threatened election contest (as
such terms are used in Rule 14a-11 of Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") or other actual
or threatened solicitation of proxies or consents by or on behalf of a Person
(as hereinafter defined) other than the Board); or
(b) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of (i) 20% or more of either (A) the then outstanding shares of
Common Stock of the Company (the "Outstanding Company Common Stock") or (B) the
combined voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the "Outstanding
Company Voting Securities"), in the case of either (A) or (B) of this clause
(i), which acquisition is not approved in advance by a majority of the incumbent
Directors, or (ii) 33% or more of either (A) the Outstanding Company Common
Stock or (B) the Outstanding Company Voting Securities, in the case of either
(A) or (B) of this clause (ii), which acquisition is approved in advance by a
majority of the Incumbent Directors; provided, however that the following
-------- -------
acquisitions shall not constitute a Change of Control: (x) any acquisition by
the Company, (y) any acquisition by an employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation controlled by the
Company or (z) any acquisition by any corporation pursuant to a reorganization,
merger or consolidation, if, following such reorganization, merger or
consolidation, the conditions described in clauses (i), (ii) and (iii) of
subsection (c) of this Appendix A are satisfied; or
(c) Approval by the stockholders of the Company of a reorganization,
merger or consolidation, in each case, unless immediately following such
reorganization, merger or consolidation, (i) more than 60% of, respectively, the
then outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
<PAGE>
generally in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all the individuals and entities who were
the beneficial owners, respectively, of the Outstanding Company Common Stock and
the Outstanding Company Voting Securities immediately prior to such
reorganization, merger or consolidation in substantially the same proportion as
their ownership immediately prior to such reorganization, merger or
consolidation of the Outstanding Company Common Stock and the Outstanding
Company Voting Securities, as the case may be, (ii) no Person (excluding the
Company, any employee benefit plan (or related trust) of the Company or such
corporation resulting from such reorganization, merger or consolidation and any
Person beneficially owning, immediately prior to such reorganization merger or
consolidation, directly or indirectly, 33% or more of the Outstanding Company
Common Stock or the Outstanding Voting Securities as the case may be)
beneficially owns directly or indirectly, 33% or more of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation or the combined voting power of the then
outstanding voting securities of such corporation entitled to vote generally in
the election of directors, and (iii) at least a majority of the members of the
board of directors of the corporation resulting from such reorganization, merger
or consolidation were the Incumbent Directors at the time of the execution of
the initial agreement providing for such reorganization, merger or
consolidation; or
(d) Approval by the stockholders of the Company of (i) a complete
liquidation or dissolution of the Company or (ii) the sale or other disposition
of all or substantially all the assets of the Company, other than to a
corporation with respect to which immediately following such sale or other
disposition, (A) more than 60% of, respectively, the then outstanding shares of
common stock of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote generally in
the election of directors is then beneficially owed, directly or indirectly, by
all or substantially all the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and the
Outstanding Company Voting Securities immediately prior to such sale or other
disposition in substantially the same proportion as their ownership, immediately
prior to such sale or other disposition, of the Outstanding Company Common Stock
and the Outstanding Company Voting Securities, as the case may be, (B) no Person
(excluding the Company, any employee benefit plan (or related trust) of the
Company or such corporation and any Person beneficially owning, immediately
prior to such sale or other disposition, directly or indirectly, 33% or more of
the Outstanding Company Common Stock or the Outstanding Company Voting
Securities, as the case may be) beneficially owns, directly or indirectly, 33%
or more of, respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors and (C) at least a majority of the members of the board of directors
of such corporation were approved by a majority of the Incumbent Directors at
the time of the execution of the initial agreement or action of the Board
providing for such sale or other disposition of assets of the Company.
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
BETWEEN EGGHEAD, INC. AND TOM COLLINS
-------------------------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made effective the
22nd day of January, 1998 (the "Effective Date"), between EGGHEAD, INC.
(the "Company"), and Tom Collins ("Executive").
Executive is currently serving as an officer of the Company. The
parties now wish to secure their future relationship. Accordingly, and in
consideration of the mutual covenants and conditions set forth in this
Agreement, the parties agree as follows:
ARTICLE 1 - TERM
1.1 Term
----
This Agreement will extend from the Effective Date for a period of three (3)
years; provided that this Agreement will be renewed automatically for a period
of three (3) years following its termination unless, prior to the date six
months from the end of any such three-year period, either party provides notice
to the other of its desire not to renew the Agreement.
ARTICLE 2 - COMPENSATION
2.1 Salary
------
Executive will receive an annual gross salary not less than the annual gross
salary Executive was receiving immediately prior to the Effective Date.
2.2 Additional Benefits
-------------------
During the term of this Agreement, the Company will provide Executive with
insurance, vacation, sick leave and other benefits as are approved by the
Company's Board of Directors and as are generally provided to other management-
level executives holding similar positions with the Company.
ARTICLE 3 - DUTIES OF EXECUTIVE
3.1 Duties
------
During the term of this Agreement a.) Executive's title shall be at least
commensurate in all material respects with the most significant of those held at
any time during the 90-day period immediately preceding the Effective Date and
b.) Executive's status, duties and responsibilities
<PAGE>
shall be reasonably commensurate with title; Executive will serve as an officer
of the Company and shall perform such duties as lawfully assigned to Executive.
The Executive shall report to the Chief Executive Officer of the Company.
ARTICLE 4 - TERMINATION
4.1 Termination Prior to the End of Term
------------------------------------
a) Either party may terminate this Agreement without cause.
(i) In the event that Executive exercises his right under this
subsection, he shall provide notice of his intent to terminate the Agreement not
less than one (1) month before the effective date of the termination. Regardless
of whether the Company elects to have Executive work through the notice period,
or elects to make Executive's resignation effective prior to the end of that
notice period, Executive shall be paid all compensation and benefits earned
through the notice period.
(ii) In the event that the Company exercises its right under this
subsection, the termination shall be effective immediately, or at such later
time as set forth in the notice (but in no event more than thirty days after the
date of the notice) and the Company shall pay to Executive the Severance
Benefits specified in Section 4.2.
The Company may, at its option, terminate this Agreement prior to the end of the
term for Cause. For purposes of this Agreement, "Cause" means the occurrence of
one or more of the following events: (a) failure or refusal to carry out any
lawful duties assigned to him by the Company's Board of Directors or the Chief
Executive Officer or any directions of the Board of Directors of the Company
reasonably consistent with such duties; (b) the conviction of the Executive of,
or the entrance by or on behalf of the Executive of a plea of nolo contendere
with respect to, violation of a state or federal criminal law (excluding non-
felony driving or traffic offenses) or other criminal act involving moral
turpitude; (c) any fraud, dishonesty or deception by the Executive that is
related to his duties for the Company; (d) any incident materially compromising
the Executive's ability to represent the Company with the public; (e) current
illegal use of drugs by the Executive; (f) any act or omission by the Executive
which substantially impairs the Company's business, goodwill or reputation; or
(g) any other material violation by the Executive of any provision of this
Agreement. In the event of a termination under this subsection, Executive shall
be paid all compensation and benefits earned through the date of termination,
but shall not be entitled to receive any further compensation or benefits other
than payments already due him as of that date. Upon notice by the Company of
any action or failure to act constituting Cause under any of clauses (a), (d) or
(f) or (g) of the second sentence of this paragraph (but excluding notice of
Cause pursuant to clause (g) based on any violation of Section 5 of this
Agreement, for which there is no cure period), the Company will provide the
Executive a reasonable opportunity to cure such act or failure to act, which
period shall be ten (10) work days.
<PAGE>
b) Executive may, at his option, terminate this Agreement prior to
the end of the term for Good Reason. For purposes of this subsection, Executive
will have Good Reason to terminate this Agreement if the Company violates
Section 3.1 above; Executive is relocated to a facility other than the Company's
headquarters in Spokane, Washington; or the Company has materially breached its
obligations under the Agreement (provided that the Company has been given
warning and notice of its alleged material breach and a reasonable opportunity
to correct the alleged material breach).
c) This Agreement shall terminate in the event that Executive dies,
or is unable to perform his duties as a result of a physical or mental
disability at any time during the term of this Agreement. In the event of a
termination under this subsection, Executive or his estate shall be paid all
compensation and benefits earned through the date of such termination, but shall
not be entitled to receive any compensation or benefits other than payments
already due him as of that date; provided that Executive's right to exercise
stock options awarded pursuant to the EGGHEAD, INC. 1993 STOCK OPTION PLAN shall
be governed by the terms of that plan. For purposes of this Agreement, Executive
will be considered unable to perform his duties as a result of a physical or
mental disability if that disability exists, or is reasonably expected to exist,
for more than ninety (90) days in any twelve consecutive calendar months.
4.2 Severance Benefits; Change in Control
-------------------------------------
In the event that the Company exercises its rights under Section 4.1(a)(ii)
(termination without Cause) or Executive exercises his rights under Section
4.1(b) (resignation for Good Reason), Executive will receive the following
severance benefits:
a) Commencing on the date of termination or resignation (the
"Termination Date"), the Company shall pay the Executive his then current base
salary for a period of twelve months (the "Initial Period"), less any lawful
withholding (such amount of twelve months' salary, in aggregate, the "Initial
Severance Amount"). The Initial Severance Amount shall be paid in a lump sum
payment within ten days of the Termination Date.
b) If the Executive has failed to commence alternative employment at
any time prior to the end of the Initial Period, the Company will continue to
pay the Executive at the rate of his base salary as of the Termination Date,
less any lawful withholding, in monthly installments for a period (the
"Extension Period") that will terminate on the earlier of: (i) the end of the
sixth month after the end of the Initial Period, or (ii) the date that the
Executive commences alternative employment. From time to time during the
Extension Period, but in no event more frequently than monthly, the Executive
will be available by telephone to update the Chief Executive Officer of the
Company on the status of his efforts to obtain alternative employment, and he
will notify the Company in writing within ten days after accepting alternative
employment. Upon accepting new employment, the Executive will not unreasonably
delay commencing work for his new employer in order to continue receiving
payments during the Extension Period. For purposes of this Agreement,
"alternative employment" is defined as any business relationship (excluding
consulting relationships of less than one month) from which the Executive
receives monthly W-
<PAGE>
2/1099 wages of at least 50% of his monthly salary as of the Termination Date.
If at any time during the Initial Period, or the Extension Period, George Orban
should no longer be Chief Executive Office of the Company, an amount equal to
the payments due during the Extension Period shall be placed in escrow, on
reasonable terms to be agreed upon by the Company and the Executive, for the
benefit of Executive.
c) Any stock option(s) issued to Executive pursuant to the EGGHEAD,
INC. 1993 STOCK OPTION PLAN (the "Plan") and the EGGHEAD, INC. NONQUALIFIED
STOCK OPTION LETTER AGREEMENT AND PLAN SUMMARY that are outstanding and
unexercised as of the Termination Date shall vest on a prorated basis as of
immediately prior to the Executive's termination or resignation on the
Termination Date (except as otherwise provided in the final sentence of this
subsection (c)). For purposes of the preceding sentence, "prorated basis" shall
mean, with respect to each such stock option, that it shall be deemed to be
vested as to that percentage of shares originally subject to the option equal to
the quotient of the number of weeks that the Executive was employed by the
Company during that stock option's entire vesting period (rounded up to the
nearest week) divided by the total number of weeks in the stock option's entire
vesting period (e.g. if a stock option has a three year vesting period, and the
Executive has worked 52 weeks of that vesting period as of the Termination Date,
the stock option would be deemed 33% vested as of immediately prior to
Executive's resignation or termination on the Termination Date.).
d) Continued coverage under the Company's medical, dental and vision
benefit programs at the same level that Executive received prior to the
termination for a period of eighteen months, or until Executive finds employment
which provides comparable benefits, whichever comes first. This period of paid
benefits will be in addition to any COBRA rights Executive may have under
applicable law.
e) In the event of a change in control, as defined in Attachment A
hereto, all of the Executive's stock options issued pursuant to the Plan, shall
vest immediately prior to such change in control.
ARTICLE 5 - RESTRICTIVE AGREEMENTS
5.1 Confidentiality. The Executive agrees not to use or disclose any
---------------
confidential information except as required to fulfill his duties and
responsibilities as an employee of the Company. As used herein, "confidential
information" means all trade secrets, non-public information, methods,
strategies, practices, computer programs and systems, research and related
documentation, customer lists and other data, marketing plans, financial
information, and all other compilations of information that relate in any matter
to the business of the Company or any of the direct or indirect subsidiaries of
the Company (such subsidiaries, the "Affiliate Entities") or any of them. The
Executive acknowledges that all confidential information is the proprietary and
confidential property of the Company or the Affiliate Entities. The Executive
further agrees to return all tangible items containing such confidential
information, wherever located and in whatever form,
<PAGE>
in addition to all other property belonging to the Company or the Affiliate
Entities, on or before the Termination Date.
5.2 Non-Solicitation. The Executive agrees that during the Severance
----------------
Period and Extension Period (if any) he will not individually, or in conjunction
with any other person, corporation or other entity, in any capacity, directly or
indirectly, (i) solicit or recruit any employee of or consultant to the Company
or any of the Affiliate Entities or (ii) cause or seek to cause (A) any employee
of or consultant to the Company or any of the Affiliate Entities to terminate
his or her employment or consulting relationship with the Company or any of the
Affiliate entities or (B) any customer, client or vendor of the Company or any
of the Affiliate Entities to alter or terminate any business relationship with
the Company or any Affiliate Entities.
5.3 Non-Competition. For a period of eighteen months from the Termination
---------------
Date, the Executive shall not, directly or indirectly, be employed by, own,
manage, join, control or participate in the ownership, management, operation or
control of or be connected with, (as that phrase is described below), any person
or entity engaged in any operations in competition with the Company or any of
the Affiliate entities in the retail sale of computer software or computer
hardware, or both, through stores, mail order, telephonic means or electronic
commerce, including, without limitation, through the Internet. For purposes of
this Section 5.3, the following shall be deemed to be persons or entities not
engaged in operations in competition with Egghead or any if its Affiliated
Entities: any person or entity if the sale of computer software and computer
hardware generates less than ten (10) percent of its total annual revenue, and
less than ten (10) percent of the total annual revenue of the division of such
person or entity, if any, which Executive is connected with. The Board of
Directors of the Company may, in its sole discretion, release the Executive from
any or all of his obligations pursuant to this Section 5.3, provided that such
release shall not be effective unless in writing. The Executive shall be deemed
to "be connected with" such business if such business is carried on by a
partnership, corporation or association of which he is an officer, director,
employee, partner, member, consultant or agent; provided, however, that nothing
herein shall prevent the purchase or ownership by the Executive of shares which
constitute less than 2% of the outstanding equity securities of a publicly or
privately held corporation.
5.4 Violation. The Executive acknowledges that his confidentiality,
---------
nonsolicitation and non-competition obligations under this Article 5 are
material inducements to the Company entering into this Agreement, that his
violation thereof shall constitute a material breach of this Agreement and that
any disclosure or action by the Executive in violation of this Article 5 will
cause serious and irreparable injury to the Company for which there is no
adequate remedy at law. If, upon investigation, the Company determines that the
Executive is in violation of this Article 5, then the Company will give the
Executive written notice of the violation, and if the Executive shall not have
cured such violation within four business days of such notice, , then the
Company may retain as liquidated damages the balance of the payments coming due
to the Executive under Section 4.2 hereof, if any, and may obtain immediate and
permanent injunctive relief in any court of competent jurisdiction. The rights
and remedies set forth in this Article 5 are in addition to all other legal,
equitable and contractual rights and remedies available to the Company.
<PAGE>
ARTICLE 6 - GENERAL
6.1 Further Assurances
------------------
Each party will, at its own expense and without expense to the other party,
execute and deliver such further agreements and other documents and do such
further acts and things as the other party reasonably requests to evidence,
carry out or give full force and effect to the intent of this Agreement. In
particular, the Company will modify or amend option letters as necessary to
permit the accelerated vesting of options under the circumstances described in
Section 4.2.
6.2 Severability
------------
If any provision of this Agreement is unenforceable or invalid for any reason it
will be severable from the remainder of this Agreement and, in its application
at that time, this Agreement will be construed as though such provision was not
contained herein and the remainder will continue in full force and effect and be
construed as if this Agreement had been executed without the invalid or
unenforceable provision.
6.3 Waiver and Consent
------------------
No consent or waiver, express or implied, by either party to or of any breach or
default by the other party of any or all of its obligations under this Agreement
will be valid unless it is in writing and stated to be a consent or waiver
pursuant to this section.
6.4 Notice
------
Every notice to be given pursuant to this Agreement by one party to the other
will be in writing and will be delivered or sent by registered or certified mail
or by personal delivery. Notices shall be effective upon receipt.
6.5 Binding Effect
--------------
This Agreement will inure to the benefit of and be binding upon the respective
legal representatives and successors.
6.6 Counterparts
------------
This Agreement may be executed in any number of counterparts with the same
effect as if all parties to this Agreement or such other writing had signed the
same document and all counterparts will be construed together and will
constitute one and the same instrument.
<PAGE>
6.7 Headings
--------
The section headings in this Agreement are for reference and shall not by
themselves determine the construction or interpretation of the Agreement.
6.8 Arbitration
-----------
All disputes between the parties relating to this Agreement shall be submitted
to binding arbitration in the City of Spokane, Washington. Either party may
commence the arbitration by delivery of a written notice to the other,
describing the issue in dispute and its position with regard to the issue. If
the parties are unable to agree on an arbitrator within thirty (30) days
following delivery of such notice, the arbitrator shall be selected by using the
selection procedures established by the American Arbitration Association.
Discovery shall be allowed in connection with any such arbitration to the same
extent permitted by the Washington Rules of Civil Procedure but either party may
petition the arbitrator to limit the scope of such discovery, in which event the
arbitrator shall determine the extent of discovery allowable in connection with
the dispute in question. Except as otherwise provided in this Agreement, the
arbitration shall be conducted in accordance with the rules of the American
Arbitration Association then in effect. The award of the arbitrator shall be
final and binding, and judgment upon an award may be entered in any court of
competent jurisdiction. In any such arbitration, the substantially prevailing
party shall pay the costs and reasonable attorneys' fees of the other party.
6.9 Governing Law.
-------------
This Agreement shall be governed by and construed in accordance with the laws of
the State of Washington without application of the principles of conflicts of
laws.
6.10. Effect on Other Agreements
--------------------------
Except as specified above, this Agreement does not modify, amend or supersede
the terms of the EGGHEAD, INC. NONQUALIFIED STOCK OPTION LETTER AGREEMENT AND
PLAN SUMMARY between the parties, which shall remain in full force and effect
according to their respective terms. In consideration of the mutual agreements
herein, the Change of Control Agreement dated July 1, 1996, and previously
entered into between the parties, is hereby terminated in all respects.
EXECUTED as of the day and year first written above.
EGGHEAD, INC.
By______________________________________ __________________________
Its_____________________________________ EXECUTIVE
<PAGE>
ATTACHMENT A
For purposes of this Agreement, a "Change of Control" control shall
mean:
(a) A "Board Change" which, for purposes or this Agreement, shall
have occurred if a majority (excluding vacant seats) of the seats on the
Company's Board of Directors (the "Board") are occupied by individuals who were
neither (i) nominated by a majority of the Incumbent Directors nor (ii)
appointed by directors so nominated. An "Incumbent Director" is a member of the
Board who has been either (i) nominated by a majority of the directors of the
Company then in office or (ii) appointed by directors so nominated, but
excluding for this purpose any such individual whose initial assumption of
office occurs as a result of either an actual or threatened election contest (as
such terms are used in Rule 14a-11 of Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") or other actual
or threatened solicitation of proxies or consents by or on behalf of a Person
(as hereinafter defined) other than the Board); or
(b) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of (i) 20% or more of either (A) the then outstanding shares of
Common Stock of the Company (the "Outstanding Company Common Stock") or (B) the
combined voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the "Outstanding
Company Voting Securities"), in the case of either (A) or (B) of this clause
(i), which acquisition is not approved in advance by a majority of the incumbent
Directors, or (ii) 33% or more of either (A) the Outstanding Company Common
Stock or (B) the Outstanding Company Voting Securities, in the case of either
(A) or (B) of this clause (ii), which acquisition is approved in advance by a
majority of the Incumbent Directors; provided, however that the following
-------- -------
acquisitions shall not constitute a Change of Control: (x) any acquisition by
the Company, (y) any acquisition by an employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation controlled by the
Company or (z) any acquisition by any corporation pursuant to a reorganization,
merger or consolidation, if, following such reorganization, merger or
consolidation, the conditions described in clauses (i), (ii) and (iii) of
subsection (c) of this Appendix A are satisfied; or
(c) Approval by the stockholders of the Company of a reorganization,
merger or consolidation, in each case, unless immediately following such
reorganization, merger or consolidation, (i) more than 60% of, respectively, the
then outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
<PAGE>
generally in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all the individuals and entities who were
the beneficial owners, respectively, of the Outstanding Company Common Stock and
the Outstanding Company Voting Securities immediately prior to such
reorganization, merger or consolidation in substantially the same proportion as
their ownership immediately prior to such reorganization, merger or
consolidation of the Outstanding Company Common Stock and the Outstanding
Company Voting Securities, as the case may be, (ii) no Person (excluding the
Company, any employee benefit plan (or related trust) of the Company or such
corporation resulting from such reorganization, merger or consolidation and any
Person beneficially owning, immediately prior to such reorganization merger or
consolidation, directly or indirectly, 33% or more of the Outstanding Company
Common Stock or the Outstanding Voting Securities as the case may be)
beneficially owns directly or indirectly, 33% or more of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation or the combined voting power of the then
outstanding voting securities of such corporation entitled to vote generally in
the election of directors, and (iii) at least a majority of the members of the
board of directors of the corporation resulting from such reorganization, merger
or consolidation were the Incumbent Directors at the time of the execution of
the initial agreement providing for such reorganization, merger or
consolidation; or
(d) Approval by the stockholders of the Company of (i) a complete
liquidation or dissolution of the Company or (ii) the sale or other disposition
of all or substantially all the assets of the Company, other than to a
corporation with respect to which immediately following such sale or other
disposition, (A) more than 60% of, respectively, the then outstanding shares of
common stock of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote generally in
the election of directors is then beneficially owed, directly or indirectly, by
all or substantially all the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and the
Outstanding Company Voting Securities immediately prior to such sale or other
disposition in substantially the same proportion as their ownership, immediately
prior to such sale or other disposition, of the Outstanding Company Common Stock
and the Outstanding Company Voting Securities, as the case may be, (B) no Person
(excluding the Company, any employee benefit plan (or related trust) of the
Company or such corporation and any Person beneficially owning, immediately
prior to such sale or other disposition, directly or indirectly, 33% or more of
the Outstanding Company Common Stock or the Outstanding Company Voting
Securities, as the case may be) beneficially owns, directly or indirectly, 33%
or more of, respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors and (C) at least a majority of the members of the board of directors
of such corporation were approved by a majority of the Incumbent Directors at
the time of the execution of the initial agreement or action of the Board
providing for such sale or other disposition of assets of the Company.
<PAGE>
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
BETWEEN EGGHEAD, INC. AND NORM HULLINGER
----------------------------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made effective the
22nd day of January, 1998 (the "Effective Date"), between EGGHEAD, INC.
(the "Company"), and Norm Hullinger ("Executive").
Executive is currently serving as an officer of the Company. The
parties now wish to secure their future relationship. Accordingly, and in
consideration of the mutual covenants and conditions set forth in this
Agreement, the parties agree as follows:
ARTICLE 1 - TERM
1.1 Term
----
This Agreement will extend from the Effective Date for a period of three (3)
years; provided that this Agreement will be renewed automatically for a period
of three (3) years following its termination unless, prior to the date six
months from the end of any such three-year period, either party provides notice
to the other of its desire not to renew the Agreement.
ARTICLE 2 - COMPENSATION
2.1 Salary
------
Executive will receive an annual gross salary not less than the annual gross
salary Executive was receiving immediately prior to the Effective Date.
2.2 Additional Benefits
-------------------
During the term of this Agreement, the Company will provide Executive with
insurance, vacation, sick leave and other benefits as are approved by the
Company's Board of Directors and as are generally provided to other management-
level executives holding similar positions with the Company.
ARTICLE 3 - DUTIES OF EXECUTIVE
3.1 Duties
------
During the term of this Agreement a.) Executive's title shall be at least
commensurate in all material respects with the most significant of those held at
any time during the 90-day period immediately preceding the Effective Date and
b.) Executive's status, duties and responsibilities
<PAGE>
shall be reasonably commensurate with title; Executive will serve as an officer
of the Company and shall perform such duties as lawfully assigned to Executive.
The Executive shall report to the Chief Executive Officer of the Company.
ARTICLE 4 - TERMINATION
4.1 Termination Prior to the End of Term
------------------------------------
a) Either party may terminate this Agreement without cause.
(i) In the event that Executive exercises his right under this
subsection, he shall provide notice of his intent to terminate the Agreement not
less than one (1) month before the effective date of the termination. Regardless
of whether the Company elects to have Executive work through the notice period,
or elects to make Executive's resignation effective prior to the end of that
notice period, Executive shall be paid all compensation and benefits earned
through the notice period.
(ii) In the event that the Company exercises its right under this
subsection, the termination shall be effective immediately, or at such later
time as set forth in the notice (but in no event more than thirty days after the
date of the notice) and the Company shall pay to Executive the Severance
Benefits specified in Section 4.2.
The Company may, at its option, terminate this Agreement prior to the end of the
term for Cause. For purposes of this Agreement, "Cause" means the occurrence of
one or more of the following events: (a) failure or refusal to carry out any
lawful duties assigned to him by the Company's Board of Directors or the Chief
Executive Officer or any directions of the Board of Directors of the Company
reasonably consistent with such duties; (b) the conviction of the Executive of,
or the entrance by or on behalf of the Executive of a plea of nolo contendere
with respect to, violation of a state or federal criminal law (excluding non-
felony driving or traffic offenses) or other criminal act involving moral
turpitude; (c) any fraud, dishonesty or deception by the Executive that is
related to his duties for the Company; (d) any incident materially compromising
the Executive's ability to represent the Company with the public; (e) current
illegal use of drugs by the Executive; (f) any act or omission by the Executive
which substantially impairs the Company's business, goodwill or reputation; or
(g) any other material violation by the Executive of any provision of this
Agreement. In the event of a termination under this subsection, Executive shall
be paid all compensation and benefits earned through the date of termination,
but shall not be entitled to receive any further compensation or benefits other
than payments already due him as of that date. Upon notice by the Company of
any action or failure to act constituting Cause under any of clauses (a), (d) or
(f) or (g) of the second sentence of this paragraph (but excluding notice of
Cause pursuant to clause (g) based on any violation of Section 5 of this
Agreement, for which there is no cure period), the Company will provide the
Executive a reasonable opportunity to cure such act or failure to act, which
period shall be ten (10) work days.
<PAGE>
b) Executive may, at his option, terminate this Agreement prior to the
end of the term for Good Reason. For purposes of this subsection, Executive
will have Good Reason to terminate this Agreement if the Company violates
Section 3.1 above; Executive is relocated to a facility other than the Company's
headquarters in Spokane, Washington; or the Company has materially breached its
obligations under the Agreement (provided that the Company has been given
warning and notice of its alleged material breach and a reasonable opportunity
to correct the alleged material breach).
c) This Agreement shall terminate in the event that Executive dies, or is
unable to perform his duties as a result of a physical or mental disability at
any time during the term of this Agreement. In the event of a termination under
this subsection, Executive or his estate shall be paid all compensation and
benefits earned through the date of such termination, but shall not be entitled
to receive any compensation or benefits other than payments already due him as
of that date; provided that Executive's right to exercise stock options awarded
pursuant to the EGGHEAD, INC. 1993 STOCK OPTION PLAN shall be governed by the
terms of that plan. For purposes of this Agreement, Executive will be
considered unable to perform his duties as a result of a physical or mental
disability if that disability exists, or is reasonably expected to exist, for
more than ninety (90) days in any twelve consecutive calendar months.
4.2 Severance Benefits; Change in Control
-------------------------------------
In the event that the Company exercises its rights under Section 4.1(a)(ii)
(termination without Cause) or Executive exercises his rights under Section
4.1(b) (resignation for Good Reason), Executive will receive the following
severance benefits:
a) Commencing on the date of termination or resignation (the
"Termination Date"), the Company shall pay the Executive his then current base
salary for a period of twelve months (the "Initial Period"), less any lawful
withholding (such amount of twelve months' salary, in aggregate, the "Initial
Severance Amount"). The Initial Severance Amount shall be paid in a lump sum
payment within ten days of the Termination Date.
b) If the Executive has failed to commence alternative employment at
any time prior to the end of the Initial Period, the Company will continue to
pay the Executive at the rate of his base salary as of the Termination Date,
less any lawful withholding, in monthly installments for a period (the
"Extension Period") that will terminate on the earlier of: (i) the end of the
sixth month after the end of the Initial Period, or (ii) the date that the
Executive commences alternative employment. From time to time during the
Extension Period, but in no event more frequently than monthly, the Executive
will be available by telephone to update the Chief Executive Officer of the
Company on the status of his efforts to obtain alternative employment, and he
will notify the Company in writing within ten days after accepting alternative
employment. Upon accepting new employment, the Executive will not unreasonably
delay commencing work for his new employer in order to continue receiving
payments during the Extension Period. For purposes of this Agreement,
"alternative employment" is defined as any business relationship (excluding
consulting relationships of less than one month) from which the Executive
receives monthly W-
<PAGE>
2/1099 wages of at least 50% of his monthly salary as of the Termination Date.
If at any time during the Initial Period, or the Extension Period, George Orban
should no longer be Chief Executive Office of the Company, an amount equal to
the payments due during the Extension Period shall be placed in escrow, on
reasonable terms to be agreed upon by the Company and the Executive, for the
benefit of Executive.
c) Any stock option(s) issued to Executive pursuant to the EGGHEAD, INC.
1993 STOCK OPTION PLAN (the "Plan") and the EGGHEAD, INC. NONQUALIFIED STOCK
OPTION LETTER AGREEMENT AND PLAN SUMMARY that are outstanding and unexercised as
of the Termination Date shall vest on a prorated basis as of immediately prior
to the Executive's termination or resignation on the Termination Date (except as
otherwise provided in the final sentence of this subsection (c)). For purposes
of the preceding sentence, "prorated basis" shall mean, with respect to each
such stock option, that it shall be deemed to be vested as to that percentage of
shares originally subject to the option equal to the quotient of the number of
weeks that the Executive was employed by the Company during that stock option's
entire vesting period (rounded up to the nearest week) divided by the total
number of weeks in the stock option's entire vesting period (e.g. if a stock
option has a three year vesting period, and the Executive has worked 52 weeks of
that vesting period as of the Termination Date, the stock option would be deemed
33% vested as of immediately prior to Executive's resignation or termination on
the Termination Date.).
d) Continued coverage under the Company's medical, dental and vision
benefit programs at the same level that Executive received prior to the
termination for a period of eighteen months, or until Executive finds employment
which provides comparable benefits, whichever comes first. This period of paid
benefits will be in addition to any COBRA rights Executive may have under
applicable law.
e) In the event of a change in control, as defined in Attachment A
hereto, all of the Executive's stock options issued pursuant to the Plan, shall
vest immediately prior to such change in control.
ARTICLE 5 - RESTRICTIVE AGREEMENTS
5.1 Confidentiality. The Executive agrees not to use or disclose any
---------------
confidential information except as required to fulfill his duties and
responsibilities as an employee of the Company. As used herein, "confidential
information" means all trade secrets, non-public information, methods,
strategies, practices, computer programs and systems, research and related
documentation, customer lists and other data, marketing plans, financial
information, and all other compilations of information that relate in any matter
to the business of the Company or any of the direct or indirect subsidiaries of
the Company (such subsidiaries, the "Affiliate Entities") or any of them. The
Executive acknowledges that all confidential information is the proprietary and
confidential property of the Company or the Affiliate Entities. The Executive
further agrees to return all tangible items containing such confidential
information, wherever located and in whatever form,
<PAGE>
in addition to all other property belonging to the Company or the Affiliate
Entities, on or before the Termination Date.
5.2 Non-Solicitation. The Executive agrees that during the Severance
----------------
Period and Extension Period (if any) he will not individually, or in conjunction
with any other person, corporation or other entity, in any capacity, directly or
indirectly, (i) solicit or recruit any employee of or consultant to the Company
or any of the Affiliate Entities or (ii) cause or seek to cause (A) any employee
of or consultant to the Company or any of the Affiliate Entities to terminate
his or her employment or consulting relationship with the Company or any of the
Affiliate entities or (B) any customer, client or vendor of the Company or any
of the Affiliate Entities to alter or terminate any business relationship with
the Company or any Affiliate Entities.
5.3 Non-Competition. For a period of eighteen months from the Termination
---------------
Date, the Executive shall not, directly or indirectly, be employed by, own,
manage, join, control or participate in the ownership, management, operation or
control of or be connected with, (as that phrase is described below), any person
or entity engaged in any operations in competition with the Company or any of
the Affiliate entities in the retail sale of computer software or computer
hardware, or both, through stores, mail order, telephonic means or electronic
commerce, including, without limitation, through the Internet. For purposes of
this Section 5.3, the following shall be deemed to be persons or entities not
engaged in operations in competition with Egghead or any if its Affiliated
Entities: any person or entity if the sale of computer software and computer
hardware generates less than ten (10) percent of its total annual revenue, and
less than ten (10) percent of the total annual revenue of the division of such
person or entity, if any, which Executive is connected with. The Board of
Directors of the Company may, in its sole discretion, release the Executive from
any or all of his obligations pursuant to this Section 5.3, provided that such
release shall not be effective unless in writing. The Executive shall be deemed
to "be connected with" such business if such business is carried on by a
partnership, corporation or association of which he is an officer, director,
employee, partner, member, consultant or agent; provided, however, that nothing
herein shall prevent the purchase or ownership by the Executive of shares which
constitute less than 2% of the outstanding equity securities of a publicly or
privately held corporation.
5.4 Violation. The Executive acknowledges that his confidentiality,
---------
nonsolicitation and non-competition obligations under this Article 5 are
material inducements to the Company entering into this Agreement, that his
violation thereof shall constitute a material breach of this Agreement and that
any disclosure or action by the Executive in violation of this Article 5 will
cause serious and irreparable injury to the Company for which there is no
adequate remedy at law. If, upon investigation, the Company determines that the
Executive is in violation of this Article 5, then the Company will give the
Executive written notice of the violation, and if the Executive shall not have
cured such violation within four business days of such notice, then the
Company may retain as liquidated damages the balance of the payments coming due
to the Executive under Section 4.2 hereof, if any, and may obtain immediate and
permanent injunctive relief in any court of competent jurisdiction. The rights
and remedies set forth in this Article 5 are in addition to all other legal,
equitable and contractual rights and remedies available to the Company.
<PAGE>
ARTICLE 6 - GENERAL
6.1 Further Assurances
------------------
Each party will, at its own expense and without expense to the other party,
execute and deliver such further agreements and other documents and do such
further acts and things as the other party reasonably requests to evidence,
carry out or give full force and effect to the intent of this Agreement. In
particular, the Company will modify or amend option letters as necessary to
permit the accelerated vesting of options under the circumstances described in
Section 4.2.
6.2 Severability
------------
If any provision of this Agreement is unenforceable or invalid for any reason it
will be severable from the remainder of this Agreement and, in its application
at that time, this Agreement will be construed as though such provision was not
contained herein and the remainder will continue in full force and effect and be
construed as if this Agreement had been executed without the invalid or
unenforceable provision.
6.3 Waiver and Consent
------------------
No consent or waiver, express or implied, by either party to or of any breach or
default by the other party of any or all of its obligations under this Agreement
will be valid unless it is in writing and stated to be a consent or waiver
pursuant to this section.
6.4 Notice
------
Every notice to be given pursuant to this Agreement by one party to the other
will be in writing and will be delivered or sent by registered or certified mail
or by personal delivery. Notices shall be effective upon receipt.
6.5 Binding Effect
--------------
This Agreement will inure to the benefit of and be binding upon the respective
legal representatives and successors.
6.6 Counterparts
------------
This Agreement may be executed in any number of counterparts with the same
effect as if all parties to this Agreement or such other writing had signed the
same document and all counterparts will be construed together and will
constitute one and the same instrument.
<PAGE>
6.7 Headings
--------
The section headings in this Agreement are for reference and shall not by
themselves determine the construction or interpretation of the Agreement.
6.8 Arbitration
-----------
All disputes between the parties relating to this Agreement shall be submitted
to binding arbitration in the City of Spokane, Washington. Either party may
commence the arbitration by delivery of a written notice to the other,
describing the issue in dispute and its position with regard to the issue. If
the parties are unable to agree on an arbitrator within thirty (30) days
following delivery of such notice, the arbitrator shall be selected by using the
selection procedures established by the American Arbitration Association.
Discovery shall be allowed in connection with any such arbitration to the same
extent permitted by the Washington Rules of Civil Procedure but either party may
petition the arbitrator to limit the scope of such discovery, in which event the
arbitrator shall determine the extent of discovery allowable in connection with
the dispute in question. Except as otherwise provided in this Agreement, the
arbitration shall be conducted in accordance with the rules of the American
Arbitration Association then in effect. The award of the arbitrator shall be
final and binding, and judgment upon an award may be entered in any court of
competent jurisdiction. In any such arbitration, the substantially prevailing
party shall pay the costs and reasonable attorneys' fees of the other party.
6.9 Governing Law.
-------------
This Agreement shall be governed by and construed in accordance with the laws of
the State of Washington without application of the principles of conflicts of
laws.
6.10. Effect on Other Agreements
--------------------------
Except as specified above, this Agreement does not modify, amend or supersede
the terms of the EGGHEAD, INC. NONQUALIFIED STOCK OPTION LETTER AGREEMENT AND
PLAN SUMMARY between the parties, which shall remain in full force and effect
according to their respective terms. In consideration of the mutual agreements
herein, the Change of Control Agreement dated September 25, 1996, and previously
entered into between the parties, is hereby terminated in all respects.
EXECUTED as of the day and year first written above.
EGGHEAD, INC.
By________________________
Its_______________________ _________________________________
EXECUTIVE
<PAGE>
ATTACHMENT A
For purposes of this Agreement, a "Change of Control" control shall
mean:
(a) A "Board Change" which, for purposes or this Agreement, shall have
occurred if a majority (excluding vacant seats) of the seats on the Company's
Board of Directors (the "Board") are occupied by individuals who were neither
(i) nominated by a majority of the Incumbent Directors nor (ii) appointed by
directors so nominated. An "Incumbent Director" is a member of the Board who has
been either (i) nominated by a majority of the directors of the Company then in
office or (ii) appointed by directors so nominated, but excluding for this
purpose any such individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person (as hereinafter
defined) other than the Board); or
(b) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of (i) 20% or more of either (A) the then outstanding shares of
Common Stock of the Company (the "Outstanding Company Common Stock") or (B) the
combined voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the "Outstanding
Company Voting Securities"), in the case of either (A) or (B) of this clause
(i), which acquisition is not approved in advance by a majority of the incumbent
Directors, or (ii) 33% or more of either (A) the Outstanding Company Common
Stock or (B) the Outstanding Company Voting Securities, in the case of either
(A) or (B) of this clause (ii), which acquisition is approved in advance by a
majority of the Incumbent Directors; provided, however that the following
-------- -------
acquisitions shall not constitute a Change of Control: (x) any acquisition by
the Company, (y) any acquisition by an employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation controlled by the
Company or (z) any acquisition by any corporation pursuant to a reorganization,
merger or consolidation, if, following such reorganization, merger or
consolidation, the conditions described in clauses (i), (ii) and (iii) of
subsection (c) of this Appendix A are satisfied; or
(c) Approval by the stockholders of the Company of a reorganization, merger or
consolidation, in each case, unless immediately following such reorganization,
merger or consolidation, (i) more than 60% of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
<PAGE>
generally in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all the individuals and entities who were
the beneficial owners, respectively, of the Outstanding Company Common Stock and
the Outstanding Company Voting Securities immediately prior to such
reorganization, merger or consolidation in substantially the same proportion as
their ownership immediately prior to such reorganization, merger or
consolidation of the Outstanding Company Common Stock and the Outstanding
Company Voting Securities, as the case may be, (ii) no Person (excluding the
Company, any employee benefit plan (or related trust) of the Company or such
corporation resulting from such reorganization, merger or consolidation and any
Person beneficially owning, immediately prior to such reorganization merger or
consolidation, directly or indirectly, 33% or more of the Outstanding Company
Common Stock or the Outstanding Voting Securities as the case may be)
beneficially owns directly or indirectly, 33% or more of, respectively, the
then outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation or the combined voting power of the then
outstanding voting securities of such corporation entitled to vote generally in
the election of directors, and (iii) at least a majority of the members of the
board of directors of the corporation resulting from such reorganization, merger
or consolidation were the Incumbent Directors at the time of the execution of
the initial agreement providing for such reorganization, merger or
consolidation; or
(d) Approval by the stockholders of the Company of (i) a complete
liquidation or dissolution of the Company or (ii) the sale or other disposition
of all or substantially all the assets of the Company, other than to a
corporation with respect to which immediately following such sale or other
disposition, (A) more than 60% of, respectively, the then outstanding shares of
common stock of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote generally in
the election of directors is then beneficially owed, directly or indirectly, by
all or substantially all the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and the
Outstanding Company Voting Securities immediately prior to such sale or other
disposition in substantially the same proportion as their ownership, immediately
prior to such sale or other disposition, of the Outstanding Company Common Stock
and the Outstanding Company Voting Securities, as the case may be, (B) no Person
(excluding the Company, any employee benefit plan (or related trust) of the
Company or such corporation and any Person beneficially owning, immediately
prior to such sale or other disposition, directly or indirectly, 33% or more of
the Outstanding Company Common Stock or the Outstanding Company Voting
Securities, as the case may be) beneficially owns, directly or indirectly, 33%
or more of, respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors and (C) at least a majority of the members of the board of directors
of such corporation were approved by a majority of the Incumbent Directors at
the time of the execution of the initial agreement or action of the Board
providing for such sale or other disposition of assets of the Company.
<PAGE>
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
BETWEEN EGGHEAD, INC. AND JIM KALASKY
-------------------------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made effective the
22nd day of January, 1998 (the "Effective Date"), between EGGHEAD, INC.
(the "Company"), and Jim Kalasky ("Executive").
Executive is currently serving as an officer of the Company. The
parties now wish to secure their future relationship. Accordingly, and in
consideration of the mutual covenants and conditions set forth in this
Agreement, the parties agree as follows:
ARTICLE 1 - TERM
1.1 Term
----
This Agreement will extend from the Effective Date for a period of three (3)
years; provided that this Agreement will be renewed automatically for a period
of three (3) years following its termination unless, prior to the date six
months from the end of any such three-year period, either party provides notice
to the other of its desire not to renew the Agreement.
ARTICLE 2 - COMPENSATION
2.1 Salary
------
Executive will receive an annual gross salary not less than the annual gross
salary Executive was receiving immediately prior to the Effective Date.
2.2 Additional Benefits
-------------------
During the term of this Agreement, the Company will provide Executive with
insurance, vacation, sick leave and other benefits as are approved by the
Company's Board of Directors and as are generally provided to other management-
level executives holding similar positions with the Company.
ARTICLE 3 - DUTIES OF EXECUTIVE
3.1 Duties
------
During the term of this Agreement a.) Executive's title shall be at least
commensurate in all material respects with the most significant of those held at
any time during the 90-day period immediately preceding the Effective Date and
b.) Executive's status, duties and responsibilities
<PAGE>
shall be reasonably commensurate with title; Executive will serve as an officer
of the Company and shall perform such duties as lawfully assigned to Executive.
The Executive shall report to the Chief Executive Officer of the Company.
ARTICLE 4 - TERMINATION
4.1 Termination Prior to the End of Term
------------------------------------
a) Either party may terminate this Agreement without cause.
(i) In the event that Executive exercises his right under this
subsection, he shall provide notice of his intent to terminate the Agreement not
less than one (1) month before the effective date of the termination. Regardless
of whether the Company elects to have Executive work through the notice period,
or elects to make Executive's resignation effective prior to the end of that
notice period, Executive shall be paid all compensation and benefits earned
through the notice period.
(ii) In the event that the Company exercises its right under this
subsection, the termination shall be effective immediately, or at such later
time as set forth in the notice (but in no event more than thirty days after the
date of the notice) and the Company shall pay to Executive the Severance
Benefits specified in Section 4.2.
The Company may, at its option, terminate this Agreement prior to the end of the
term for Cause. For purposes of this Agreement, "Cause" means the occurrence of
one or more of the following events: (a) failure or refusal to carry out any
lawful duties assigned to him by the Company's Board of Directors or the Chief
Executive Officer or any directions of the Board of Directors of the Company
reasonably consistent with such duties; (b) the conviction of the Executive of,
or the entrance by or on behalf of the Executive of a plea of nolo contendere
with respect to, violation of a state or federal criminal law (excluding non-
felony driving or traffic offenses) or other criminal act involving moral
turpitude; (c) any fraud, dishonesty or deception by the Executive that is
related to his duties for the Company; (d) any incident materially compromising
the Executive's ability to represent the Company with the public; (e) current
illegal use of drugs by the Executive; (f) any act or omission by the Executive
which substantially impairs the Company's business, goodwill or reputation; or
(g) any other material violation by the Executive of any provision of this
Agreement. In the event of a termination under this subsection, Executive shall
be paid all compensation and benefits earned through the date of termination,
but shall not be entitled to receive any further compensation or benefits other
than payments already due him as of that date. Upon notice by the Company of
any action or failure to act constituting Cause under any of clauses (a), (d) or
(f) or (g) of the second sentence of this paragraph (but excluding notice of
Cause pursuant to clause (g) based on any violation of Section 5 of this
Agreement, for which there is no cure period), the Company will provide the
Executive a reasonable opportunity to cure such act or failure to act, which
period shall be ten (10) work days.
<PAGE>
b) Executive may, at his option, terminate this Agreement prior to
the end of the term for Good Reason. For purposes of this subsection, Executive
will have Good Reason to terminate this Agreement if the Company violates
Section 3.1 above; Executive is relocated to a facility other than the Company's
headquarters in Spokane, Washington; or the Company has materially breached its
obligations under the Agreement (provided that the Company has been given
warning and notice of its alleged material breach and a reasonable opportunity
to correct the alleged material breach).
c) This Agreement shall terminate in the event that Executive dies,
or is unable to perform his duties as a result of a physical or mental
disability at any time during the term of this Agreement. In the event of a
termination under this subsection, Executive or his estate shall be paid all
compensation and benefits earned through the date of such termination, but shall
not be entitled to receive any compensation or benefits other than payments
already due him as of that date; provided that Executive's right to exercise
stock options awarded pursuant to the EGGHEAD, INC. 1993 STOCK OPTION PLAN shall
be governed by the terms of that plan. For purposes of this Agreement, Executive
will be considered unable to perform his duties as a result of a physical or
mental disability if that disability exists, or is reasonably expected to exist,
for more than ninety (90) days in any twelve consecutive calendar months.
4.2 Severance Benefits; Change in Control
-------------------------------------
In the event that the Company exercises its rights under Section 4.1(a)(ii)
(termination without Cause) or Executive exercises his rights under Section
4.1(b) (resignation for Good Reason), Executive will receive the following
severance benefits:
a) Commencing on the date of termination or resignation (the
"Termination Date"), the Company shall pay the Executive his then current base
salary for a period of twelve months (the "Initial Period"), less any lawful
withholding (such amount of twelve months' salary, in aggregate, the "Initial
Severance Amount"). The Initial Severance Amount shall be paid in a lump sum
payment within ten days of the Termination Date.
b) If the Executive has failed to commence alternative employment at
any time prior to the end of the Initial Period, the Company will continue to
pay the Executive at the rate of his base salary as of the Termination Date,
less any lawful withholding, in monthly installments for a period (the
"Extension Period") that will terminate on the earlier of: (i) the end of the
sixth month after the end of the Initial Period, or (ii) the date that the
Executive commences alternative employment. From time to time during the
Extension Period, but in no event more frequently than monthly, the Executive
will be available by telephone to update the Chief Executive Officer of the
Company on the status of his efforts to obtain alternative employment, and he
will notify the Company in writing within ten days after accepting alternative
employment. Upon accepting new employment, the Executive will not unreasonably
delay commencing work for his new employer in order to continue receiving
payments during the Extension Period. For purposes of this Agreement,
"alternative employment" is defined as any business relationship (excluding
consulting relationships of less than one month) from which the Executive
receives monthly W-
<PAGE>
2/1099 wages of at least 50% of his monthly salary as of the Termination Date.
If at any time during the Initial Period, or the Extension Period, George Orban
should no longer be Chief Executive Office of the Company, an amount equal to
the payments due during the Extension Period shall be placed in escrow, on
reasonable terms to be agreed upon by the Company and the Executive, for the
benefit of Executive.
c) Any stock option(s) issued to Executive pursuant to the EGGHEAD,
INC. 1993 STOCK OPTION PLAN (the "Plan") and the EGGHEAD, INC. NONQUALIFIED
STOCK OPTION LETTER AGREEMENT AND PLAN SUMMARY that are outstanding and
unexercised as of the Termination Date shall vest on a prorated basis as of
immediately prior to the Executive's termination or resignation on the
Termination Date (except as otherwise provided in the final sentence of this
subsection (c)). For purposes of the preceding sentence, "prorated basis" shall
mean, with respect to each such stock option, that it shall be deemed to be
vested as to that percentage of shares originally subject to the option equal to
the quotient of the number of weeks that the Executive was employed by the
Company during that stock option's entire vesting period (rounded up to the
nearest week) divided by the total number of weeks in the stock option's entire
vesting period (e.g. if a stock option has a three year vesting period, and the
Executive has worked 52 weeks of that vesting period as of the Termination Date,
the stock option would be deemed 33% vested as of immediately prior to
Executive's resignation or termination on the Termination Date.).
d) Continued coverage under the Company's medical, dental and vision
benefit programs at the same level that Executive received prior to the
termination for a period of eighteen months, or until Executive finds employment
which provides comparable benefits, whichever comes first. This period of paid
benefits will be in addition to any COBRA rights Executive may have under
applicable law.
e) In the event of a change in control, as defined in Attachment A
hereto, all of the Executive's stock options issued pursuant to the Plan, shall
vest immediately prior to such change in control.
ARTICLE 5 - RESTRICTIVE AGREEMENTS
5.1 Confidentiality. The Executive agrees not to use or disclose any
---------------
confidential information except as required to fulfill his duties and
responsibilities as an employee of the Company. As used herein, "confidential
information" means all trade secrets, non-public information, methods,
strategies, practices, computer programs and systems, research and related
documentation, customer lists and other data, marketing plans, financial
information, and all other compilations of information that relate in any matter
to the business of the Company or any of the direct or indirect subsidiaries of
the Company (such subsidiaries, the "Affiliate Entities") or any of them. The
Executive acknowledges that all confidential information is the proprietary and
confidential property of the Company or the Affiliate Entities. The Executive
further agrees to return all tangible items containing such confidential
information, wherever located and in whatever form,
<PAGE>
in addition to all other property belonging to the Company or the Affiliate
Entities, on or before the Termination Date.
5.2 Non-Solicitation. The Executive agrees that during the Severance
----------------
Period and Extension Period (if any) he will not individually, or in conjunction
with any other person, corporation or other entity, in any capacity, directly or
indirectly, (i) solicit or recruit any employee of or consultant to the Company
or any of the Affiliate Entities or (ii) cause or seek to cause (A) any employee
of or consultant to the Company or any of the Affiliate Entities to terminate
his or her employment or consulting relationship with the Company or any of the
Affiliate entities or (B) any customer, client or vendor of the Company or any
of the Affiliate Entities to alter or terminate any business relationship with
the Company or any Affiliate Entities.
5.3 Non-Competition. For a period of eighteen months from the Termination
---------------
Date, the Executive shall not, directly or indirectly, be employed by, own,
manage, join, control or participate in the ownership, management, operation or
control of or be connected with, (as that phrase is described below), any person
or entity engaged in any operations in competition with the Company or any of
the Affiliate entities in the retail sale of computer software or computer
hardware, or both, through stores, mail order, telephonic means or electronic
commerce, including, without limitation, through the Internet. For purposes of
this Section 5.3, the following shall be deemed to be persons or entities not
engaged in operations in competition with Egghead or any if its Affiliated
Entities: any person or entity if the sale of computer software and computer
hardware generates less than ten (10) percent of its total annual revenue, and
less than ten (10) percent of the total annual revenue of the division of such
person or entity, if any, which Executive is connected with. The Board of
Directors of the Company may, in its sole discretion, release the Executive from
any or all of his obligations pursuant to this Section 5.3, provided that such
release shall not be effective unless in writing. The Executive shall be deemed
to "be connected with" such business if such business is carried on by a
partnership, corporation or association of which he is an officer, director,
employee, partner, member, consultant or agent; provided, however, that nothing
herein shall prevent the purchase or ownership by the Executive of shares which
constitute less than 2% of the outstanding equity securities of a publicly or
privately held corporation.
5.4 Violation. The Executive acknowledges that his confidentiality,
---------
nonsolicitation and non-competition obligations under this Article 5 are
material inducements to the Company entering into this Agreement, that his
violation thereof shall constitute a material breach of this Agreement and that
any disclosure or action by the Executive in violation of this Article 5 will
cause serious and irreparable injury to the Company for which there is no
adequate remedy at law. If, upon investigation, the Company determines that the
Executive is in violation of this Article 5, then the Company will give the
Executive written notice of the violation, and if the Executive shall not have
cured such violation within four business days of such notice, , then the
Company may retain as liquidated damages the balance of the payments coming due
to the Executive under Section 4.2 hereof, if any, and may obtain immediate and
permanent injunctive relief in any court of competent jurisdiction. The rights
and remedies set forth in this Article 5 are in addition to all other legal,
equitable and contractual rights and remedies available to the Company.
<PAGE>
ARTICLE 6 - GENERAL
6.1 Further Assurances
------------------
Each party will, at its own expense and without expense to the other party,
execute and deliver such further agreements and other documents and do such
further acts and things as the other party reasonably requests to evidence,
carry out or give full force and effect to the intent of this Agreement. In
particular, the Company will modify or amend option letters as necessary to
permit the accelerated vesting of options under the circumstances described in
Section 4.2.
6.2 Severability
------------
If any provision of this Agreement is unenforceable or invalid for any reason it
will be severable from the remainder of this Agreement and, in its application
at that time, this Agreement will be construed as though such provision was not
contained herein and the remainder will continue in full force and effect and be
construed as if this Agreement had been executed without the invalid or
unenforceable provision.
6.3 Waiver and Consent
------------------
No consent or waiver, express or implied, by either party to or of any breach or
default by the other party of any or all of its obligations under this Agreement
will be valid unless it is in writing and stated to be a consent or waiver
pursuant to this section.
6.4 Notice
------
Every notice to be given pursuant to this Agreement by one party to the other
will be in writing and will be delivered or sent by registered or certified mail
or by personal delivery. Notices shall be effective upon receipt.
6.5 Binding Effect
--------------
This Agreement will inure to the benefit of and be binding upon the respective
legal representatives and successors.
6.6 Counterparts
------------
This Agreement may be executed in any number of counterparts with the same
effect as if all parties to this Agreement or such other writing had signed the
same document and all counterparts will be construed together and will
constitute one and the same instrument.
<PAGE>
6.7 Headings
--------
The section headings in this Agreement are for reference and shall not by
themselves determine the construction or interpretation of the Agreement.
6.8 Arbitration
-----------
All disputes between the parties relating to this Agreement shall be submitted
to binding arbitration in the City of Spokane, Washington. Either party may
commence the arbitration by delivery of a written notice to the other,
describing the issue in dispute and its position with regard to the issue. If
the parties are unable to agree on an arbitrator within thirty (30) days
following delivery of such notice, the arbitrator shall be selected by using the
selection procedures established by the American Arbitration Association.
Discovery shall be allowed in connection with any such arbitration to the same
extent permitted by the Washington Rules of Civil Procedure but either party may
petition the arbitrator to limit the scope of such discovery, in which event the
arbitrator shall determine the extent of discovery allowable in connection with
the dispute in question. Except as otherwise provided in this Agreement, the
arbitration shall be conducted in accordance with the rules of the American
Arbitration Association then in effect. The award of the arbitrator shall be
final and binding, and judgment upon an award may be entered in any court of
competent jurisdiction. In any such arbitration, the substantially prevailing
party shall pay the costs and reasonable attorneys' fees of the other party.
6.9 Governing Law.
-------------
This Agreement shall be governed by and construed in accordance with the laws of
the State of Washington without application of the principles of conflicts of
laws.
6.10. Effect on Other Agreements
--------------------------
Except as specified above, this Agreement does not modify, amend or supersede
the terms of the EGGHEAD, INC. NONQUALIFIED STOCK OPTION LETTER AGREEMENT AND
PLAN SUMMARY between the parties, which shall remain in full force and effect
according to their respective terms. In consideration of the mutual agreements
herein, the Change of Control Agreement dated July 1, 1996, and previously
entered into between the parties, is hereby terminated in all respects.
EXECUTED as of the day and year first written above.
EGGHEAD, INC.
By__________________________________ _____________________________
Its_________________________________ EXECUTIVE
<PAGE>
ATTACHMENT A
For purposes of this Agreement, a "Change of Control" control shall
mean:
(a) A "Board Change" which, for purposes or this Agreement, shall have
occurred if a majority (excluding vacant seats) of the seats on the Company's
Board of Directors (the "Board") are occupied by individuals who were neither
(i) nominated by a majority of the Incumbent Directors nor (ii) appointed by
directors so nominated. An "Incumbent Director" is a member of the Board who has
been either (i) nominated by a majority of the directors of the Company then in
office or (ii) appointed by directors so nominated, but excluding for this
purpose any such individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person (as hereinafter
defined) other than the Board); or
(b) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of (i) 20% or more of either (A) the then outstanding shares of
Common Stock of the Company (the "Outstanding Company Common Stock") or (B) the
combined voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the "Outstanding
Company Voting Securities"), in the case of either (A) or (B) of this clause
(i), which acquisition is not approved in advance by a majority of the incumbent
Directors, or (ii) 33% or more of either (A) the Outstanding Company Common
Stock or (B) the Outstanding Company Voting Securities, in the case of either
(A) or (B) of this clause (ii), which acquisition is approved in advance by a
majority of the Incumbent Directors; provided, however that the following
-------- -------
acquisitions shall not constitute a Change of Control: (x) any acquisition by
the Company, (y) any acquisition by an employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation controlled by the
Company or (z) any acquisition by any corporation pursuant to a reorganization,
merger or consolidation, if, following such reorganization, merger or
consolidation, the conditions described in clauses (i), (ii) and (iii) of
subsection (c) of this Appendix A are satisfied; or
(c) Approval by the stockholders of the Company of a reorganization,
merger or consolidation, in each case, unless immediately following such
reorganization, merger or consolidation, (i) more than 60% of, respectively, the
then outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
<PAGE>
generally in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all the individuals and entities who were
the beneficial owners, respectively, of the Outstanding Company Common Stock and
the Outstanding Company Voting Securities immediately prior to such
reorganization, merger or consolidation in substantially the same proportion as
their ownership immediately prior to such reorganization, merger or
consolidation of the Outstanding Company Common Stock and the Outstanding
Company Voting Securities, as the case may be, (ii) no Person (excluding the
Company, any employee benefit plan (or related trust) of the Company or such
corporation resulting from such reorganization, merger or consolidation and any
Person beneficially owning, immediately prior to such reorganization merger or
consolidation, directly or indirectly, 33% or more of the Outstanding Company
Common Stock or the Outstanding Voting Securities as the case may be)
beneficially owns directly or indirectly, 33% or more of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation or the combined voting power of the then
outstanding voting securities of such corporation entitled to vote generally in
the election of directors, and (iii) at least a majority of the members of the
board of directors of the corporation resulting from such reorganization, merger
or consolidation were the Incumbent Directors at the time of the execution of
the initial agreement providing for such reorganization, merger or
consolidation; or
(d) Approval by the stockholders of the Company of (i) a complete
liquidation or dissolution of the Company or (ii) the sale or other disposition
of all or substantially all the assets of the Company, other than to a
corporation with respect to which immediately following such sale or other
disposition, (A) more than 60% of, respectively, the then outstanding shares of
common stock of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote generally in
the election of directors is then beneficially owed, directly or indirectly, by
all or substantially all the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and the
Outstanding Company Voting Securities immediately prior to such sale or other
disposition in substantially the same proportion as their ownership, immediately
prior to such sale or other disposition, of the Outstanding Company Common Stock
and the Outstanding Company Voting Securities, as the case may be, (B) no Person
(excluding the Company, any employee benefit plan (or related trust) of the
Company or such corporation and any Person beneficially owning, immediately
prior to such sale or other disposition, directly or indirectly, 33% or more of
the Outstanding Company Common Stock or the Outstanding Company Voting
Securities, as the case may be) beneficially owns, directly or indirectly, 33%
or more of, respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors and (C) at least a majority of the members of the board of directors
of such corporation were approved by a majority of the Incumbent Directors at
the time of the execution of the initial agreement or action of the Board
providing for such sale or other disposition of assets of the Company.
<TABLE> <S> <C>
<PAGE>
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