<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 ended October 2, 1999
---------------
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.COM, INC.
-----------------
(Exact name of registrant as specified in its charter)
Washington 91-1296187
---------- ----------
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification Number)
521 S.E. Chkalov Drive 98683
---------------------- -----
Vancouver, Washington (Zip Code)
---------------------
(Address of principal executive offices)
(360) 883-3447
--------------
(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:
Class Outstanding at
----- November 4, 1999
Common Stock ----------------
$.01 par value 30,808,260 shares
1
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PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements and Supplementary Data
EGGHEAD.COM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
April 3, October 2,
ASSETS 1999 1999
------------------ -----------------
Current assets: (unaudited)
<S> <C> <C>
Cash and cash equivalents $ 119,467 $ 99,363
Accounts receivable, net of allowance for doubtful
accounts of $920 and $767, respectively 2,316 2,424
Merchandise inventories, net 12,599 9,500
Prepaid expenses and other current assets 759 1,688
--------- ---------
Total current assets 135,141 112,975
Property and equipment, net 9,196 12,017
Goodwill, net 31,631 30,773
Other assets 217 786
--------- ---------
$ 176,185 $ 156,551
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable $ 16,276 $ 20,572
Accrued liabilities 12,398 10,239
Reserves and liabilities related to restructuring 6,517 2,423
--------- ---------
Total liabilities 35,191 33,234
--------- ---------
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;
30,675,059 and 30,791,244 shares issued
and outstanding, respectively 307 308
Additional paid-in capital 249,927 250,448
Retained deficit (109,240) (127,439)
--------- ---------
Total shareholders' equity 140,994 123,317
--------- ---------
$ 176,185 $ 156.551
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
(unaudited) (unaudited)
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September October September October
26, 2, 26, 2,
1998 1999 1998 1999
----------- --------- ----------- ---------
Net sales $35,075 $ 43,350 $ 64,616 $ 83,959
Cost of sales 31,342 40,931 57,805 78,629
----------- --------- ---------- ----------
Gross margin 3,733 2,419 6,811 5,330
Selling and marketing expense 6,941 9,366 12,731 18,886
General and administrative expense 3,687 3,745 6,754 7,937
Restructuring - (2,735) (2,735)
Merger related expense - 536 708
Amortization of goodwill 429 430 848 859
Depreciation 507 1,213 872 2,316
----------- --------- ---------- ----------
Operating loss (7,831) (10,136) (14,394) (22,641)
Other income, net 632 2,455 1,646 4,442
----------- --------- ---------- ----------
Loss before income taxes (7,199) (7,681) (12,748) (18,199)
Income tax provision - - - -
----------- --------- ---------- ----------
Net loss $(7,199) $ (7,681) $(12,748) $(18,199)
=========== ========= ========== ==========
Basic loss per share $ (0.30) $ (0.25) $ (0.53) $ (0.59)
=========== ========= ========== ==========
Weighted average common shares outstanding 24,281 30,783 23,925 30,747
=========== ========= ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
3
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EGGHEAD.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
26 Weeks Ended
(unaudited)
---------------------------------------------
September 26, October 2,
1998 1999
------------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss from operations $(12,748) $(18,199)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,720 3,176
Deferred rent and other (3) (31)
(Gain) loss on disposition of assets (275) 38
Changes in assets and liabilities:
Accounts receivable, net 2,949 (108)
Merchandise inventories (3,748) 3,099
Prepaid expenses & other current assets 210 (929)
Other assets (76) (571)
Accounts payable (2,819) 4,296
Restructuring reserves (8,596) (4,094)
Accrued liabilities (443) (2,159)
------------------- --------------------
Net cash used in operating activities (23,829) (15,482)
------------------- --------------------
Cash flows from investing activities:
Additions to property and equipment (1,606) (5,144)
Proceeds from sale of property and equipment 7,102 -
------------------- --------------------
Net cash provided by (used in) investing activities 5,496 (5,144)
------------------- --------------------
Cash flows from financing activities:
Proceeds from stock issuances 10,475 522
------------------- --------------------
Net cash provided by financing activities 10,475 522
------------------- --------------------
Net decrease in cash and cash equivalents (7,858) (20,104)
Cash and cash equivalents at beginning of period 67,381 119,467
------------------- --------------------
Cash and cash equivalents at end of period $ 59,523 $ 99,363
=================== ====================
Supplemental disclosures of cash
paid (received) during the year:
Interest $ 6 $ -
Income taxes $ (233) $ (284)
</TABLE>
See Notes to Consolidated Financial Statements.
4
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EGGHEAD.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Amounts in thousands)
<TABLE>
<CAPTION>
Common Stock Additional
-------------- Paid-in Retained
Shares Amount Capital (Deficit) Total
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, April 4, 1999 30,675 $307 $249,927 $(109,240) $140,994
Stock issued for cash, pursuant to employee stock
purchase plan 16 - 114 - 114
Stock issued for cash, pursuant to stock option plan 96 1 366 - 367
Stock grants 4 - 41 - 41
Net loss - - - (18,199) (18,199)
-------------------------------------------------
Balance, October 2, 1999 30,791 $308 $250,448 $(127,439) $123,317
=================================================
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
All references herein to fiscal 1999 relate to the fiscal year ended April 3,
1999 and all references to fiscal 2000 refer to the fiscal year ending April 1,
2000.
Note 1 Basis of Presentation
The accompanying unaudited financial statements of Egghead.com, Inc. and
subsidiaries ("Egghead.com" or the "Company") 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 of 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 53-week period ended April 3, 1999, contained in the Company's Annual Report
on Form 10-K, as amended, filed pursuant to the Securities Exchange Act of 1934.
Operating results for the 26 weeks ended October 2, 1999 are not necessarily
indicative of the results that may be expected for the full fiscal year ending
April 1, 2000.
Fiscal Years
The Company uses a 52/53 week fiscal year, ending on the Saturday nearest March
31 of each year. Fiscal quarters are such that the first three quarters consist
of 13 weeks and the fourth quarter consists of the remaining 13/14 weeks.
Fiscal 2000 will consist of 52 weeks. Fiscal 1999 had 53 weeks.
Reclassifications
Certain prior year balances have been reclassified to conform with the current
period presentation. These reclassifications had no effect on retained earnings
or net income as previously reported.
Note 2 Merger
On July 14, 1999, Egghead.com announced that it had signed a definitive merger
agreement with Onsale, Inc. ("Onsale"), a leading internet retailer. In the
merger, each outstanding share of Egghead.com common stock (other than
dissenting shares meeting certain conditions) will be converted into the right
to receive .565 shares of Onsale common stock (the "Exchange Ratio"). The
shares of Onsale common stock received by Egghead.com shareholders in the merger
will represent stock ownership in the combined company after the merger.
Options to purchase Egghead.com common stock will be assumed by Onsale and
converted into options to purchase Onsale common stock, and the exercise price
and number of shares of Onsale common stock subject to each such option will be
appropriately adjusted to reflect the Exchange Ratio. The merger is intended by
the parties to qualify as a tax-free reorganization and be accounted for as a
"pooling of interests." If the merger is consummated, Egghead.com, Inc. will
become a wholly-owned subsidiary of Onsale. Upon closing of the merger, Onsale
will change its name to Egghead.com, Inc. so that the combined company will be
called Egghead.com, Inc. after the merger. The merger is subject to approval by
shareholders of both companies, regulatory approvals and satisfaction or waiver
of certain other conditions. There can be no assurance that the proposed merger
will ultimately be consummated.
Note 3 Loss Per Share
Basic loss per share amounts are computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the period in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 128,
Earnings per Share. Diluted earnings per common share are not disclosed as
potentially dilutive common stock equivalents would be anti-dilutive to the loss
per share calculation for the 13-week and 26-week periods ended October 2, 1999
and September 26, 1998.
6
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Note 4 IncomeTaxes
Egghead.com determines its income tax accounts in accordance with SFAS No. 109,
Accounting for Income Taxes. Deferred income taxes result primarily from
temporary differences in the recognition of certain items for income tax and
financial reporting purposes.
Given its ongoing losses, Egghead.com does not believe that its deferred tax
assets meet the realization criteria of SFAS No. 109. Under SFAS No. 109, the
realization of the deferred tax assets depends on generating future taxable
income. Egghead.com management has determined that it is more likely than not
that the deferred tax assets could not be currently realized. Therefore, the
Company did not record a tax benefit for the three months and six months ended
September 26, 1998 and October 2, 1999.
Note 5 Commitments and Contingencies
Significant Suppliers
During the three months ended October 2, 1999, one primary distributor accounted
for approximately 44% of Egghead.com's purchases. The loss of this distributor
could have a material adverse effect on Egghead.com's operating results and
financial condition.
Credit Line for Inventory Financing
The Company has available credit lines of up to $10 million for the financing of
inventory. The terms of such financings vary depending on the vendor terms.
The credit lines are fully secured by the inventory purchased through the
agreements with the lenders. The lenders have reserved the right to discontinue
the inventory financing at any time at their discretion. At October 2, 1999,
there were no borrowings outstanding under these credit lines.
Leases
Egghead.com leases corporate offices and distribution facilities under operating
leases with remaining terms ranging from one to five years. The leases
generally require Egghead.com to pay taxes, insurance and certain common area
maintenance costs.
Aggregate rental expense, including common area maintenance charges, for all
operating leases was approximately $458,000 and $333,000 for the three months
ended September 26, 1998 and October 2, 1999, and $669,000 and $753,000 for the
six months then ended, respectively. As of October 2, 1999, future minimum
rental payments under noncancelable operating leases for headquarters and
distribution facilities and equipment consisted of the following:
<TABLE>
<CAPTION>
Operating
Leases
Fiscal Year (in thousands)
--------------
<S> <C>
Remainder of 2000 $ 683
2001 1,095
2002 463
2003 467
Thereafter 583
------
Total minimum payments $3,291
======
</TABLE>
The Company has recorded a restructuring liability for the closure of Egghead
retail stores and the Sacramento, California distribution center, and a
significant reduction in headquarters staff. The restructuring liability was
$2.4 million at October 2, 1999, of which $2.2 million related to retail lease
obligations, which are not included in the above schedule of future minimum
rental payments.
7
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements of Egghead.com and the notes thereto included
elsewhere in this filing. References in this filing to "Egghead.com,"
"Egghead," "we," "our," and "us" refer to Egghead.com, Inc. and our wholly owned
subsidiaries, unless the context otherwise requires.
The following "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains forward-looking statements based on current
expectations, estimates and projections about our industry, management's beliefs
and certain assumptions made by management. All statements, trends, analyses
and other information contained in this Report on Form 10-Q relative to trends
in net sales, gross margin, expense levels, liquidity and capital resources, as
well as other statements in this Report on Form 10-Q, including, but not limited
to, words such as "expect(s)," "anticipate(s)," "intend(s)," "plan(s),"
"believe(s)," "seek(s)," "estimate(s)," and other similar expressions,
constitute forward-looking statements. These forward-looking statements are not
guarantees of future performance. Because these forward-looking statements
involve risks and uncertainties, there are important factors that could cause
actual results to differ materially from those expressed or implied by these
forward-looking statements, including those set forth under "Liquidity and
Capital Resources" and "Additional Factors That May Affect Future Results"
included in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Particular attention should be paid to the
cautionary statements involving our limited online operating history, our
history of losses and expectation of future losses, the unpredictability of our
future revenues and fluctuations in our operating results, the fluctuation of
our operating results due to seasonality, the potential negative effects if the
proposed merger with Onsale is not completed, the risks of systems failures and
business interruptions, the risks of capacity constraints, the risks relating to
systems development, management of growth, the intensely competitive nature of
the electronic commerce industry, reliance on third parties and reliance on
manufacturers, distributors and suppliers. Readers are cautioned not to place
undue reliance on the forward-looking statements, which speak only as of the
date made. Except as required by law, we undertake no obligation to update any
forward-looking statement, whether as a result of new information, future events
or otherwise. Readers, however, should carefully review the factors set forth
in other reports or documents that we file from time to time with the Securities
and Exchange Commission.
Proposed Merger
On July 14, 1999, Egghead.com announced that it had signed a definitive
merger agreement with Onsale, a leading internet retailer. In the merger, each
outstanding share of Egghead.com common stock (other than dissenting shares
meeting certain conditions) will be converted into the right to receive .565
shares of Onsale common stock (the "Exchange Ratio"). The shares of Onsale
common stock received by Egghead.com shareholders in the merger will represent
stock ownership in the combined company after the merger. Options to purchase
Egghead.com common stock will be assumed by Onsale and converted into options to
purchase Onsale common stock, and the exercise price and number of shares of
Onsale common stock subject to each such option will be appropriately adjusted
to reflect the Exchange Ratio. The merger is intended by the parties to qualify
as a tax-free reorganization and be accounted for as a "pooling of interests."
If the merger is consummated, Egghead.com will become a wholly-owned subsidiary
of Onsale. Upon closing of the merger, Onsale will change its name to
Egghead.com, Inc. so that the combined company will be called Egghead.com, Inc.
after the merger. The merger is subject to approval by shareholders of both
companies, regulatory approvals and satisfaction or waiver of certain other
conditions. Egghead.com filed a proxy statement with the Securities and Exchange
Commission that was distributed to shareholders of record as of September 20,
1999. A special shareholder meeting of Egghead.com was held on November 4,
1999, to seek approval of the merger, and was adjourned until November 19, 1999
to allow additional time for shareholders to cast their votes. Egghead.com is
incorporated in Washington state, and therefore requires an affirmative vote of
two-thirds of the outstanding shares to authorize the merger. As of the time of
the November 4, 1999 adjournment, a majority of shareholders had voted in favor
of the merger with Onsale. There can be no assurance that the proposed merger
will ultimately be consummated.
8
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Overview
We are a leading online retailer of personal computer hardware, software,
peripherals, accessories and other related products. In addition to computer-
related products, we sell consumer electronics and other consumer and business
goods.
Egghead, Inc. began operations primarily as a traditional software
reseller. The predecessor to Egghead, Inc., DJ&J Software Corporation, was
incorporated in Washington in 1983. Egghead, Inc. was incorporated in Washington
in 1984 and became the parent company to DJ&J Software Corporation. By 1992,
Egghead, Inc. had over 200 retail store locations and had begun a direct mail
division and a Corporate, Government and Educational Sales Division. On May 13,
1996, Egghead, Inc. sold the Corporate, Government and Educational Sales
Division for $45.0 million. In response to continuing retail store losses,
Egghead, Inc. closed 70 retail stores in February 1997 and recorded a related
$24.0 million restructuring and asset impairment charge. On August 14, 1997,
Egghead, Inc. acquired Surplus Software, Inc. ("Surplus Direct"). Surplus Direct
owned and operated two Web sites and a direct mail division which specialized in
excess, closeout and refurbished computer related merchandise. On February 28,
1998, we changed our name from Egghead, Inc. to Egghead.com, Inc., closed our
remaining retail stores and shifted our primary business emphasis to electronic
commerce. As part of this transition, we closed our distribution center in
Sacramento, California, combined our management and operations with those of
Surplus Direct and consolidated the majority of our operations in Vancouver,
Washington.
Operations. Net sales, cost of sales, gross margin and selling and
marketing expenses consist of the results of our online shopping Web sites and
inbound telephone orders. Customers can purchase products via the Internet at
our online store, or can browse through our online store or review advertising
flyers and then contact the inbound telephone center to complete purchases. We
offer discounts to businesses, educational institutions and governmental
entities that purchase large volumes for use or for resale.
Anticipated Losses. We have incurred substantial losses in the operation
and closure of our former retail store network and in the operation of our
online store. As of October 2, 1999, we had a retained deficit of $127.4
million. We have not achieved profitability as an electronic commerce company
and expect to continue to incur substantial net losses for the foreseeable
future. We plan to continue to enhance our brand name through marketing and
advertising programs, offer additional categories of merchandise for sale on our
online store and improve and enhance our technology, infrastructure and systems.
These initiatives will likely result in operating expenses that are higher than
current operating expenses. We will need to generate significantly higher
revenues to achieve profitability and maintain profitability if it is achieved.
Although our net sales from electronic commerce have grown as compared with
comparable prior year periods, such growth rates may not be sustainable.
Additionally, we have experienced a historical trend of decreasing gross margin
percentage, which increases the volume of net sales necessary for us to achieve
profitability. Because of these and other factors, we believe that period-to-
period comparisons of our historical results of operations are not good
indicators of our future performance.
9
<PAGE>
Results of Operations--Three and Six Months Ended September 26, 1998 Compared
with the Three and Six Months Ended October 2, 1999
The following table shows the relationship of certain items relating to
continuing operations included in our Consolidated Statements of Operations
expressed as a percentage of net sales:
<TABLE>
<CAPTION>
Percentage of Net Sales
---------------------------------------------------------------------------
13 weeks ended 26 weeks ended
---------------------------------------------------------------------------
September 26, October 2, September 26, October 2,
1998 1999 1998 1999
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 89.4 94.4 89.5 93.7
---------------------------------------------------------------------------
Gross margin 10.6 5.6 10.5 6.3
Selling and marketing expense 19.8 21.6 19.7 22.5
General and administrative expense 10.5 8.6 10.4 9.5
Restructuring - (6.3) - (3.3)
Merger related expense - 1.2 - 0.8
Depreciation and amortization expense 2.6 3.8 2.7 3.8
---------------------------------------------------------------------------
Operating loss (22.3) (23.4) (22.3) (27.0)
Other income, net 1.8 5.7 2.6 5.3
---------------------------------------------------------------------------
Loss before income taxes (20.5)% (17.7)% (19.7)% (21.7)%
===========================================================================
</TABLE>
10
<PAGE>
Net Sales. Total net sales for the second quarter of fiscal 2000 were
$43.4 million, a 23.6% increase from $35.1 million for the second quarter of
fiscal 1999. Net sales for the six months ended October 2, 1999 were $84.0
million, a 29.9% increase from $64.6 million for the same period in fiscal 1999.
The increases in net sales for the second quarter and first six-month period of
fiscal 2000 were primarily attributable to an increase in the online customer
base, significant investments in marketing programs designed to promote and
maintain brand awareness, an increase in the number of daily and weekly online
auctions, an increase in the categories and amount of merchandise offered and
advertising revenue. Our customer accounts increased to approximately 1.25
million as of October 2, 1999 from approximately 727,000 as of September 26,
1998.
Gross Margin. Gross margin consists of net merchandise sales and
advertising revenue minus cost of sales. Cost of sales includes initial margin
(net sales minus cost of products sold), obsolete inventory charges and net
shipping (shipping reimbursements less shipping costs). Gross margin from net
sales was $2.4 million, or 5.6% of sales, for the second quarter of fiscal 2000,
a reduction from gross margin of 10.6% of sales for the comparable prior year
period. Gross margin from net sales was $5.3 million, or 6.3% of sales, for the
six months ended October 2, 1999, compared with gross margin of 10.5% of sales
for the same period in fiscal 1999. Gross margin in the second quarter and
first six-month period of fiscal 2000 reflects continued downward pressure due
to certain competitors' competitive pricing strategies, which was partially
offset by freight and handling revenue. We have responded to these competitive
pressures by reducing the selling prices on certain products. This reduction in
selling prices had a material adverse impact on our second quarter fiscal 2000
gross margins when compared to our historical online gross margins. Management
has initiated, and will continue to initiate, actions in an attempt to offset
the reduction in gross margins; however, there can be no assurance that we will
be able to maintain gross margins or that this reduction in selling prices will
not negatively affect our gross margins in the third quarter of fiscal 2000.
Selling and Marketing Expense. Selling and marketing expense consists
primarily of operating expenses related to marketing, inbound telephone support,
online store support and distribution. Such operating expenses include
promotional agreements for online and offline advertising, credit card
processing costs, payroll and benefits, telecommunications, bad debts and
supplies. The selling and marketing expenses have increased $2.4 million and
$6.2 million for the second quarter and first six-month period of fiscal 2000,
respectively, from the comparable periods in fiscal year 1999. The increases in
selling and marketing expenses were primarily attributable to our efforts to
improve customer service performance, enhance our brand name recognition, and
expand our online shopping capabilities. However, we cannot assure you that the
increases in such expenses will actually result in the intended increases and
expansions.
General and Administrative Expense. General and administrative expense
consists primarily of payroll and related expenses of headquarters support
functions, such as executive, merchandising, purchasing, engineering,
accounting, recruiting and facilities expenses and other general corporate
expenses. The general and administrative expenses for the second quarter of
fiscal 2000 decreased 10.6% to $3.7 million, or 8.6% of sales, as compared with
$4.2 million, or 10.3% of sales for the first quarter of fiscal 2000. The
general and administrative expenses have remained unchanged at $3.7 million for
the second quarter of fiscal 2000 from the comparable period in fiscal year
1999, while these expenses have increased $1.2 million for the comparable six-
month periods. This increase was primarily due to increased payroll and other
overhead costs to support our sales growth.
Restructuring. Restructuring income of $2.7 million reflects a change in
management's estimate of costs remaining to complete the closure of our retail
network, which is substantially complete. The revision in estimates during the
quarter ended October 2, 1999 primarily related to the resolution of certain
lease obligations for former retail facilities.
Merger related expense. Merger related expense of $0.5 million and $0.7
million for the second quarter and first six-month period of fiscal 2000
represents costs incurred related to the proposed merger with Onsale, for which
recognition has not been deferred, primarily related to employee retention.
Depreciation and Amortization Expense. Depreciation and amortization
expense consists primarily of depreciation of our capital equipment and
amortization of goodwill recorded in connection with the acquisition of Surplus
Direct in August 1997. Depreciation expense of $1.2 million and $2.3 million for
the second quarter and first six-month period of fiscal 2000, respectively,
increased compared with $0.5 million and $0.9 million for the comparable periods
in fiscal year 1999. Net property and equipment increased $2.8 million to $12.0
million at
11
<PAGE>
October 2, 1999 from $9.2 million at April 3, 1999. These increases are
primarily due to the purchasing of hardware and software necessary for expanding
our Web site capabilities and serving our increasing customer base, and
leasehold improvements to our headquarters in Vancouver, Washington and our
distribution facility. Amortization expense remained consistent for each of the
second quarters of fiscal 2000 and fiscal 1999 at $0.4 million.
Other Income, Net. Other income, net for the second quarter and first six-
month period of fiscal 2000 was $2.4 million and $4.4 million, respectively,
compared with $0.6 million and $1.6 million for the same periods of fiscal 1999.
These increases were primarily attributable to an increase in interest income,
resulting from higher cash balances due to the issuance of an additional 5.75
million shares of common stock through a public offering in March 1999, which
resulted in net proceeds of $72.9 million. In addition, other income, net for
the quarter ended October 2, 1999 includes approximately $0.5 million of non-
recurring income primarily related to the final settlement of certain pre-
acquisition contingencies from the purchase of Surplus Direct in August 1997.
Income Taxes. Due to our ongoing net operating losses, we did not record a
provision for income taxes for the second quarter of fiscal 2000 or fiscal
1999. Given our recent losses, we have determined that our deferred tax assets
do not meet the realization criteria of Statement of Financial Accounting
Standards ("SFAS") No. 109, Accounting for Income Taxes. Under SFAS No. 109, the
realization of the deferred tax assets depends on generating future taxable
income. We have determined that it is more likely than not that the deferred tax
assets could not currently be realized. Until we have determined that all of the
existing net operating losses are realizable, we will not record a tax charge or
benefit for future operating results. Our net operating losses can be recovered
for tax purposes over a 15-year period from origin if profitability is achieved.
See Note 4 of Notes to Consolidated Financial Statements.
Liquidity and Capital Resources
In recent fiscal years, we have funded our operations through cash provided by
operations, public issuance of common stock, asset sales, exercises of stock
options and the proceeds relating to the sale of the Corporate, Government and
Educational Sales Division.
Cash and cash equivalents decreased to $99.4 million as of October 2, 1999
from $119.5 million at April 3, 1999. The decrease in the cash balance was
primarily due to net cash used in operating activities of $15.5 million and net
cash used in investing activities of $5.1 million.
Cash used in operating activities of $15.5 million for the first six-month
period of fiscal 2000 was primarily due to the net loss of $18.2 million, a
decrease in accrued liabilities of $2.2 million, and a $4.1 million decrease in
the restructure reserve liability, partially offset by depreciation and
amortization of $3.2 million, a $3.1 million decrease in inventory, and a $4.3
increase in accounts payable.
Net cash used in investing activities of $5.1 million for the first six-month
period of fiscal 2000 consisted of capital expenditures, primarily related to
the upgrading of the Web site software platforms and related hardware, and
leasehold improvements to the new distribution facility.
Cash provided by financing activities of $0.5 million for the first six-month
period of fiscal 2000 consisted of proceeds from stock issuances under our stock
option and stock purchase plans.
As of October 2, 1999, our principal source of liquidity was $99.4 million of
cash. We have credit lines totaling $10.0 million for the financing of
inventory. The credit lines are fully secured by the inventory purchased. As of
October 2, 1999, there were no borrowings outstanding under these lines of
credit. As of October 2, 1999, our principal commitments consisted of
obligations in connection with operating leases and commitments for advertising
and promotional arrangements. Although we have no material commitments for
capital expenditures, we anticipate future purchases related to enhancements of
our Web site to improve functionality and navigation, incorporating features
that are intended to improve the customer shopping experience, and scalability
and performance of our Web site. We estimate capital expenditures through the
end of fiscal 2000 to be approximately $5.0 million. See Note 5 of Notes to
Consolidated Financial Statements.
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We believe that our current cash and cash equivalent balances, without
considering the effect of the consummation of the proposed merger with Onsale,
will be sufficient to meet our anticipated cash needs for working capital and
capital expenditures for the next twelve months. Our future liquidity and
capital requirements will depend upon numerous factors discussed under the
"Additional Factors That May Affect Future Results" section of this Report on
Form 10-Q. In addition, we may, from time to time, consider the acquisition of
or investment in complementary businesses, products, services and technologies,
which might increase our liquidity requirements or cause us to issue additional
equity or debt securities. Although we believe that our current cash and cash
equivalent balances will be sufficient for the next twelve months (without
considering the effects of the consummation of the proposed merger with Onsale),
we cannot assure you that we will not require additional financing within this
time frame or that such additional funding, if needed, will be available on
terms acceptable to us or at all. We do not currently use derivative financial
instruments.
Impact of the Year 2000 Issue
The Year 2000 issue exists because many computer systems and applications use
two-digit fields to designate a year. Date-sensitive computer systems and
programs may fail to recognize or correctly process the year 2000 as the century
date change approaches or occurs. This inability to properly recognize or
address the year 2000 may cause systems errors or failures that could seriously
disrupt or prevent normal business operations.
As a company engaged in electronic commerce, we rely on computer programs and
systems in connection with our internal and external communication networks and
systems (including transmissions of information over the Internet), the
operation of our Web site, customer use of our Web site, order processing and
fulfillment, accounting and financial systems, and other business functions.
Because our internal systems and software are relatively new, and the majority
are covered by maintenance agreements with third-party suppliers, we do not
expect that the Year 2000 costs relating to our own internal systems will be
significant. Our plan for addressing Year 2000 issues has three phases: (1)
identification and evaluation; (2) development of plans for addressing the
issues and prioritization of those plans; and (3) implementation of plans and
verification of effectiveness. As of October 2, 1999, we had completed these
three phases of addressing our Year 2000 issues.
Due to our electronic commerce focus, our reliance on significant non-
information technology systems is primarily limited to telecommunications
equipment, voicemail systems and property security systems. We have replaced our
telecommunications equipment and voicemail systems with systems that the
suppliers state are Year 2000 compliant. We have evaluated our property security
systems and determined that they are Year 2000 compliant.
Any failure of third-party networks, systems or services could have a material
adverse impact on our business. Our business depends on the satisfactory
performance and reliability of the external communication and computer networks,
systems and services integral to the Internet. These networks, systems and
services are maintained or provided by third parties and affect the ability of
customers to access and purchase products at our Web site. We also rely on other
systems and services that third parties provide to our customers. As a result,
the success of our plan to address the Year 2000 issues depends in part on
parallel efforts being undertaken by such other third parties. We have
identified and initiated communications with those third parties whose networks,
systems or services are critical to our business to determine the status of
these entities' Year 2000 compliance. We cannot assure you that all such parties
will provide accurate and complete information, or that all their networks,
systems or services will achieve full Year 2000 compliance in a timely fashion.
In an attempt to mitigate the risk of noncompliance by certain critical service
providers, we have begun to diversify our use of certain services among several
providers. However, we cannot assure you that this diversification will mitigate
the risk of noncompliance.
Costs related to our efforts to address Year 2000 issues have been expensed as
incurred and have not been material to date. We have funded Year 2000-related
costs through funds provided by operations. Future costs of these efforts are
partially based on numerous assumptions about future events. We cannot assure
you that these estimates will be correct. Actual costs could differ materially
from these estimates.
Although we have taken steps to achieve Year 2000 compliance of our internal
systems and to evaluate the compliance of third-party service providers on which
our business depends, the most reasonably likely worst-case scenario resulting
from possible Year 2000 noncompliance is that noncompliance by third parties
would disrupt,
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reduce or eliminate for a period of time the ability of our customers to access
and purchase products at our Web site. If such occurrences are frequent or long
in duration, they could materially adversely affect our business. The Year 2000
compliance of third-party global, national and local communications networks and
the compliance of individual Internet service providers is not within our
control. Accordingly, a contingency plan for this worst-case scenario does not
exist and we do not believe we will be able to develop one. We have, however,
begun to diversify our uses of certain services among several providers to
attempt to mitigate this risk. We cannot assure you, however, that our efforts
will mitigate the risk of non-compliance, and any failure of third-party
networks, systems or services could materially adversely affect our business.
We believe we are taking the necessary steps regarding Year 2000 compliance
with respect to matters within our control to seek to minimize the impact of
Year 2000 issues on our business. However, we cannot assure you that the
efforts taken to date will result in the intended level of Year 2000 compliance,
that we will not incur significant additional expenses in dealing with Year 2000
issues, that the third parties upon which our business depends will achieve Year
2000 compliance, or that the Year 2000 problem will not materially adversely
affect our business, financial condition or results of operations.
We rely on the quality of the products that manufacturers, distributors and
suppliers provide to us for sale to our customers. To the extent that the
products we sell are not Year 2000 compliant, we may be subject to claims by
customers that could materially adversely affect our business or damage our
reputation.
Recent Accounting Pronouncements
During June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. The new
standard requires companies to record derivatives on the balance sheet as assets
or liabilities, measured at fair value. Gains or losses resulting from changes
in the values of those derivatives would be accounted for depending on the use
of the derivative and whether it qualifies for hedge accounting. Because we do
not use derivatives, the new standard is expected to have no material impact on
our financial position or results of operations. SFAS No. 133 will be effective
for fiscal 2001.
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Additional Factors That May Affect Future Results
In addition to other information contained in this report, the following factors
could affect our actual results and could cause such results to differ
materially from those achieved in the past or expressed in our forward-looking
statements.
We have a limited online operating history which provides little information
with which to evaluate our electronic commerce business
In February 1998, we shifted our business emphasis to the Internet and closed
our remaining retail stores. We therefore have had only a limited operating
history as an electronic commerce company. As a result, there is little
information on which to evaluate our business and prospects as an electronic
commerce company. An investor in our common stock must consider the risks and
difficulties that early-stage companies frequently encounter in the new and
rapidly evolving market of electronic commerce. Such risks for us include:
. our evolving and unpredictable business model;
. our competitors that have more established electronic commerce operations;
. our need and ability to manage growth; and
. the rapid evolution of technology in electronic commerce.
We have a history of losses and expect future losses
We have incurred substantial losses in the operation and closing of our former
retail store network and in the operation of our electronic commerce business.
As of October 2, 1999, we had a retained deficit of $127.4 million. We have not
achieved profitability as an electronic commerce company, and we expect to
continue to incur substantial net losses for the foreseeable future. We plan to
continue to enhance our brand name through competitive pricing, marketing and
advertising programs, offer additional categories of merchandise for sale at our
online store and improve and enhance our technology, infrastructure and systems.
These initiatives will likely result in operating expenses that are higher than
current operating expenses. We will need to generate significant revenues to
achieve profitability and to maintain profitability if it is achieved. Although
our revenues from electronic commerce have grown in recent quarters, such growth
rates may not be sustainable and we may not become profitable in the future.
Our future revenues are unpredictable and our operating results may fluctuate
significantly
Because we have a limited operating history in electronic commerce and because
electronic commerce is a new, emerging market, we cannot accurately forecast our
revenues. Although our revenues from electronic commerce have grown in recent
quarters, you should not use these past results to predict our future results.
We base our current and future expenditures on our plans and estimates of future
revenues. Our expenses are, to a large degree, fixed. We may be unable to
adjust spending in a timely manner if we experience an unexpected shortfall in
our revenues.
We expect that our future quarterly operating results will fluctuate
significantly because of many factors, several of which we do not control. Such
factors include:
. our ability to satisfy customers, retain existing customers and attract new
customers at a steady rate;
. our ability to acquire, price and market merchandise inventory such that we
maintain gross margins in our existing business and in future product lines
and markets;
. pricing competition, including, but not limited to, pricing which results in
no gross margin on certain products;
. the level of traffic at our Web site;
. our ability to fulfill customer orders;
. the development, announcement or introduction of new sites, services or
products by us or by our competitors;
. the amount the Internet is used generally and, more specifically, for the
purchase of consumer products such as those that we offer;
. our ability to upgrade and develop our systems and infrastructure and attract
new employees;
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. the occurrence of technical or communications failures, system downtime and
Internet disruptions;
. the amount and timing of operating costs and capital expenditures that we
incur to expand our business;
. governmental regulation and taxation policies;
. disruptions in service by common carriers such as United Parcel Service;
. unanticipated increases in shipping and transaction-processing costs; and
. general economic conditions and economic conditions specific to the Internet,
electronic commerce and the computer industry.
Our revenues depend on the number of times customers make purchases at our
online store and the level of sales and bidding activity at the Egghead Auctions
section of our online store. The amount of sales and bidding activity at our
online store depends in part on the number of customers, the competitive pricing
of our products and the availability of merchandise from our suppliers. We
cannot forecast the number of future customers, the future pricing strategies of
our competitors or the future availability of merchandise with any degree of
certainty. It is clear, however, that if the number of customers does not
increase, if our gross margins decrease or if the amount of merchandise
available to us decreases substantially, our business will suffer.
Because of these and other factors, we believe that period-to-period
comparisons of our historical results of operations are not a good indicator of
our future performance.
Our operating results may fluctuate depending on the season
We expect to experience fluctuations in our operating results because of
seasonal fluctuations in traditional retail patterns. Retail sales in the
traditional retail industry tend to be significantly higher in the fourth
calendar quarter of each year than in the preceding three quarters. As a result
of such factors, our operating results in one or more future quarters may
fluctuate and, therefore, period-to-period comparisons of our historical results
of operations may not be good indicators of our future performance.
Failure to complete the merger transaction with Onsale, Inc. could harm our
stock price and future business and operations
We face a number of specific risks if the proposed merger with Onsale is not
completed, including the following:
. we may be required to pay Onsale a termination fee equal to four percent of
our equity value (as described in the merger agreement filed as an exhibit to
our current report on Form 8-K filed with the Securities and Exchange
Commission on July 23, 1999);
. we may be required to make an unsecured loan to Onsale for up to $16.0
million and reimburse Onsale for expenses incurred in connection with the
proposed merger, including investment banking, legal and accounting expenses;
. an option that has been granted to Onsale to purchase 19.9% of our common
stock may become exercisable;
. the price of our common stock may decline to the extent that the current
market price reflects a market assumption that the merger will be completed;
and
. costs related to the merger, such as legal and accounting and some financial
advisor fees, must be paid even if the merger is not completed.
In addition, current and prospective employees may experience uncertainty
about their future roles, which may impair our ability to attract and retain key
management, marketing, technical and administrative personnel. This may impair
our ability to conduct normal business operations if the merger is not
completed.
Furthermore, if the stock option granted to Onsale is exercised, we will be
unable to account for future business combinations as a "pooling of interests."
The special shareholders meeting that was held on November 4, 1999 to seek
approval of the merger was adjourned until November 19, 1999, because there was
an insufficient number of shareholder votes on November 4,
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1999 to approve the merger. We cannot assure you that a further adjournment of
the meeting will not occur or that the proposed merger will ultimately be
consummated.
We face risks relating to the Year 2000 issue
The Year 2000 issue exists because many computer systems and applications use
two-digit fields to designate a year. Date-sensitive computer systems and
programs may fail to recognize or correctly process the year 2000 as the century
date change approaches or occurs. This inability to properly recognize or
address the year 2000 may cause systems errors or failures that could seriously
disrupt or prevent normal business operations. As a company engaged in
electronic commerce, we rely on computer programs and systems in connection with
our internal and external communication networks and systems (including
transmissions of information over the Internet), the operation of our Web site,
customer use of our Web site, order processing and fulfillment, accounting and
financial systems, and other business functions. We have completed our Year 2000
readiness program, but cannot assure you that all of the systems on which we
rely are Year 2000 compliant, and we cannot assure you that our systems will be
made Year 2000 compliant in a timely manner or that the third parties upon which
our business depends will achieve Year 2000 compliance. We may incur significant
additional expenses for Year 2000 issues.
Any failure of third-party networks, systems or services upon which our
business depends could have a material adverse impact on our business. Our
business depends on the satisfactory performance and reliability of the external
communication and computer networks, systems and services integral to the
Internet. These networks, systems and services are maintained or provided by
third parties and affect the ability of our customers to access and purchase
products at our Web site. We also rely on other systems and services that third
parties provide to our customers. As a result, the success of our plan to
address Year 2000 issues depends in part on parallel efforts being undertaken by
other third parties. We have identified and initiated communications with third
parties whose networks, systems or services are critical to our business to
determine the status of their Year 2000 compliance. We cannot assure you that
all such parties will provide accurate and complete information, or that all
their networks, systems or services will achieve full Year 2000 compliance in a
timely fashion. The most reasonably likely worst-case scenario for us resulting
from Year 2000 issues is that third-party noncompliance would disrupt, reduce or
eliminate for a period of time the ability of our customers to connect with and
purchase products at our Web site. If such occurrences are frequent or long in
duration, they could materially adversely affect our business. The compliance of
third-party global, national and local communications networks and the
compliance of individual Internet service providers is not within our control.
Accordingly, a contingency plan for this worst-case scenario does not exist, and
we do not believe we will be able to develop one.
We rely on the quality of the products that manufacturers, distributors and
suppliers provide to us for sale to our customers. To the extent that the
products we sell are not Year 2000 compliant, we may be subject to claims by
customers that could materially adversely affect our business or damage our
reputation.
We may have future capital needs
We currently anticipate that our available funds (without considering the
effects of the consummation of the proposed merger with Onsale), will be
sufficient to meet our anticipated needs for working capital (including, without
limitation, for marketing and advertising expenses), capital expenditures and
business expansion for at least the next twelve months. Thereafter, we may need
to raise additional funds. However, we may need to raise additional funds sooner
in order to fund more rapid expansion, to develop new or enhanced services or
products, to respond to competitive pressures or to acquire complementary
businesses, products, services or technologies. We cannot assure you that
additional financing will be available, or available on terms favorable to us.
If such financing is not available, we may not be able to fund our expansion,
take advantage of unanticipated acquisition opportunities, develop or enhance
services, products or technologies, or respond to competitive pressures.
We may suffer systems failures and business interruptions
Our success, especially our ability to receive and fulfill customer orders,
largely depends on the efficient and uninterrupted operation of our computer and
telephone communications systems. Almost all of our computer and
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communications systems are located at a single leased facility in Vancouver,
Washington. We have experienced temporary power failures and telecommunications
failures from time to time at this facility. Our systems are vulnerable to
damage from fire, floods, power loss, telecommunications failures, break-ins,
earthquakes and other events. Although we have implemented network security
measures, our servers are vulnerable to computer viruses, physical or electronic
break-ins, attempts by third parties deliberately to exceed the capacity of our
systems and similar disruptions. Any of these events could lead to interruptions
or delays in service, loss of data or the inability to accept and confirm
customer orders. Generally, we do not have redundant systems or a formal
disaster recovery plan, and our coverage limits on our property and business
interruption insurance may not be adequate to compensate us for losses that may
occur.
We face risks of capacity constraints
Our revenues depend to a significant degree on the number of customers who use
our online store to buy merchandise. We depend on the satisfactory performance,
reliability and availability of our Web site, transaction- processing systems,
network infrastructure, customer support center and delivery and shipping
systems. These factors are critical to our reputation, our ability to attract
and retain customers and to maintain adequate customer service levels, and our
operating results. If the amount of traffic, the number of orders or the amount
of auction bidding at our Web site increases substantially, we may experience
capacity constraints and may need to further expand and upgrade our technology,
transaction-processing systems and network infrastructure. We may be unable to
sufficiently predict the rate or timing of increases in the use of our online
store to enable us to quickly upgrade our systems to handle such increases.
We face risks relating to systems development
We are heavily dependent on our technological systems, some of which were not
designed for electronic commerce but have been modified by us for that use.
Although we upgrade and expand these systems on an ongoing basis, in the near
future we will need to significantly upgrade and expand or replace our
transaction-processing systems to handle increased traffic at our online store.
We will also need to upgrade and expand our systems for the Egghead Auctions
format of our online store, particularly to improve its scalability. We also
plan to upgrade and expand our systems to add customer feedback features to
provide enhanced customer service, more complete customer data and better
management reporting information. These efforts will require us to integrate
newly developed and/or purchased technologies into our existing systems and to
hire more engineering and information technology personnel in the near future.
If we are unable in a timely manner to hire required personnel and to add new
software and hardware or to develop and upgrade our existing systems to handle
increased traffic and increased sales and auction bidding at our online store,
we could experience unanticipated system disruptions, slower response times,
degraded customer service and a decrease in our ability to fulfill customer
orders.
We may be unable to manage our growth
Our ability to successfully implement our business plan in a rapidly evolving
market requires an effective planning and growth-management process. If we are
unable to manage our growth, we may not be able to implement our business plan,
and our business may suffer as a result. We expect that we will have to expand
our business to address potential growth in the number of customers, to expand
our product and service offerings and to pursue other market opportunities. We
expect that we will need to expand existing operations, particularly those
relating to information technology and merchandising. We expect that we will
also need to continue to improve our operational, financial and inventory
systems, procedures and controls, and will need to expand, train and manage our
workforce, particularly our information technology staff. Furthermore, we
expect that we will need to continue to manage multiple relationships with
various suppliers, freight companies, warehouse operators, Web sites, Internet
service providers, and other third parties as the electronic commerce business
evolves.
The electronic commerce market is intensely competitive
The electronic commerce industry is new, rapidly evolving and intensely
competitive. We may not be successful in competing against our current and
future competitors. It is not difficult to enter the electronic commerce
market, and current and new competitors can launch new electronic commerce Web
sites at relatively low
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cost. We expect competition in electronic commerce to increase as retailers,
suppliers, manufacturers and direct marketers who have not traditionally sold
computer products and consumer goods directly to consumers through the Internet
enter this market segment. Furthermore, competition may increase to the extent
that mergers and acquisitions result in electronic commerce companies with
greater market share and revenues. Increased competition or failure by us to
compete successfully is likely to result in price reductions, fewer customer
orders, reduced gross margins, increased marketing costs, loss of market share,
or any combination of these problems.
We currently compete with a variety of companies that sell personal computer
products and other consumer goods through a variety of sales channels to
customers. These competitors include:
. Companies with electronic commerce sites such as Amazon.com, Inc., Beyond.com
Corporation, Buy.com Inc. and Cyberian Outpost, Inc., Dell Computer
Corporation, and electronic software distributors such as Digital River,
Inc.;
. Companies offering Internet auctions, such as Onsale, Inc., uBid, Inc.,
Yahoo! Inc., Internet Shopping Network, Inc. (the FirstAuction site), Micro
Warehouse, Inc., eBay Inc. and Amazon.com, Inc.;
. Companies whose primary business is not online retailing but who derive
significant revenue from electronic commerce, including America Online, Inc.,
Yahoo! Inc. and QVC, Inc.;
. Traditional retailers of personal computer products such as CompUSA, Inc.,
Best Buy and Circuit City;
. Manufacturers such as Dell Computer Corporation and Gateway, Inc. that sell
directly to the consumer, including over the Internet;
. Mass merchandisers such as Wal-Mart Stores, Inc., Costco Wholesale
Corporation and Best Buy Co., Inc. that primarily sell through traditional
retail channels but also sell over the Internet; and
. Office products retailers such as Office Depot Inc. and Staples, Inc. that
primarily sell through traditional retail channels but also sell over the
Internet.
. Catalog-based merchants with a significant electronic commerce offering, such
as CDW Computers Centers, Inc., Micro Warehouse, Inc., Insight Enterprises,
Inc., Multiple Zones International, Inc. and Creative Computers, Inc.
We believe that the principal competitive factors affecting our market are
brand name recognition, competitive pricing, quality of customer service,
quality of product information, breadth of merchandise offerings, cost of
customer acquisition and ease of use of electronic commerce sites. Although we
believe we compete adequately with respect to such factors, we cannot assure you
that we can maintain our competitive position against current and potential
competitors, especially those with greater financial, marketing, customer
support, technical and other resources. Some competitors have begun selling
certain products at or near the purchase price paid by them to acquire the
products. To improve our competitive position, we are focused on increasing our
level of customer service and maintaining competitive pricing.
Current and potential competitors have established or may establish
cooperative relationships among themselves or directly with suppliers to obtain
exclusive or semi-exclusive sources of merchandise. New competitors or
alliances among competitors and suppliers may emerge and rapidly acquire market
share. For example, Dell Computer Corporation and Amazon.com, Inc. have agreed
to provide links from their Web sites to new Web pages that advertise their
respective products. Also, manufacturers might elect to sell or liquidate their
products directly over the Internet. Many of our current and potential
competitors have significantly greater financial, marketing, customer support,
technical and other resources than we do. As a result, they may be able to
secure merchandise from suppliers on more favorable terms than we can, and they
may be able to respond more quickly to changes in customer preference or to
devote greater resources to the development, promotion and sale of their
merchandise than we can.
We rely heavily on certain third parties, including Internet service providers
and telecommunications companies
Our operations depend on a variety of third parties for Internet access,
telecommunications, operating software, order fulfillment, merchandise delivery
and credit card transaction processing. We have limited control over these
third parties, and we cannot assure you that we will be able to maintain
satisfactory relationships with any of them
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on acceptable commercial terms. Nor can we assure you that the quality of
products and services that they provide will remain at the levels needed to
enable us to conduct our business effectively.
We rely on Internet service providers to connect our Web site to the Internet.
From time to time, we have experienced temporary interruptions in our Web site
connection and also our telecommunications access. Frequent or prolonged
interruptions of these Web site connection services could result in significant
losses of revenues. Our Web site software and internally developed auction
software depend on operating systems, data base and server software that were
produced by and licensed from third parties. From time to time, we have
discovered errors and defects in such software and, in part, rely on these third
parties to correct these errors and defects promptly.
Third-party distribution centers fulfill a significant portion of the sales
for which we are responsible. Accordingly, any service interruptions
experienced by these distribution centers as a result of labor problems or
otherwise could disrupt or prevent the fulfillment of some of our customers'
orders. In addition, we use United Parcel Service and Airborne Express as the
primary delivery services for our products. Our business would suffer if labor
problems or other causes prevented these or any other major carriers from
delivering our products for significant time periods. Furthermore, First USA
Bank, through its relationship with First USA Paymentech, Inc. (Paymentech) is
our sole processor of credit card transactions. If computer systems failures or
other problems were to prevent Paymentech from processing our credit card
transactions, we would experience delays and business disruptions. Any such
delays or disruptions in customer service may damage our reputation or result in
loss of customers.
We rely heavily on certain manufacturers, distributors and suppliers
We depend entirely on certain manufacturers, distributors and suppliers to
supply us with merchandise for sale at our online store. We cannot assure you
that we will be able to develop and maintain satisfactory relationships with
such parties on acceptable commercial terms, or that we will be able to obtain
sufficient quality and quantities of merchandise at competitive prices. Also,
the quality of service provided by such parties may fall below the standard
needed to enable us to conduct our business effectively. We acquire products
for sale both directly from manufacturers and indirectly through distributors
and suppliers. Purchases from Ingram Micro Inc., a distributor of computers and
related products, accounted for approximately 44% of our aggregate merchandise
purchases for the three months ended October 2, 1999. We have no long-term
contracts or arrangements with manufacturers, distributors or suppliers that
guarantee availability of merchandise for our online store. We cannot assure
you that current manufacturers, distributors and suppliers will continue to sell
merchandise to us or otherwise provide merchandise for sale by us or that we
will be able to establish new manufacturer, distributor or supplier
relationships that ensure merchandise will be available for sale by us. We also
rely on many of our distributors and suppliers to ship merchandise to customers.
We have limited control over the shipping procedures of these distributors and
suppliers, and such shipments have often been subject to delays. Most
merchandise sold by us carries a warranty from the manufacturer or the supplier,
and we are not obligated to accept merchandise returns. Nevertheless, we in
fact have accepted returns from customers for which we did not receive
reimbursements from our suppliers or manufacturers, and the levels of returned
merchandise in the future may exceed our expectations. We may also find that we
have to accept more returns in the future to maintain customer satisfaction.
We face the risks of expanding into new services and business areas
To increase our revenues, we will need to expand, over time, our operations by
promoting new or complementary products or by expanding the breadth and depth of
our product or service offerings. If we expand our operations in this manner,
we will require significant additional development resources and such expansion
may strain our management, financial and operational resources. We may not
significantly benefit in such expansion from the Egghead.com brand name or from
the early entry advantage that we have experienced in the online computer
products market. Gross margins attributable to new business areas may be lower
than those associated with our existing business activities. We cannot assure
you that our expansions into new product categories, online sales formats or
products or service offerings will be timely or will generate enough revenue to
offset their costs. Also, any new product category or product or service
offering that we launch that is not favorably received by consumers could damage
our reputation or the Egghead.com brand.
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We depend on our key personnel, and we will need to attract and retain
additional personnel
Our performance is substantially dependent on the continued services and on
the performance of our executive officers and other key employees, particularly
George P. Orban, our Chief Executive Officer and Chairman of the Board. We do
not maintain "key person" life insurance policies. Although some of our
executive officers and key employees have entered into employment agreements,
none of these agreements prevents any of them from leaving Egghead.com. As a
result of our proposed merger with Onsale, some of our executive officers or key
employees may experience uncertainty about their future roles and may elect to
leave the Company. The loss of the services of any of our executive officers or
other key employees could materially adversely affect our business.
Additionally, we believe we will need to expand significantly our information
technology staff in the near future and will need to identify, attract, hire,
train and retain other highly- skilled personnel to be successful. Competition
for personnel in the electronic commerce industry is intense. We cannot assure
you that we will be able to expand our information technology staff or
successfully identify, attract, hire and retain other highly-skilled personnel
in a timely and effective manner.
Electronic commerce poses security risks to us
A significant barrier to electronic commerce and communications is the secure
transmission of confidential information over public networks. We rely upon
encryption and authentication technology licensed from third parties to provide
secure transmission of confidential information. We cannot assure you that our
security measures will prevent security breaches, and such breaches could expose
us to operating losses, litigation and possible liability. Advances in computer
capabilities, new discoveries in the field of cryptography or other events or
developments may result in a compromise or breach of the algorithms that we use
to protect customer transaction data. A party who is able to circumvent our
security measures could steal proprietary information or interrupt our
operations. We may need to spend a great deal of money and use other resources
to protect against the threat of such security breaches or to alleviate problems
caused by such breaches. Concerns over the security of online transactions and
the privacy of users may also inhibit the growth of the Internet generally, and
the Web in particular, especially as a means of conducting commercial
transactions.
We face risks relating to our inventory
We directly purchase some of the merchandise that we sell at our online
Egghead Superstores and most of our off-price merchandise, including excess,
close-out, refurbished and reconditioned goods, that we sell at our online
Egghead SurplusDirect liquidation center and through Egghead Auctions. We
assume the inventory risks, inventory obsolescence risks and price erosion risks
for products that we purchase directly. These risks are especially significant
because much of the merchandise we sell at our online store (for example,
computer hardware, software and consumer electronics) is characterized by rapid
technological change, obsolescence and price erosion. In the recent past we
have recorded charges for obsolete inventory and have had to sell certain
merchandise at a discount or loss. It is impossible to determine with certainty
whether an item will sell for more than the price we pay for it. Because we
rely heavily on purchased inventory, our success will depend on our ability to
liquidate our inventory rapidly, the ability of our buying staff to purchase
inventory at attractive prices relative to its resale value, and our ability to
manage customer returns and the shrinkage resulting from theft, loss and
misrecording of inventory. If we are unsuccessful in any of these areas, we may
be forced to sell our inventory at a discount or loss.
We are dependent on intellectual property
Our performance and ability to compete are dependent to a significant degree
on our proprietary technology. We rely on a combination of trademark, copyright
and trade secret laws to establish and protect our proprietary rights. Although
we have applied for trademark protection for the Egghead.com name, this name is
not currently a registered trademark in the United States. We cannot assure you
that we will be able to secure significant protection for this trademark and our
other trademarks or service marks. It is possible that our competitors or
others will adopt product or service names similar to "Egghead.com" or other
service marks or trademarks of ours, thereby impeding our ability to build brand
identity and possibly confusing customers.
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Our proprietary software is protected by copyright laws. The source code for
our proprietary software also is protected under applicable trade secret laws.
We cannot assure you that the steps we take to protect our software will prevent
misappropriation of our technology or that the agreements we enter into for that
purpose will be enforceable. It might be possible for a third party to copy or
otherwise obtain and use our software or other proprietary information without
authorization, or to develop similar software independently. Policing
unauthorized use of our technology is difficult, particularly because the global
nature of the Internet makes it difficult to control the ultimate destination or
security of software or other data transmitted. The laws of other countries may
not adequately protect our intellectual property.
We may in the future receive notices from third parties claiming infringement
by our software or other intellectual property used in our business. While we
are not currently subject to any such claim, any future claim, with or without
merit, could result in significant litigation costs and distraction of
management, and could require us to enter into costly and burdensome royalty and
licensing agreements. Such royalty and licensing agreements, if required, may
not be available on terms acceptable to us, or may not be available at all. In
the future, we may also need to file lawsuits to defend the validity of our
intellectual property rights and trade secrets, or to determine the validity and
scope of the proprietary rights of others. Such litigation, whether successful
or unsuccessful, could result in substantial costs and diversion of resources.
We also rely on a variety of technologies that we license from third parties
such as the database and Internet commerce server applications that we license
from Oracle Corporation. We cannot assure you that these third-party technology
licenses will continue to be available to us on commercially reasonable terms.
If we lose any such licenses, or if we are unable to maintain or obtain upgrades
to any of these licenses, it could delay completion of our proprietary software
enhancements until equivalent technology is identified, licensed or developed,
and integrated.
We are vulnerable to the rapid evolution of electronic commerce and related
technology
The Internet and the electronic commerce industry are characterized by rapid
technological change, changes in user and customer requirements, frequent new
service or product introductions embodying new technologies, and the emergence
of new industry standards and practices. Changes in the Internet, electronic
commerce and the related technology could render our Web site and technology
obsolete. To remain competitive, we must continue to enhance and improve the
customer service features, responsiveness and functionality of our Web site.
Our success in achieving these goals depends on our ability to develop or
license new technologies and respond promptly and cost-effectively to
technological advances and emerging industry standards and practices. The
development and licensing of technologies relating to the Internet and
electronic commerce involves significant technical, financial and business
risks. We may not be successful in developing, licensing or integrating new
technologies or promptly adapting our Web site, proprietary technology and
transaction-processing systems to customer needs or emerging industry standards.
We are dependent on the continued development of the Internet infrastructure
We depend almost entirely on the Internet for revenue and the increased use of
the Internet for commerce is essential for our business to grow. Accordingly,
our success depends in large part on the continued development of the
infrastructure for providing Internet access and services. The Internet could
lose its viability or its usage could decline due to many factors, including:
. delays in the development of the Internet infrastructure;
. power outages;
. disruptions due to the inability of computer systems to recognize the year
2000;
. the adoption of new standards or protocols for the Internet; or
. changes or increases in governmental regulation.
We cannot be certain that the infrastructure or complementary services
necessary to maintain the Internet as a useful and easy means of buying goods
will be developed or that, if they are developed, the Internet will remain a
viable marketing and sales channel for the types of products and services that
we offer at our online store.
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We face risks associated with maintaining the value of our domain names
We currently hold various Web domain names relating to our brand, including
the Egghead.com, Surplusdirect.com and Surplusauction.com domain names. We
cannot assure you that we will be able to acquire or maintain relevant domain
names in all jurisdictions in which we conduct business. The acquisition and
maintenance of domain names generally is regulated by governmental agencies and
their designees. The regulation of domain names in the United States and in
foreign countries is subject to change. Governing bodies may establish
additional top-level domains, appoint additional domain name registrars or
modify the requirements for holding domain names. The relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary rights is unclear. Therefore, we may be unable to prevent third
parties from acquiring domain names that are similar to, infringe on or
otherwise decrease the value of our brand and our trademarks and other
proprietary rights.
We are subject to government regulation and legal uncertainties
We are currently subject to regulations applicable to businesses generally, as
well as laws or regulations directly applicable to communications or commerce
over the Internet. The adoption or modification of laws or regulations relating
to the Internet could adversely affect our business. The law of the Internet
remains largely unsettled, even in areas where there has been some legislative
action. Several states have laws that regulate auctions and auction companies
within their jurisdictions. Some states may interpret their statutes to apply
to our auction transactions with consumers in such states. The burdens of
complying with auctioneering laws could materially increase our cost of doing
business. Similarly, states may construe their existing laws governing issues
such as property ownership, taxation, intellectual property, libel and personal
privacy to apply to Internet companies servicing consumers within their
jurisdictions. Resolution of whether or how these laws will be applied is
uncertain and may take years to resolve. In addition, due to the increasing
popularity and use of the Internet, it is possible that a number of laws and
regulations may be adopted with respect to the Internet or other online services
covering issues such as user privacy, security, pricing, content, copyrights,
distribution, taxation and characteristics and quality of products and services.
Furthermore, the growth and development of electronic commerce may prompt calls
for more stringent consumer protection laws that may impose additional burdens
on electronic commerce companies.
We are vulnerable to additional tax obligations
We currently collect sales tax only on sales of products delivered to
residents in the state of Washington. However, other states or foreign
countries may seek to impose sales tax collection obligations on us and other
electronic commerce companies. A number of proposals have been made at the
state and local levels that would impose additional taxes on the sale of goods
and services through the Internet. These proposals, if adopted, could
substantially impair the growth of electronic commerce and cause purchasing at
our online store to be less attractive to customers as compared with traditional
retail purchasing. The U.S. Congress has passed legislation limiting, for a
limited period of time, the ability of the states to impose taxes on Internet-
based transactions. Failure to renew this legislation could result in the
imposition by various states of taxes on electronic commerce.
Our stock price may be extremely volatile
The market price of our common stock has fluctuated substantially in the past
and is likely to fluctuate substantially in the future. In addition, the
securities markets have experienced significant price and volume fluctuations
and the market prices of the securities of Internet-related companies have been
especially volatile. In the past, companies that have experienced volatility in
the market price of their stock have been subject to securities class action
litigation. A securities class action lawsuit against us could result in
substantial costs and a diversion of management's attention and resources.
Our restated articles of incorporation and restated bylaws provide director and
officer indemnification and limit their liability
We may have to spend significant resources indemnifying our officers and
directors or paying for damages caused by their conduct. The Washington Business
Corporation Act provides for broad indemnification by corporations of their
officers and directors, and our restated bylaws implement this indemnification
to the fullest extent permitted under the Act as it currently exists or as it
may be amended in the future. Similarly, our restated articles of incorporation
include a provision that limits the liability of our directors to the fullest
23
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extent permitted by the Act as it currently exists or as it may be amended in
the future. Consequently, subject to this Act and to certain limited exceptions
in our restated articles, none of our directors will be liable to us or to our
shareholders for monetary damages resulting from his or her conduct as a
director.
We have anti-takeover provisions in place that make it more difficult for a
third party to acquire us
Provisions of our restated articles of incorporation, our restated bylaws and
Washington law could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our shareholders. For example, our
restated articles of incorporation provide that our board of directors may,
without shareholder approval, issue preferred stock with rights superior to the
rights of the holders of our common stock. As a result, our board could issue
preferred stock quickly and easily, adversely affecting the rights of holders of
our common stock. Such preferred stock could include terms calculated to delay
or prevent a change in control of Egghead.com or make the removal of management
more difficult. Also, our restated bylaws contain advance notice procedures with
respect to shareholder proposals and the nomination of candidates for election
as directors which could make it more difficult for our shareholders to propose
a change of control or to change our board of directors. In addition, our
restated articles of incorporation and our restated bylaws provide for the
division of our board of directors into three classes, with the directors in
each class serving for three-year terms, and one class being elected each year
by our shareholders. Because this system of electing and removing directors
generally makes it more difficult for shareholders to replace a majority of the
board of directors, it may tend to discourage a third party from making a tender
offer or otherwise attempting to gain control of Egghead.com and may preserve
the tenure of the current board of directors. Furthermore, Washington law
imposes restrictions on certain transactions between a corporation and certain
significant shareholders. The Washington Business Corporation Act prohibits a
target corporation, with certain exceptions, from engaging in certain
`'significant business transactions'' with an `'acquiring person'' (generally a
person or group of persons that beneficially owns 10% or more of the outstanding
voting securities of the target corporation) for five years from the date the
person or group of persons became an `'acquiring person,'' unless a majority of
the target corporation's board of directors approved the significant business
transaction before the person or group of persons became an acquiring person.
Generally, a `'significant business transaction'' includes a merger, asset or
stock sale, and certain other transactions resulting in a financial benefit to
the acquiring person. After the five-year period, a significant business
transaction may occur, as long as it complies with certain `'fair price''
provisions of the statute. These provisions could delay or prevent a change of
control of Egghead.com, even if such change of control would benefit our
shareholders.
24
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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
25
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ITEM 6. Exhibits and Reports On Form 8-K
a. Exhibits
2.1 Form of Company Voting Agreement dated July 13, 1999 between Onsale, Inc.
and certain shareholders of Egghead.com, Inc. (incorporated herein by
reference to Exhibit 2.4 to registrant's report on Form 8-K dated July 13,
1999)
2.2 Form of Parent Voting Agreement dated July 13, 1999 between Egghead.com,
Inc. and certain stockholders of Onsale, Inc. (incorporated herein by
reference to Exhibit 2.4 to registrant's report on Form 8-K dated July 13,
1999)
10.1 Amendment No. 1 to Egghead.com, Inc. Restated Nonemployee Director Stock
Option Plan.
10.2 Amendment No. 2 to Egghead.com, Inc. Restated Nonemployee Director Stock
Option Plan.
10.3 Executive Employment Agreement between Egghead.com, Inc., DJ & J Software
Corporation and George P. Orban, dated September 20, 1999.
10.4 Employment Agreement between Egghead.com, Inc., Surplus Software, Inc. and
Jonathan W. Brodeur, dated October 25, 1999.
10.5 Rentention Bonus Agreement between Egghead.com, Inc. and Jonathan W.
Brodeur, dated July 13, 1999.
10.6 Second Amendment to Employment Agreement between Egghead.com, Inc. and
Brian W. Bender, effective October 26, 1999.
10.7 Pledge Agreement by Egghead.com, Inc. for the benefit of Brian W. Bender,
entered into as of September 9, 1999.
10.8 Form of Pledge Agreement by Egghead.com, Inc. for the benefit of each of
the persons listed on Schedule 1 to the Agreement.
10.9 Pledge Agreement by Egghead.com, Inc. for the benefit of Jonathan W.
Brodeur, entered into as of November 15, 1999.
10.10 Supplemental Retention Bonus Agreement between Egghead.com, Inc. and
James Kalasky, entered into as of October 1, 1999
10.11 Promissory note signed by James Kalasky
10.12 Promissory note signed by Tommy Collins
27.1 Financial Data Schedule
b. Reports on Form 8-K
We filed a report on Form 8-K, dated July 13, 1999, to report, under Item 5
of Form 8-K, that we had entered into a definitive Agreement and Plan of
Merger with Onsale, Inc. and EO Corporation, a wholly owned subsidiary of
Onsale, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the city of Vancouver, State
of Washington, on the 16th day of November, 1999.
EGGHEAD.COM, INC.
By: /s/ Brian W. Bender
---------------------------------------
Brian W. Bender
Chief Financial Officer,
Vice President of Finance and Secretary
(Authorized Officer and
Principal Financial Officer)
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EXHIBIT INDEX
Exhibits
2.1 Form of Company Voting Agreement dated July 13, 1999 between Onsale, Inc.
and certain shareholders of Egghead.com, Inc. (incorporated herein by
reference to Exhibit 2.4 to registrant's report on Form 8-K dated July 13,
1999)
2.2 Form of Parent Voting Agreement dated July 13, 1999 between Egghead.com,
Inc. and certain stockholders of Onsale, Inc. (incorporated herein by
reference to Exhibit 2.4 to registrant's report on Form 8-K dated July 13,
1999)
10.1 Amendment No. 1 to Egghead.com, Inc. Restated Nonemployee Director Stock
Option Plan.
10.2 Amendment No. 2 to Egghead.com, Inc. Restated Nonemployee Director Stock
Option Plan.
10.3 Executive Employment Agreement between Egghead.com, Inc., DJ & J Software
Corporation and George P. Orban, dated September 20, 1999.
10.4 Employment Agreement between Egghead.com, Inc., Surplus Software, Inc. and
Jonathan W. Brodeur, dated October 25, 1999.
10.5 Rentention Bonus Agreement between Egghead.com, Inc. and Jonathan W.
Brodeur, dated July 13, 1999.
10.6 Second Amendment to Employment Agreement between Egghead.com, Inc. and
Brian W. Bender, effective October 26, 1999.
10.7 Pledge Agreement by Egghead.com, Inc. for the benefit of Brian W. Bender,
entered into as of September 9, 1999.
10.8 Form of Pledge Agreement by Egghead.com, Inc. for the benefit of each of
the persons listed on Schedule 1 to the Agreement.
10.9 Pledge Agreement by Egghead.com, Inc. for the benefit of Jonathan W.
Brodeur, entered into as of November 15, 1999.
10.10 Supplemental Retention Bonus Agreement between Egghead.com, Inc. and
James Kalasky, entered into as of October 1, 1999
10.11 Promissory note signed by James Kalasky
10.12 Promissory note signed by Tommy Collins
27.1 Financial Data Schedule
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Exhibit 10.1
AMENDMENT NO. 1 TO
EGGHEAD.COM, INC.
RESTATED NONEMPLOYEE DIRECTOR
STOCK OPTION PLAN
The Egghead.com, Inc. Restated Nonemployee Director Stock Option Plan (the
"Plan") is amended as follows:
The second and third sentences of the first paragraph of Article VI of the
Plan are hereby amended as follows:
Upon the effective date of a dissolution or liquidation of the
Corporation, or of a reorganization, merger or consolidation of the
Corporation with one or more corporations that results in more than
20% of the outstanding voting shares of the Corporation being owned by
one or more affiliated corporations or other affiliated entities, or
of a transfer of all or substantially all the assets or more than 20%
of the then outstanding shares of the Corporation to another
corporation or other entity, this Plan and all options granted
hereunder shall terminate, unless such options are assumed in such
transaction. In the event of such dissolution, liquidation,
reorganization, merger, consolidation, transfer of assets or transfer
of stock, each optionee shall be entitled, for a period of twenty days
prior to the effective date of such transaction, to purchase the full
number of shares under his or her option which he or she otherwise
would have been entitled to purchase during the remaining term of such
options.
The date of the adoption of this Amendment No. 1 by the Board of Directors
of the corporation is July 13, 1999. The effective date of this Amendment No. 1
shall be July 13, 1999, the date of adoption by the Board of Directors.
<PAGE>
Exhibit 10.2
AMENDMENT NO. 2 TO
EGGHEAD.COM, INC.
RESTATED NONEMPLOYEE DIRECTOR
STOCK OPTION PLAN
The Egghead.com, Inc. Restated Nonemployee Director Stock Option Plan (the
"Plan") is amended as follows:
The third sentences of the first paragraph of Article VI of the Plan are
hereby amended to read as follows:
In the event of such dissolution, liquidation, reorganization, merger,
consolidation, transfer of assets or transfer of stock, each optionee
shall be entitled, beginning twenty days prior to the effective date
of such transaction, to purchase the full number of shares under his
or her option which he or she otherwise would be entitled to purchase
during the remaining term of such options.
The date of the adoption of this Amendment No. 2 by the Board of Directors
of the corporation is October 25, 1999. The effective date of this
Amendment No. 2 shall be October 25, 1999, the date of adoption by the
Board of Directors.
<PAGE>
Exhibit 10.3
EXECUTIVE EMPLOYMENT AGREEMENT
EGGHEAD.COM, INC.
DJ & J SOFTWARE CORPORATION
GEORGE P. ORBAN
Dated as of September 20, 1999
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement (this "Agreement") between Egghead.com,
Inc. ("Egghead"), a Washington corporation, DJ & J Software Corporation ("DJ&
J"), a Washington corporation, and George P. Orban ("Executive") is dated and
entered into as of September 20, 1999. Egghead and DJ& J are hereinafter
referred to collectively as the "Company".
In consideration of the mutual covenants and promises contained herein, the
Company and the Executive agree as follows:
1. Employment
The Company will continue to employ the Executive and the Executive will
continue to serve as its Chairman and Chief Executive Officer, with duties and
responsibilities customarily associated with such position. The Executive will
perform such additional duties as may be assigned from time to time by the Board
of Directors of the Company which relate to the business of the Company, its
subsidiaries or any business ventures in which the Company or its subsidiaries
may participate. Subject to and consistent with the Company's Articles of
Incorporation and Bylaws and subject to and consistent with its responsibilities
under law, the Board of Directors of the Company, during the Term, will include
the Executive as a part of the appropriate slate of directors for whom it
solicits proxies in connection with the annual meeting of shareholders.
2. Attention and Effort
The Executive will devote his full business time, attention and effort to
the Company's business and will use his skills and render services to the best
of his ability to serve the interests of the Company.
3. Term
The Executive's term of employment under this Agreement shall commence on
the date hereof and shall continue until terminated pursuant to Section 6 of
this Agreement (the "Term").
<PAGE>
4. Compensation
4.1 Base Salary
The Executive's compensation shall consist, in part, of an annual base
salary of $300,000 before all customary payroll deductions (the "Base Salary").
The Base Salary shall be paid in substantially equal installments at the same
intervals as other officers of the Company are paid.
5. Benefits and Expenses
5.1 Expenses
The Company shall promptly reimburse the Executive for all reasonable and
necessary business expenses incurred and advanced by him in carrying out his
duties under this Agreement. The Executive shall present to the Company from
time to time an itemized account of such expenses in such form as may be
required by the Company.
5.2 Benefits
During the term of employment hereunder, the Executive shall be entitled to
participate fully in any benefit plans, programs, policies and any fringe
benefits which may be made available to the senior executives of the Company
generally (except incentive and other bonus plans other than as specifically
contemplated in this Agreement), including but not limited to medical, dental,
disability, pension and retirement benefits, life insurance and other death
benefits.
6. Termination
Employment of the Executive pursuant to this Agreement may be terminated as
follows but in any case, the provisions of Sections 9 and 10 shall survive the
termination of the Executive's employment
6.1 By the Company
With or without Cause (as defined below), the Board of Directors may
terminate the employment of the Executive at any time during the Term upon
giving Notice of Termination (as defined below).
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<PAGE>
6.2 By the Executive
The Executive may terminate his employment at any time during the Term for
any reason upon giving Notice of Termination. Executive shall be deemed to have
Good Reason for termination if any of the following should occur:
(a) a material adverse change in Executive's position causing it to be of
materially less stature or responsibility, including but not limited to a
material change in job title or job responsibilities, without Executive's
written consent, provided, however, the anticipated change in Executive's job
title and job responsibilities in connection with the pending merger with
Onsale, Inc. shall not constitute such a material change;
(b) a reduction in Executive's salary without his written consent;
(c) a relocation of the Executive's principal place of employment away from
the greater Portland, Oregon/Vancouver, Washington metropolitan area
6.3 Automatic Termination
Employment shall terminate automatically upon death or total disability of
the Executive. The term "total disability" as used herein, shall mean an
inability to perform the duties set forth in Section 1 because of illness or
physical or mental disability for a period equal to the waiting period for
Executive to be eligible for coverage under the Company's long term disability
insurance, unless the Executive is granted a leave of absence by the Board of
Directors of the Company. Executive and the Company hereby acknowledge that the
Executive's ability to perform the duties specified in Section 1 is of the
essence of this Agreement. Termination hereunder shall be deemed to be
effective immediately upon the Executive's death or 30 days following a Notice
of Termination based upon a determination by the Board of Directors of the
Company of the Executive's total disability, as defined herein.
6.4 Notice
The term "Notice of Termination" shall mean written notice of termination
of the Executive's employment. At the election of the Company, as set forth in
the Notice of Termination, the Executive's employment and performance of
services may continue for a period of 30 days following the Notice of
Termination. Otherwise the Executive's employment shall terminate effective
upon receipt of the Notice of Termination, provided that the Executive shall be
entitled to termination payments in accordance with Section 7.
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<PAGE>
6.5 Cause
Wherever reference is made in this Agreement to termination being with or
without Cause, "Cause" means cause given by the Executive to the Company and is
limited to the following:
(i) Conviction of a felony or of a crime involving moral
turpitude;
(ii) Continued misuse of alcohol or controlled substances; or
(iii) The willful misconduct or gross negligence of the Executive
which results in a material adverse effect on the Company.
7. Termination Payments
In the event of termination of the employment of the Executive during the
Term, all compensation and benefits set forth in this Agreement shall terminate
except as specifically provided in this Section 7:
7.1 Termination by the Company
If the Board of Directors terminates the Executive's employment during the
Term, the Executive shall be entitled to receive (i) any unpaid Base Salary
which has accrued for services already performed as of the date termination of
the Executive's employment becomes effective, and (ii) one year annual base
salary of $300,000, payable in a lump sum within 30 days after termination;
provided, however, that if the Executive is terminated by the Board of Directors
for Cause, the Executive shall not be entitled to receive the benefits set forth
in clause (ii).
7.2 Termination by the Executive Other Than for Good Reason
If the Executive terminates his employment during the Term other than for
Good Reason, the Executive shall not be entitled to receive any payments
hereunder other than any unpaid Base Salary which has accrued for services
already performed as of the date termination of the Executive's employment
becomes effective.
7.3 Termination by the Executive for Good Reason
If the Executive terminates his employment during the Term for Good Reason,
as defined in Section 6.2, the Executive shall be entitled to receive (i) any
unpaid Base Salary which has accrued for services already performed as of the
date of termination,
<PAGE>
and (ii) one year annual base salary of $300,000, payable in a lump sum within
30 days after termination
7.4 Termination Because of Death or Total Disability
Except as provided in section 8, in the event of a termination of the
Executive's employment during the Term because of his death or total disability,
the Executive or his personal representative shall not be entitled to receive
any payments under this Section 7 other than any unpaid Base Salary which has
accrued for services already performed as of the date termination of the
Executive's employment becomes effective.
7.5 Limitation on Termination Payments
It being the intent of the parties that Executive shall not receive both a
termination payment and the payment described in Section 8, Executive shall not
be entitled to receive any termination payments (other than unpaid Base Salary
for services already performed) under this Section 7 if he has become entitled
to or has been paid the payment described in Section 8 of this Agreement..
8. Retention Bonus
In order to induce Executive to remain employed through any sale or merger
of the Company and to assist the Company in connection with such sale or merger,
the Company agrees that if it enters into, or is party to, an agreement to
liquidate its business during the Term, either through the sale of substantially
all of its assets for cash, stock or other property, or through a merger or
other business combination in which the holders of voting stock of the company
before such transaction own less than 50% of the voting stock of the combined or
surviving company following such transaction, the Executive shall be entitled to
receive a retention bonus of $300,000.00, provided that the Executive continues
his employment and carries out his responsibilities under this Agreement in
connection with such liquidation, sale, merger or business combination, through
December 31, 1999. Such amount shall be paid in a lump sum within ten (10) (10)
days following December 31, 1999. In the event Executive should die or become
totally disabled following the execution of an agreement under which the Company
is to be sold, merged, combined or liquidated, but prior to December 31, 1999,
the Company will pay the $300,000 bonus described in this Section to Executive
in the event of total disability or to his estate within thirty (30) days of
December 31, 1999.
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<PAGE>
9. Noncompetition and Nonsolicitation
9.1 Applicability
This Section 9 shall survive the termination of the Executive's employment
with the Company or the expiration of the term of this Agreement.
9.2 Scope of Competition
The Executive agrees that he will not, directly or indirectly, prior to the
date on which his employment with the Company terminates or August 31, 2000,
whichever is later, be employed by, own, manage, operate, join, control or
participate in the ownership, management, operation or control of or be
connected with, in any manner, any person or entity which derives more than
thirty percent (30%) of its revenues from computer hardware or software sales in
competition with the Company (including, without limitation, sale or resale
over, by or through the Internet or other electronic means) in the United
States, unless released from such obligation in writing by the Company's Board
of Directors. 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 employee, 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.
9.3 Scope of Nonsolicitation
The Executive shall not, in addition, directly or indirectly (i) solicit,
influence or entice any employee or consultant of the Company to cease his
relationship with the Company or (ii) solicit, entice or in any way divert any
customer or supplier of the Company to do business with an entity described
herein. This Section 9.3 shall apply during the time period and geographical
area described in Section 9.2 hereof.
9.4 Equitable Relief
The Executive acknowledges that the provisions of this Section 9 are
essential to the Company, that the Company would not enter into this Agreement
if it did not include covenants not to compete or solicit and that damages
sustained by the Company as a result of a breach of such covenants cannot be
adequately remedied by damages, and the Executive agrees that the Company,
notwithstanding any other provision of this Agreement, in addition to any other
remedy it may have under this Agreement or at law, shall be entitled to
injunctive and other equitable relief to prevent or curtail any breach of any
provision of this Agreement, including without
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<PAGE>
limitation this Section 9. The Executive acknowledges that the covenants in this
Agreement are reasonable and that compliance with such covenants will not
prevent him from pursuing his livelihood.
9.5 Effect of Violation
The Executive and the Company agree that additional consideration has been
given for the Executive entering into the noncompetition and nonsolicitation
provisions of this Agreement and the Nondisclosure Agreement described in
Section 10, such additional consideration including, without limitation certain
provisions for termination payments pursuant to Section 7 and other payments
pursuant to Section 8 of this Agreement. Violation by the Executive of such
noncompetition and nonsolicitation provisions or the Nondisclosure Agreement
shall relieve the Company of any obligation it may have to make such termination
payments and other payments, but shall not relieve the Executive of his
obligation hereunder not to compete or solicit.
9.6 Definition of the Company
For purposes of Sections 9.2 and 9.3 hereof, "the Company" shall include
all subsidiaries of the Company, the Company's parent corporation and any
business ventures in which the Company, its subsidiaries or its parent
corporation may participate.
10. Nondisclosure
As a condition of his employment hereunder, the Executive has executed and
delivered to the Company an agreement addressing the nondisclosure of
confidential information (the "Nondisclosure Agreement") in the form attached
hereto as Exhibit A and incorporated herein by reference as if set forth in full
herein, which Nondisclosure Agreement shall survive the termination of the
Executive's employment.
11. Form of Notice
Every notice required by the terms of this Agreement shall be given in
writing by serving the same upon the party to whom it was addressed personally,
by courier, by facsimile transmission (with hard copy delivered by overnight
courier) or by registered or certified mail, return receipt requested, at the
address set forth below or at such other address as may hereafter be designated
by notice given in compliance with the terms hereof:
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<PAGE>
If to the Executive: George P. Orban
10 - 17th Avenue South
Naples, FL 33940-7401
If to the Company: Egghead.com, Inc.
521 E. Chkalov Drive
Vancouver, WA 98683
ATTN: Chief Financial Officer
Copy to: David F. McShea
Perkins Coie
1201 Third Avenue, 40th Floor
Seattle, Washington 98101
or such other address as shall be provided in accordance with the terms hereof.
Notice shall be effective upon personal delivery, delivery by courier, receipt
of facsimile transmission or three days after mailing.
12. Assignment
The Executive agrees that this Agreement may be transferred or assigned by
the Company to (a) any corporation resulting from any merger, consolidation or
other reorganization to which the Company is a party or (b) any corporation,
partnership, association or other person to which the Company may transfer all
or substantially all of the assets and business, and such assignee or transferee
shall succeed to the rights and obligations of the Company hereunder. This
Agreement is not assignable by the Executive.
13. Waiver
No waiver of any of the provisions hereof shall be valid unless in writing,
signed by the party against whom such claim or waiver is sought to be enforced,
nor shall failure to enforce any right hereunder constitute a continuing waiver
of the same or a waiver of any other right hereunder.
14. Amendments in Writing
No amendment, modification, waiver, termination or discharge of any
provision of this Agreement, nor consent to any departure therefrom by either
party hereto, shall in any event be effective unless the same shall be in
writing, specifically identifying this Agreement and the provision intended to
be amended, modified,
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<PAGE>
waived, terminated or discharged and signed by the Company and the Executive,
and each such amendment, modification, waiver, termination or discharge shall be
effective only in the specific instance and for the specific purpose for which
given. No provision of this Agreement shall be varied, contradicted or explained
by any oral agreement, course of dealing or performance or any other matter not
set forth in an agreement in writing and signed by the Company and the
Executive.
15. Applicable Law
This Agreement shall be governed by the substantive laws of the state of
Washington, without regard to its conflicts of laws provisions.
16. Severability
All provisions of this Agreement are severable, and the unenforceability or
invalidity of any single provision hereof shall not affect the remaining
provisions.
17. Headings
All headings or titles in this Agreement are for the purpose of reference
only and shall not in any way affect the interpretation or construction of this
Agreement.
18. Attorneys
In any action or proceeding brought by any party against the other arising
out of or relating in any way to this Agreement, the prevailing party shall, in
addition to other allowable costs, be entitled to an award of reasonable
attorneys' fees.
19. Previous Employment Agreement
This Agreement replaces and fully supersedes the Executive Employment
Agreement entered into between Egghead, Inc., the predecessor to the Company,
and Executive dated January 31, 1997. All provisions of such previous agreement
are void and no longer in effect.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed and entered into this
Agreement on the date set forth above.
EXECUTIVE:
/s/ GEORGE P. ORBAN
--------------------------
George P. Orban
COMPANY:
EGGHEAD.COM, INC.
By /s/ BRIAN BENDER
----------------------
Brian Bender
Its Vice President, Chief Financial Officer
and Secretary
DJ & J SOFTWARE CORPORATION
By /s/ BRIAN BENDER
----------------------
Brian Bender
Its Vice President, Chief Financial Officer
and Secretary
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<PAGE>
Exhibit 10.4
EMPLOYMENT AGREEMENT
BETWEEN EGGHEAD.COM, INC., SURPLUS SOFTWARE,
INC. AND JONATHAN W. BRODEUR
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made effective the 25th day
of October, 1999 (the "Effective Date"), by and among Egghead.com, Inc., a
corporation organized under the laws of the state of Washington (the "Company"),
Surplus Software, Inc., a wholly owned subsidiary of the Company and
corporation organized under the laws of the state of Oregon ("Surplus
Software"), and Jonathan W. Brodeur ("Employee"). Employee is currently serving
as an officer of Surplus Software and employee 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 through Janaury 22, 2001;
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
Employee will receive an annual gross salary not less than the annual gross
salary Employee was receiving immediately prior to the Effective Date.
2.2 Additional Benefits
During the term of this Agreement, the Company will provide Employee with
insurance, vacation, sick leave and other benefits as are approved by the
Company's Board of Directors and as are generally provided to management-level
employees holding similar positions with the Company.
<PAGE>
ARTICLE 3 - DUTIES OF EXECUTIVE
3.1 Duties
During the term of this Agreement a.) Employee'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.) Employee's status, duties and responsibilities shall be reasonably
commensurate with title; Employee will serve as an officer of Surplus Software
or the Company or both, as determined by the Company in its sole discretion, and
shall perform such duties as lawfully assigned to Employee. The Employee shall
report to the Chief Executive Officer of the Company.
ARTICLE 4 - TERMINATION
4.1 Termination Prior to the End of Term
a) Either the Company, on the one hand, or the Employee, on the other hand
may terminate this Agreement without cause.
(i) In the event that Employee 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 Employee work through the
notice period, or elects to make Employee's resignation effective prior to the
end of that notice period, Employee 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 Employee 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 Board of Directors of the Company or
Surplus Software or the Chief Executive Officer of the Company or any directions
of the Board of Directors of the Company or Surplus Software reasonably
consistent with such duties; (b) the conviction of the Employee of, or the
entrance by or on behalf of the Employee 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 Employee that is related
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<PAGE>
to his duties for the Company; (d) any incident materially compromising the
Employee's ability to represent the Company with the public; (e) current illegal
use of drugs by the Employee; (f) any act or omission by the Employee which
substantially impairs the Company's business, goodwill or reputation; or (g) any
other material violation by the Employee of any provision of this Agreement. In
the event of a termination under this paragraph, Employee 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 Employee a reasonable
opportunity to cure such act or failure to act, which period shall be ten (10)
work days.
b) Employee may, at his option, terminate this Agreement prior to the end
of the term for Good Reason. For purposes of this subsection, Employee will
have Good Reason to terminate this Agreement if the Company violates Section 3.1
above; the Employee is relocated to a facility of the Company that is not within
fifty miles of Portland, Oregon; 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 Employee 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, Employee 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 Employee's right to exercise any stock option
awarded pursuant to the EGGHEAD.COM, INC. 1997 NONOFFICER EMPLOYEE STOCK OPTION
PLAN, as amended or restated from time to time (the "EGGHEAD PLAN"), shall be
governed by the terms of the EGGHEAD PLAN and the letter agreement evidencing
such option. For purposes of this Agreement, Employee 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.
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<PAGE>
4.2 Severance Benefits
In the event that the Company exercise its rights under Section 4.1(a)(ii)
(termination without Cause) or Employee exercises his rights under Section
4.1(b) (resignation for Good Reason), Employee will receive the following
severance benefits:
a) Commencing on the date of termination or resignation (the "Termination
Date"), the Company shall pay the Employee his then current base salary for a
period of twelve months, 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 Employee has failed to commence alternative employment at any
time prior to the first anniversary of the Termination Date (such period, the
"Initial Period"), then from the end of the Initial Period, the Company will
continue to pay the Employee 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 Employee commences alternative employment. From time to time during
the Extension Period, but in no event more frequently than monthly, the Employee
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 Employee 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 Employee
receives monthly W-2/1099 wages of at least 50% of his monthly salary as of the
Termination Date.
c) Continued coverage under the Company's medical, dental and vision
benefit programs at the same level that Employee received prior to the
termination for a period of eighteen months, or until Employee finds employment
which provides comparable benefits, whichever comes first. This period of paid
benefits will be in addition to any COBRA rights Employee may have under
applicable law.
d) The Company and Employee shall enter into a Pledge Agreement in
substantially the form of Attachment B for the purposes of holding any sum that
may become payable pursuant to Section 4.2(a) in the event of a termination or
resignation.
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<PAGE>
ARTICLE 5 - RESTRICTIVE AGREEMENTS
5.1 Confidentiality
The Employee 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,
including, but not limited to, Surplus Software, the "Affiliate Entities") or
any of them. The Employee acknowledges that all confidential information is the
proprietary and confidential property of the Company or the Affiliate Entities.
The Employee further agrees to return all tangible items containing such
confidential information, wherever located and in whatever form, 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 Employee agrees that during the Initial 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 Employee 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 the Company or any of its Affiliated Entities: any
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<PAGE>
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 Employee is connected with. The Board of Directors of the
Company may, in its sole discretion, release the Employee 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 Employee 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 Employee of shares which constitute less than 2% of
the outstanding equity securities of a publicly or privately held corporation.
5.4 Violation
The Employee 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 Employee 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 Employee is in violation
of this Article 5, then the Company will give the Employee written notice of the
violation, and if the Employee 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 Employee under Sections 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.
ARTICLE 6 - GENERAL
6.1 Further Assurances
Each party will, at its own expense and without expense to the other parties,
execute and deliver such further agreements and other documents and do such
further acts and things as any of the other parties reasonably requests to
evidence, carry out or give full force and effect to the intent of this
Agreement.
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<PAGE>
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 any party to or of any breach or
default by any 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 another
party 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.
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 Vancouver, Washington. Any party hereto
may commence the arbitration by delivery of a written notice to the other
parties hereto, describing the issue in dispute and its position with regard to
the issue. If the parties
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<PAGE>
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 any 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
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
In consideration of the mutual agreements herein, the Amended and Restated
Employment Agreement, between Employee and Surplus Software, dated May 15, 1996,
as amended by the Employment Agreement Amendment (the "Amendment"), between
Employee and Surplus Software, effective April 30, 1997, is hereby terminated in
all respects, except that Section 8 of the Amendment is not terminated and
remains in full force and effect provided that in the event of any conflict
between the terms and provisions of Section 5.1 hereof and the confidentiality
provisions of that certain Assignment of Inventions and Confidentiality
Agreement referenced in Section 8 of the Amendment, the provisions of Section
5.1 hereof shall control. Except as set forth in the foregoing sentence, this
Agreement constitutes the entire agreement between the parties with respect to
the subject matter covered herein and all prior understandings and agreements
with respect to such subject matter, whether oral or written, are hereby
superseded and nullified. This Agreement does not in any manner supersede or
affect that certain Rescission Agreement between the Company and Employee,
entered into as of July 13, 1999, or that certain Retention Bonus Agreement
between the Company and Employee, entered into as of July 13, 1999.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
EXECUTED as of the day and year first written above.
EGGHEAD.COM, INC.
By /s/ GEORGE P. ORBAN /s/ JONATHAN W. BRODEUR
- ---------------------------- ----------------------------
Its CEO EMPLOYEE
- ---------------------------- 10/25/99
SURPLUS SOFTWARE, INC.
By /s/ BRIAN W. BENDER /s/ JONATHAN W. BRODEUR
- ------------------------------ ----------------------------
Its Brian Bender, Secretary 10/25/99
- ------------------------------
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<PAGE>
Exhibit 10.5
RETENTION BONUS AGREEMENT
BETWEEN EGGHEAD.COM, INC. AND JON BRODEUR
THIS RETENTION BONUS AGREEMENT (the "Agreement") between Egghead.com, Inc.
(the "Company") and Jon Brodeur ("Employee") is entered into as of July 13,
1999.
WHEREAS, the Company desires to create an incentive for retention of
Employee, and whereas Employee is willing to receive a retention bonus in the
circumstances set forth in this Agreement.
In consideration of the mutual promises and agreements contained herein,
the parties hereto agree as follows:
1. Retention Bonus. As an incentive for retention of Employee, the Company
agrees to pay to Employee a lump sum bonus, in an amount equal to the Employee's
current 12-month salary, to be paid on January 31, 2000 (the "Retention Date")
if Employee remains employed with the Company (or any successor, or parent of
successor, of the Company) through the Retention Date; provided, however, that
such retention bonus shall also be payable in the event Employee is terminated
not "for Cause" (as defined in the Amended and Restated Employment Agreement
dated May 15, 1996, as amended by the Employment Agreement Amendment between the
Employee and Surplus Software) by the Company (or any successor, or parent of
successor, of the Company) prior to the Retention Date.
2. Successors. This Agreement shall be binding upon, and inure to the
benefit of, the successors and assigns of the parties hereto. This Agreement
may not be assigned by Executive without the prior written consent of the
Company.
3. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington without application of
principles of conflicts of laws.
IN WITNESS WHEREOF, this Agreement is entered into as of the date first
above written.
EMPLOYEE EGGHEAD.COM, INC.
/s/ JONATHAN W. BRODEUR By: /s/ GEORGE P. ORBAN
- ----------------------- -----------------------
Name: George P. Orban
Chairman and Chief Employee Officer
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<PAGE>
Exhibit 10.6
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
BETWEEN EGGHEAD.COM, INC. AND BRIAN BENDER
EGGHEAD.COM, INC. (the "Company"), as successor to EGGHEAD, INC., and Brian
Bender ("Executive") are parties to an EMPLOYMENT AGREEMENT (the "Agreement"),
dated and effective as of January 22, 1998, and amended as of June 30, 1999.
The Company and Executive now wish to further amend the Agreement as set forth
below, with amendments effective as of October 26, 1999. The Company and the
Executive agree and acknowledge the sufficiency of consideration for these
amendments based on the mutual benefits conferred.
A. Term of the Agreement
The Company and Executive mutually desire to continue Executive's
employment for a transition period following the anticipated Change of Control
of the Company. Executive and the Company therefore mutually agree to amend
Section 1.1 of the Agreement to read as follows:
This Agreement will extend from the Effective Date through January 3,
2000.
B. Salary
Executive and the Company desire that Executive's salary continue at its
current level for the remainder of the term of this Agreement. Executive and
the Company hereby mutually agree to amend Section 2.1 of the Agreement to read
as follows:
Until the Termination Date (as hereinafter defined), Executive will
continue to receive a gross salary not less than the gross salary
Executive was receiving as of October 26, 1999.
C. Termination Prior to the Term
The first sentence of Section 4.1(a)(i) is hereby amended to read as
follows: "In the event that Executive exercises his right under this
subsection, he shall provide written notice of his intent to terminate the
Agreement to the Chief Executive Officer of the Company or of the Company's
successor not less than five (5) days before the effective date of the
Termination."
<PAGE>
D. Additional Benefits
Executive and the Company desire that Executive use his accrued vacation
and other leave during the remainder of the term of this Agreement. Executive
and the Company hereby mutually agree to amend Section 2.2 of the Agreement by
adding the following additional sentence:
Notwithstanding the foregoing, Executive shall use his accrued
vacation, which the parties hereby agree is currently at 162 hours,
and other leave prior to the Termination Date and shall not be paid
for any unused accrued vacation or other leave on or following the
Termination Date. Executive may use such accrued vacation and other
leave at any time or times he chooses prior to the Termination Date.
E. Duties of the Executive and Termination for Good Reason
The Executive and the Company continue to agree that the Company may modify
the Executive's status, duties and/or responsibilities under Section 3.1 of the
Agreement during the remaining term of his employment under the Agreement.
Executive and the Company mutually agree to amend the last sentence of
Subsection 4.1(b) of the Agreement to read as follows:
Executive's resignation at any time from November 4, 1999 through the
conclusion of the term of this Agreement, as amended herein, shall
also be deemed a termination for Good Reason, entitling Executive to
severance benefits described in Section 4.2 of the Agreement.
F. Confirmation
Except as expressly modified by this Amendment, all terms and conditions in
the Agreement as heretofore amended are hereby confirmed and remain in full
force and effect.
WHEREFORE, effective October 26, 1999, the undersigned parties accept and
agree to these amendments to the Agreement.
EGGHEAD.COM, INC. BRIAN BENDER
By /s/ GEORGE P. ORBAN /s/ BRIAN W. BENDER
- ----------------------------- ------------------------
Its Chief Executive Officer
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<PAGE>
Exhibit 10.7
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT (this "Agreement") is made and entered into as of
September 9, 1999 (the "Effective Date"), by EGGHEAD.COM, INC., formerly known
as Egghead, Inc. ("the Company") for the benefit of BRIAN BENDER ("Executive").
RECITALS:
The Company and Executive have entered into that certain Employment
Agreement effective as of January 22, 1998, as amended by Amendment No. 1
effective as of June 30, 1999 (as amended, the "Employment Agreement") pursuant
to which the Company and Executive agreed to enter into a pledge agreement.
This Agreement sets forth the terms and conditions upon which the Company
pledges to Executive the collateral described in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the Company agrees as follows:
1. DEFINITIONS, ETC.
1.1 Terms Defined
For the purposes of this Agreement, the following terms shall have the
following meanings:
"Account" means that certain account established with Broker in the name of
the Company, currently designated as account no. 00704122672-6, together with
all replacements and substitutions for such account.
"Broker" means American Express Financial Advisors, Inc. and any successors
in interest to American Express Financial Advisors, Inc.
"Event of Default" means the failure, within ten days following demand by
Executive, to pay Executive any amount due pursuant to Section 4.2(a) of the
Employment Agreement.
"Pledged Assets" means the Account, together with (a) all assets now or
hereafter in the Account, including, without limitation, all securities
accounts, securities entitlements, investment property, financial assets,
certificated securities, and uncertificated securities (as those terms are
defined in the Uniform Commercial
<PAGE>
Code adopted in the state of Washington, as amended from time to time), and (b)
all income, products, proceeds, dividends and distributions from any of the
foregoing, including, without limitation, proceeds in the nature of accounts,
general intangibles, and insurance proceeds.
"Required Pledge Amount" means a sum equal to the Executive's monthly gross
salary on the Effective Date hereof for a period of twelve months, less any
lawful withholding.
"Secured Obligations" means the obligation of the Company to pay Executive
all amounts due pursuant to Section 4.2(a) of the Employment Agreement.
1.2 Incorporation of Recitals and Exhibits
The foregoing recitals are incorporated into this Agreement by reference.
All references to "Exhibits" contained herein are references to exhibits
attached hereto, the terms of which are made a part hereof for all purposes.
2. PLEDGE AND CREATION OF SECURITY INTEREST
2.1 Pledge and Grant of Security Interest
As security for the full, prompt and complete payment by the Company of
each of the Secured Obligations, the Company hereby pledges, assigns,
hypothecates, and transfers to Executive the Pledged Assets and grants to
Executive a security interest under the Uniform Commercial Code of the state of
Washington, as amended, in and to the Pledged Assets.
2.2 Voting Rights
Unless and until an Event of Default occurs, the Company may exercise all
voting, corporate, consensual and other rights with respect to the Pledged
Assets, provided, however, that no vote shall be cast or corporate right
exercised or other action taken which, in Executive's reasonable judgment, would
impair the Pledged Assets or which would be inconsistent with or result in any
violation of any provision of this Agreement.
2.3 Value of Collateral
(a) Within ten days of the execution of this Agreement, the Company shall
cause to be deposited into the Account cash in the amount of the Required Pledge
Amount.
<PAGE>
(b) If the market value of the Pledged Assets ever exceeds 110% of the
Required Pledge Amount (whether or not an Event of Default exists) during the
term of this Agreement, the Company shall be entitled to a release and
distribution from the Account of assets selected by the Company in excess of the
Required Pledge Amount. Executive agrees to fully cooperate with the Company in
obtaining such a distribution from the Account.
(c) If the market value of the Pledged Assets is ever less than 90% of the
Required Pledge Amount during the term of this Agreement, the Company shall,
within ten days of written demand by Executive to the Company, deposit cash into
the Account in an amount necessary to bring the market value of the Pledged
Assets to the Required Pledge Amount.
(d) If Executive's monthly gross salary increases during the term of this
Agreement, then Executive may require, by written notice to the Company, that
the Required Pledge Amount be increased to reflect his then-current monthly
gross salary (the "Adjusted Required Pledge Amount"), and that the Company
deposit cash into the Account in an amount necessary to bring the market value
of the Pledged Assets to the Adjusted Required Pledge Amount.
(e) During the term of this Agreement the Company shall be permitted to
invest funds in the Account in accordance with the investment guidelines
attached to this Agreement as Exhibit A.
---------
3. REPRESENTATIONS AND WARRANTIES
The Company hereby represents and warrants that:
3.1 No Approvals
No consent, license, permit, approval or authorization of, or filing with,
or notice or report to, or registration, filing or declaration with, any person
(including, without limitation, any governmental authority or creditors of the
Company), is required in connection with the execution, delivery, performance,
validity or enforceability by or against the Company of this Agreement.
3.2 Enforceability
This Agreement has been duly executed and delivered by the Company and
constitutes a legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms.
<PAGE>
3.3 Other Agreements
The execution, delivery and performance of this Agreement do not and will
not violate any requirement of law or any contractual obligation applicable to
or binding upon the Company.
3.4 Ownership
The Company is the owner of and has good and marketable title to the
Pledged Assets and will, at its own expense, defend Executive's right, title and
security interest in and to the Pledged Assets against the claims of any person
or entity.
3.5 No Encumbrances
The Company represents that all of the Pledged Assets are owned by the
Company free of any pledge, mortgage, hypothecation, lien, charge, encumbrance
or security interest in such shares or the proceeds thereof, except for that
granted hereunder.
3.6 First Priority Lien
The lien against the Pledged Assets granted pursuant to this Agreement
constitutes a valid, perfected first priority lien on the Pledged Assets,
enforceable as such against all creditors of the Company and any persons
purporting to purchase any of the Pledged Assets from the Company.
4. COVENANTS
The Company covenants and agrees with Executive that, from and after the
date of this Agreement until the Secured Obligations are paid in full:
4.1 No Other Liens
The Company will not create or permit the existence of any lien on or
security interest in the Pledged Assets (other than that hereby created) without
the written consent of Executive.
4.2 Sale or Encumbrance
Without the prior written consent of Executive and except as otherwise
provided in Section 2.3(e) hereof, the Company will not (a) sell, assign,
transfer, exchange or otherwise dispose of, or grant any option with respect to,
the Pledged Assets, (b) create, incur or permit to exist any lien or option in
favor of, or any claim of any person with respect to, any of the Pledged Assets,
or any interest therein, except
<PAGE>
for the lien provided for by this Agreement. The Company will defend the right,
title and interest of Executive in and to the Pledged Assets against the claims
and demands of all persons whomsoever. Notwithstanding the foregoing, the
Company may sell one or more of the Pledged Assets so long as the proceeds from
such sale remain in the Account subject to the security interest granted by the
Company to Executive pursuant to this Agreement.
4.3 Further Assurances
At any time and from time to time, upon the written request of Executive,
and at the sole expense of the Company, the Company will promptly and duly
execute and deliver such further instruments and documents and take such further
actions as Executive may reasonably request for the purposes of obtaining or
preserving the full benefits of this Agreement and of the rights and powers
herein granted.
4.4 Indemnification
The Company agrees to pay, and to save Executive harmless from, any and all
liabilities with respect to, or resulting from any delay in paying, any and all
stamp, excise, sales or other taxes (except for the tax imposed on the overall
net income of Executive) which may be payable or determined to be payable with
respect to any of the Pledged Assets or in connection with any of the
transactions contemplated by this Agreement.
5. RIGHTS AND REMEDIES
5.1 Remedies
Executive may exercise, in addition to all other rights and remedies
granted in this Agreement and in any other instrument or agreement securing,
evidencing or relating to the Secured Obligations, all rights and remedies of a
secured party under the Uniform Commercial Code of the state of Washington.
Without limiting the generality of the foregoing, Executive, without demand of
performance or other demand, presentment, protest, advertisement or notice of
any kind (except any notice required by law or referred to in this Agreement) to
or upon the Company or any other person (all and each of which demands,
defenses, advertisements and notices are hereby waived to the extent not
prohibited by law), may in such circumstances forthwith collect, receive,
appropriate and realize upon the Pledged Assets, or any part thereof, and/or may
forthwith withdraw from the Account, sell, assign, give option or options to
purchase or otherwise dispose of and deliver the Pledged Assets or any part
thereof (or contract to do any of the foregoing), in one or more parcels at
public or private sale or sales, in the over-the-counter market, at any exchange
broker's board or
<PAGE>
at Executive's offices or elsewhere upon such terms and conditions as he may
deem advisable, for cash or on credit or for future delivery without assumption
of any credit risk. Executive shall have the right upon any such public sale or
sales and, to the extent permitted by law, upon any such private sale or sales
to purchase the whole or any part of the Pledged Assets so sold, free and clear
of any right or equity of redemption in the Company, which right or equity is
hereby waived or released to the extent not prohibited by law. Executive shall
apply the net proceeds of any such collection, recovery, receipt, appropriation,
realization or sale, after deducting all reasonable costs and expenses of every
kind incurred therein or incidental to the care or safekeeping of any of the
Pledged Assets or in any way relating to the Pledged Assets or the rights of
Executive hereunder, including, without limitation, reasonable attorneys' fees
and disbursements, to the payment in whole or in part of the Secured Obligations
in such order as Executive may elect, and only after such application and after
the payment by Executive of any other amount required by any provision of law,
including, without limitation, RCW 62A.9-504(1)(c), need Executive account for
the surplus, if any, to the Company.
5.2 Rights Regarding Pledged Assets
If an Event of Default shall occur: (a) Executive shall have the right to
receive any and all cash dividends paid in respect of the Pledged Assets and
make application thereof to the Secured Obligations in such order as he may
determine and (b) the Pledged Assets shall be registered in the name of
Executive or his nominee, and Executive or his nominee may thereafter exercise
(i) all voting, corporate, consensual and other rights pertaining to such shares
of the Pledged Assets and (ii) any and all rights of conversion, exchange,
subscription and any other rights, privileges or options pertaining to such
shares of the Pledged Assets as if he were the absolute owner thereof
(including, without limitation, the right to exchange at his discretion any and
all of the Pledged Assets upon the merger, consolidation, reorganization,
recapitalization or other fundamental change in the corporate structure of the
issuer of the Pledged Assets, or upon the exercise by the Company or Executive
of any right, privilege or option pertaining to such Pledged Assets, and in
connection therewith, the right to deposit and deliver any and all of the
Pledged Assets with any committee, depositary, transfer agent, registrar or
other designated agency upon such terms and conditions as he may determine), all
without liability except to account for property actually received by him, but
Executive shall have no duty to exercise any such right, privilege or option and
shall not be responsible for any failure to do so or delay in so doing.
<PAGE>
5.3 Right to Proceed Against Pledged Assets
The rights of Executive hereunder shall not be conditioned or contingent
upon the pursuit by Executive of any right or remedy against the Company or
against any other person which may be or become liable in respect of all or any
part of the Secured Obligations or against any other collateral therefor,
guarantee thereof or right of offset with respect thereto. Executive shall not
be liable for any failure to demand, collect or realize upon all or any part of
the Pledged Assets or for any delay in doing so, nor shall he be under any
obligation to sell or otherwise dispose of any Pledged Assets upon the request
of the Company or any other person or to take any other action whatsoever with
regard to the Pledged Assets or any part thereof except that Executive shall be
required to exercise reasonable care with respect to the safe keeping of
collateral in his possession.
5.4 Waiver; Notice of Sale
To the extent permitted by applicable law, the Company waives all claims,
damages and demands it may acquire against Executive arising out of the exercise
by Executive of any of his rights hereunder. If any notice of a proposed sale
or other disposition of Pledged Assets shall be required by law, such notice
shall be deemed reasonable and proper if given at least ten days before such
sale or other disposition. To the extent not prohibited by applicable law, the
Company further waives and agrees not to assert any rights or privileges which
it may acquire under RCW 62A.9-112.
6. GENERAL PROVISIONS
6.1 Limitation on Duties Regarding Pledged Assets
Executive shall not be liable for failure to demand, collect or realize
upon any of the Pledged Assets or for any delay in doing so nor shall Executive
be under any obligation to sell or otherwise dispose of any Pledged Assets upon
the request of the Company or otherwise.
6.2 Expenses Incurred by Executive
Executive is not required to, but may at his option, pay any tax or other
charge or expense payable by the Company and any filing or recording fees, and
any amounts so paid shall be repayable by the Company upon demand. The Company
will also repay upon demand all of Executive's reasonable expenses incurred in
collecting, conserving or protecting the Pledged Assets. All such sums shall
bear interest at 8% per annum from the date of Executive's payment until the
Company's repayment. All such sums and interest thereon shall be secured by the
security interest granted herein.
<PAGE>
The rights granted by this Section 6.2 are not a waiver of any other rights of
Executive arising from breach of any of the Company's covenants.
6.3 Nonwaivers
This Agreement shall not be qualified or supplemented by course of dealing.
No waiver or modification by Executive of any of the terms or conditions hereof
shall be effective unless in writing signed by Executive. No waiver or
indulgence by Executive as to any required performance by the Company shall
constitute a waiver as to any subsequent required performance or other
obligations of the Company hereunder.
6.4 Attorneys' Fees and Costs
In the event of an arbitration or litigation between the parties to enforce
a right or rights under this Agreement, the prevailing party shall be entitled
to recover from the nonprevailing party all costs and expenses, including
reasonable attorneys' fees, incurred by the prevailing party in protecting or
enforcing rights under the terms of this Agreement. Attorneys' fees shall
include services rendered at arbitration, trial and any appeal therefrom, in
bankruptcy, as well as services rendered subsequent to judgment and obtaining
execution thereon.
6.5 Term of Agreement
This Agreement shall be a continuing agreement until such time as the
Company has paid the Secured Obligations as described in Section 4.2(a) of the
Employment Agreement. Upon payment of the Secured Obligations, the Company
shall be entitled to a distribution of all of the Pledged Assets and a written
acknowledgment in a form reasonably designated by the Company executed by
Executive that this Agreement has terminated. Executive agrees to cooperate
with the Company in obtaining such a distribution of all of the Pledged Assets
and a written acknowledgment of termination.
6.6 Successors
All obligations, rights, powers and privileges herein provided shall inure
to the benefit of and shall bind the heirs, executors, administrators and
successors of the parties hereto.
6.7 Governing Law
This Agreement and the Secured Obligations are subject to the laws of the
state of Washington and are to be construed in accordance therewith.
<PAGE>
6.8 Consent to Jurisdiction, Service and Venue
For the purpose of performance of the obligations under or otherwise in
connection herewith, the parties hereby consent to the jurisdiction and venue of
the courts of the state of Washington or of any federal court located in such
state. The parties hereby waive the right to contest the jurisdiction and venue
of courts located in the state of Washington on the ground of inconvenience or
otherwise.
6.9 Severability
Any provision of this Agreement which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
6.10 Satisfaction of Obligation
The parties agree that the execution of this Agreement and consummation of
the pledge of the Pledge Assets in accordance with the provisions of this
Agreement shall satisfy the requirement set forth in Section 4.2(f) of the
Employment Agreement.
6.11 Counterparts
This Agreement may be executed in one or more counterparts, each of which
shall constitute an original Agreement, but all of which together shall
constitute one and the same instrument.
EGGHEAD.COM, INC.
By: /s/ GEORGE P. ORBAN
---------------------------
Title: CEO
---------------------------
Accepted By:
/s/ BRIAN W. BENDER
---------------------------------
Brian Bender
<PAGE>
EXHIBIT A
to Pledge Agreement
Egghead, Inc. Investment Policy
April 25, 1991
Revised: May 2, 1996
OBJECTIVES
1. Principal preservation: Minimize principal risk.
2. Liquidity: Meet liquidity requirements.
3. Yield: Deliver after-tax yields consistent with market conditions and
primary objectives of principal preservation and liquidity.
4. Diversification: Investment in one issuer shall not exceed $5
million: diversified money market funds meeting the criteria
described below shall be exempt from this requirement.
5. Control: Provide appropriate fiduciary control of all investments.
INVESTMENT GUIDELINES
1. Maturity: No investment will have a maturity in excess of one year.
Repurchase Agreements will have maturities no greater than 14 days.
2. Liquidity: The portfolio will be constructed so that it can provide a
minimum:
a. $2 million within one day.
b. An additional $3 million within one week.
c. An additional $10 million within thirty days.
<PAGE>
3. Eligible Investments: The instruments listed below meet the
requirements of the company's revolving loan agreement with Seattle-
First National Bank (Agent) and U.S. Bank of Washington N.A.
APPROVED INVESTMENTS
1. Taxable Instruments
-------------------
a. Obligations issued by the U.S. Treasury.
b. Money Market Funds composed of instruments rated no lower than:
AA, A2, P2 or MIG2, at the time of purchase by the fund. Unrated
issues are acceptable if the quality, as judged by the fund's
advisers, are of quality consistent with the fund's requirements.
c. Commercial Paper issued by domestic or foreign institutions rated
at least A1 (Standard & Poor's) or P1 (Moody's). In the case of
split issues, the minimum acceptable rating would be either A2 or
P2.
d. Banker's Acceptance. Euro Dollar and Certificates of Deposit
with the issuer possessing a long term debt rating of AA or a
Commercial Paper rating of A1 or P1.
e. Repurchase Agreements which are fully collateralized by U.S.
Treasury or agencies (e.g., FNMA, SLMA, Farm Credits, FHLB) but
excluding mortgage backed securities. All Repurchase Agreements
will have maturity no greater than 14 days.
2. Tax-Exempt/Tax Preferred Instruments
------------------------------------
a. Tax Exempt Money Market funds composed of instruments rated no
lower than: AA, A2, P2 or MIG2, at the time of purchase by the
fund. Unrated issues are acceptable if the quality, as judged by
the fund's advisers, are of quality consistent with the fund's
requirements.
b. Municipal Notes/Bonds with a MIG1, VMIG1 or an underlying AA
rating of the state or municipality.
<PAGE>
c. Commercial Paper issued by domestic or foreign institutions rated
at least A1 (Standard & Poor's) or P1 (Moody's). In the case of
split issues, the minimum rating would be either A2 or P2.
CONCENTRATION LIMITS
Investments with one issuer (except U.S. Treasury) shall not exceed $5.0
million. Money Market Funds with a well diversified portfolio of instruments
and issuers are exempt from this limit.
RESPONSIBILITIES AND REPORTING
The Controller is responsible for prudent investment of Egghead's cash
balances consistent with the guidelines set forth in this policy. The
Controller is authorized to make investments subject to the above guidelines and
additional direction from the President, Chief Financial Officer or Board of
Directors. Reports outlining current investment activity are provided daily to
the Controller and to the Chief Financial Officer, with reporting to the Board
of Directors each period.
. Chief Financial Officer Brian W.Bender
. Controller David H. Johns
<PAGE>
Exhibit 10.8
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT (this "Agreement") is made and entered into as of
November __, 1999 (the "Effective Date"), by EGGHEAD.COM, INC., formerly known
as Egghead, Inc. ("the Company") for the benefit of ________________
("Executive").
RECITALS:
The Company and Executive have entered into that certain Employment
Agreement effective as of January 22, 1998, as amended by Amendment No. 1
effective as of January 28, 1999 (as amended, the "Employment Agreement")
pursuant to which the Company and Executive entered into the Escrow Agreement
attached hereto as Exhibit A (the "Escrow Agreement").
---------
The Company and Executive have mutually agreed to rescind and cancel the
Escrow Agreement, and in lieu thereof, Company and Executive have agreed to
enter into this Agreement pursuant to which the Company pledges to Executive the
collateral described in this Agreement. The parties have further agreed to
amend the Employment Agreement to provide for the execution of this Pledge
Agreement in lieu of the Escrow Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the Company agrees as follows:
1. DEFINITIONS, ETC.
1.1 Terms Defined
For the purposes of this Agreement, the following terms shall have the
following meanings:
"Account" means that certain account established with Broker in the name of
the Company, currently designated as account no. _____________, together with
all replacements and substitutions for such account.
"Broker" means American Express Financial Advisors, Inc. and any successors
in interest to American Express Financial Advisors, Inc.
"Event of Default" means the failure, within ten days following demand by
Executive, to pay Executive any amount due pursuant to Section 4.2(a) of the
Employment Agreement.
<PAGE>
"Pledged Assets" means the Account, together with (a) all assets now or
hereafter in the Account, including, without limitation, all securities
accounts, securities entitlements, investment property, financial assets,
certificated securities, and uncertificated securities (as those terms are
defined in the Uniform Commercial Code adopted in the state of Washington, as
amended from time to time), and (b) all income, products, proceeds, dividends
and distributions from any of the foregoing, including, without limitation,
proceeds in the nature of accounts, general intangibles, and insurance proceeds.
"Required Pledge Amount" means a sum equal to the Executive's monthly gross
salary on the Effective Date hereof for a period of twelve months, less any
lawful withholding.
"Secured Obligations" means the obligation of the Company to pay Executive
all amounts due pursuant to Section 4.2(a) of the Employment Agreement.
1.2 Incorporation of Recitals and Exhibits
The foregoing recitals are incorporated into this Agreement by reference.
All references to "Exhibits" contained herein are references to exhibits
attached hereto, the terms of which are made a part hereof for all purposes.
2. RESCISSION OF ESCROW AGREEMENT AND AMENDMENT TO
EMPLOYMENT AGREEMENT
The Company and Executive hereby agree to rescind the Escrow Agreement.
Such Escrow Agreement shall have no force and effect. The Company and Executive
further agree that Section 4.2(f) of the Employment Agreement shall be hereby
amended to substitute the term "Pledge Agreement" where the term Employment
Agreement now appears.
3. PLEDGE AND CREATION OF SECURITY INTEREST
3.1 Pledge and Grant of Security Interest
As security for the full, prompt and complete payment by the Company of
each of the Secured Obligations, the Company hereby pledges, assigns,
hypothecates, and transfers to Executive the Pledged Assets and grants to
Executive a security interest under the Uniform Commercial Code of the state of
Washington, as amended, in and to the Pledged Assets.
<PAGE>
3.2 Voting Rights
Unless and until an Event of Default occurs, the Company may exercise all
voting, corporate, consensual and other rights with respect to the Pledged
Assets, provided, however, that no vote shall be cast or corporate right
exercised or other action taken which, in Executive's reasonable judgment, would
impair the Pledged Assets or which would be inconsistent with or result in any
violation of any provision of this Agreement.
3.3 Value of Collateral
(a) Within ten days of the execution of this Agreement, the Company shall
cause to be deposited into the Account cash in the amount of the Required Pledge
Amount.
(b) If the market value of the Pledged Assets ever exceeds 110% of the
Required Pledge Amount (whether or not an Event of Default exists) during the
term of this Agreement, the Company shall be entitled to a release and
distribution from the Account of assets selected by the Company in excess of the
Required Pledge Amount. Executive agrees to fully cooperate with the Company in
obtaining such a distribution from the Account.
(c) If the market value of the Pledged Assets is ever less than 90% of the
Required Pledge Amount during the term of this Agreement, the Company shall,
within ten days of written demand by Executive to the Company, deposit cash into
the Account in an amount necessary to bring the market value of the Pledged
Assets to the Required Pledge Amount.
(d) If Executive's monthly gross salary increases during the term of this
Agreement, then Executive may require, by written notice to the Company, that
the Required Pledge Amount be increased to reflect his then-current monthly
gross salary (the "Adjusted Required Pledge Amount"), and that the Company
deposit cash into the Account in an amount necessary to bring the market value
of the Pledged Assets to the Adjusted Required Pledge Amount.
(e) During the term of this Agreement the Company shall be permitted to
invest funds in the Account in accordance with the investment guidelines
attached to this Agreement as Exhibit B.
---------
4. REPRESENTATIONS AND WARRANTIES
The Company hereby represents and warrants that:
<PAGE>
4.1 No Approvals
No consent, license, permit, approval or authorization of, or filing with,
or notice or report to, or registration, filing or declaration with, any person
(including, without limitation, any governmental authority or creditors of the
Company), is required in connection with the execution, delivery, performance,
validity or enforceability by or against the Company of this Agreement.
4.2 Enforceability
This Agreement has been duly executed and delivered by the Company and
constitutes a legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms.
4.3 Other Agreements
The execution, delivery and performance of this Agreement do not and will
not violate any requirement of law or any contractual obligation applicable to
or binding upon the Company.
4.4 Ownership
The Company is the owner of and has good and marketable title to the
Pledged Assets and will, at its own expense, defend Executive's right, title and
security interest in and to the Pledged Assets against the claims of any person
or entity.
4.5 No Encumbrances
The Company represents that all of the Pledged Assets are owned by the
Company free of any pledge, mortgage, hypothecation, lien, charge, encumbrance
or security interest in such shares or the proceeds thereof, except for that
granted hereunder.
4.6 First Priority Lien
The lien against the Pledged Assets granted pursuant to this Agreement
constitutes a valid, perfected first priority lien on the Pledged Assets,
enforceable as such against all creditors of the Company and any persons
purporting to purchase any of the Pledged Assets from the Company.
5. COVENANTS
The Company covenants and agrees with Executive that, from and after the
date of this Agreement until the Secured Obligations are paid in full:
<PAGE>
5.1 No Other Liens
The Company will not create or permit the existence of any lien on or
security interest in the Pledged Assets (other than that hereby created) without
the written consent of Executive.
5.2 Sale or Encumbrance
Without the prior written consent of Executive and except as otherwise
provided in Section 3.3(e) hereof, the Company will not (a) sell, assign,
transfer, exchange or otherwise dispose of, or grant any option with respect to,
the Pledged Assets, (b) create, incur or permit to exist any lien or option in
favor of, or any claim of any person with respect to, any of the Pledged Assets,
or any interest therein, except for the lien provided for by this Agreement.
The Company will defend the right, title and interest of Executive in and to the
Pledged Assets against the claims and demands of all persons whomsoever.
Notwithstanding the foregoing, the Company may sell one or more of the Pledged
Assets so long as the proceeds from such sale remain in the Account subject to
the security interest granted by the Company to Executive pursuant to this
Agreement.
5.3 Further Assurances
At any time and from time to time, upon the written request of Executive,
and at the sole expense of the Company, the Company will promptly and duly
execute and deliver such further instruments and documents and take such further
actions as Executive may reasonably request for the purposes of obtaining or
preserving the full benefits of this Agreement and of the rights and powers
herein granted.
5.4 Indemnification
The Company agrees to pay, and to save Executive harmless from, any and all
liabilities with respect to, or resulting from any delay in paying, any and all
stamp, excise, sales or other taxes (except for the tax imposed on the overall
net income of Executive) which may be payable or determined to be payable with
respect to any of the Pledged Assets or in connection with any of the
transactions contemplated by this Agreement.
6. RIGHTS AND REMEDIES
6.1 Remedies
Executive may exercise, in addition to all other rights and remedies
granted in this Agreement and in any other instrument or agreement securing,
evidencing or
<PAGE>
relating to the Secured Obligations, all rights and remedies of a secured party
under the Uniform Commercial Code of the state of Washington. Without limiting
the generality of the foregoing, Executive, without demand of performance or
other demand, presentment, protest, advertisement or notice of any kind (except
any notice required by law or referred to in this Agreement) to or upon the
Company or any other person (all and each of which demands, defenses,
advertisements and notices are hereby waived to the extent not prohibited by
law), may in such circumstances forthwith collect, receive, appropriate and
realize upon the Pledged Assets, or any part thereof, and/or may forthwith
withdraw from the Account, sell, assign, give option or options to purchase or
otherwise dispose of and deliver the Pledged Assets or any part thereof (or
contract to do any of the foregoing), in one or more parcels at public or
private sale or sales, in the over-the-counter market, at any exchange broker's
board or at Executive's offices or elsewhere upon such terms and conditions as
he may deem advisable, for cash or on credit or for future delivery without
assumption of any credit risk. Executive shall have the right upon any such
public sale or sales and, to the extent permitted by law, upon any such private
sale or sales to purchase the whole or any part of the Pledged Assets so sold,
free and clear of any right or equity of redemption in the Company, which right
or equity is hereby waived or released to the extent not prohibited by law.
Executive shall apply the net proceeds of any such collection, recovery,
receipt, appropriation, realization or sale, after deducting all reasonable
costs and expenses of every kind incurred therein or incidental to the care or
safekeeping of any of the Pledged Assets or in any way relating to the Pledged
Assets or the rights of Executive hereunder, including, without limitation,
reasonable attorneys' fees and disbursements, to the payment in whole or in part
of the Secured Obligations in such order as Executive may elect, and only after
such application and after the payment by Executive of any other amount required
by any provision of law, including, without limitation, RCW 62A.9-504(1)(c),
need Executive account for the surplus, if any, to the Company.
6.2 Rights Regarding Pledged Assets
If an Event of Default shall occur: (a) Executive shall have the right to
receive any and all cash dividends paid in respect of the Pledged Assets and
make application thereof to the Secured Obligations in such order as he may
determine and (b) the Pledged Assets shall be registered in the name of
Executive or his nominee, and Executive or his nominee may thereafter exercise
(i) all voting, corporate, consensual and other rights pertaining to such shares
of the Pledged Assets and (ii) any and all rights of conversion, exchange,
subscription and any other rights, privileges or options pertaining to such
shares of the Pledged Assets as if he were the absolute owner thereof
(including, without limitation, the right to exchange at his discretion any and
all of the Pledged Assets upon the merger, consolidation, reorganization,
<PAGE>
recapitalization or other fundamental change in the corporate structure of the
issuer of the Pledged Assets, or upon the exercise by the Company or Executive
of any right, privilege or option pertaining to such Pledged Assets, and in
connection therewith, the right to deposit and deliver any and all of the
Pledged Assets with any committee, depositary, transfer agent, registrar or
other designated agency upon such terms and conditions as he may determine), all
without liability except to account for property actually received by him, but
Executive shall have no duty to exercise any such right, privilege or option and
shall not be responsible for any failure to do so or delay in so doing.
6.3 Right to Proceed Against Pledged Assets
The rights of Executive hereunder shall not be conditioned or contingent
upon the pursuit by Executive of any right or remedy against the Company or
against any other person which may be or become liable in respect of all or any
part of the Secured Obligations or against any other collateral therefor,
guarantee thereof or right of offset with respect thereto. Executive shall not
be liable for any failure to demand, collect or realize upon all or any part of
the Pledged Assets or for any delay in doing so, nor shall he be under any
obligation to sell or otherwise dispose of any Pledged Assets upon the request
of the Company or any other person or to take any other action whatsoever with
regard to the Pledged Assets or any part thereof except that Executive shall be
required to exercise reasonable care with respect to the safe keeping of
collateral in his possession.
6.4 Waiver; Notice of Sale
To the extent permitted by applicable law, the Company waives all claims,
damages and demands it may acquire against Executive arising out of the exercise
by Executive of any of his rights hereunder. If any notice of a proposed sale
or other disposition of Pledged Assets shall be required by law, such notice
shall be deemed reasonable and proper if given at least ten days before such
sale or other disposition. To the extent not prohibited by applicable law, the
Company further waives and agrees not to assert any rights or privileges which
it may acquire under RCW 62A.9-112.
7. GENERAL PROVISIONS
7.1 Limitation on Duties Regarding Pledged Assets
Executive shall not be liable for failure to demand, collect or realize
upon any of the Pledged Assets or for any delay in doing so nor shall Executive
be under any
<PAGE>
obligation to sell or otherwise dispose of any Pledged Assets upon the request
of the Company or otherwise.
7.2 Expenses Incurred by Executive
Executive is not required to, but may at his option, pay any tax or other
charge or expense payable by the Company and any filing or recording fees, and
any amounts so paid shall be repayable by the Company upon demand. The Company
will also repay upon demand all of Executive's reasonable expenses incurred in
collecting, conserving or protecting the Pledged Assets. All such sums shall
bear interest at 8% per annum from the date of Executive's payment until the
Company's repayment. All such sums and interest thereon shall be secured by the
security interest granted herein. The rights granted by this Section 6.2 are
not a waiver of any other rights of Executive arising from breach of any of the
Company's covenants.
7.3 Nonwaivers
This Agreement shall not be qualified or supplemented by course of dealing.
No waiver or modification by Executive of any of the terms or conditions hereof
shall be effective unless in writing signed by Executive. No waiver or
indulgence by Executive as to any required performance by the Company shall
constitute a waiver as to any subsequent required performance or other
obligations of the Company hereunder.
7.4 Attorneys' Fees and Costs
In the event of an arbitration or litigation between the parties to enforce
a right or rights under this Agreement, the prevailing party shall be entitled
to recover from the nonprevailing party all costs and expenses, including
reasonable attorneys' fees, incurred by the prevailing party in protecting or
enforcing rights under the terms of this Agreement. Attorneys' fees shall
include services rendered at arbitration, trial and any appeal therefrom, in
bankruptcy, as well as services rendered subsequent to judgment and obtaining
execution thereon.
7.5 Term of Agreement
This Agreement shall be a continuing agreement until such time as the
Company has paid the Secured Obligations as described in Section 4.2(a) of the
Employment Agreement. Upon payment of the Secured Obligations, the Company
shall be entitled to a distribution of all of the Pledged Assets and a written
acknowledgment in a form reasonably designated by the Company executed by
Executive that this Agreement has terminated. Executive agrees to cooperate
with the
<PAGE>
Company in obtaining such a distribution of all of the Pledged Assets
and a written acknowledgment of termination.
7.6 Successors
All obligations, rights, powers and privileges herein provided shall inure
to the benefit of and shall bind the heirs, executors, administrators and
successors of the parties hereto.
7.7 Governing Law
This Agreement and the Secured Obligations are subject to the laws of the
state of Washington and are to be construed in accordance therewith.
7.8 Consent to Jurisdiction, Service and Venue
For the purpose of performance of the obligations under or otherwise in
connection herewith, the parties hereby consent to the jurisdiction and venue of
the courts of the state of Washington or of any federal court located in such
state. The parties hereby waive the right to contest the jurisdiction and venue
of courts located in the state of Washington on the ground of inconvenience or
otherwise.
7.9 Severability
Any provision of this Agreement which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
7.10 Satisfaction of Obligation
The parties agree that the execution of this Agreement and consummation of
the pledge of the Pledge Assets in accordance with the provisions of this
Agreement shall satisfy the requirement set forth in Section 4.2(f) of the
Employment Agreement (as amended by this Agreement).
<PAGE>
7.11 Counterparts
This Agreement may be executed in one or more counterparts, each of which
shall constitute an original Agreement, but all of which together shall
constitute one and the same instrument.
EGGHEAD.COM, INC.
By:______________________________
Title:___________________________
Accepted By:
__________________________________
<PAGE>
SCHEDULE 1
PERSONS WHO HAVE EXECUTED FORM PLEDGE AGREEMENT WITH
EGGHEAD.COM, INC.
1. Tommy Collins
2. Norman Hullinger
3. James Kalasky
<PAGE>
Exhibit 10.9
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT (this "Agreement") is made and entered into as of
November 15, 1999 (the "Effective Date"), by EGGHEAD.COM, INC., formerly known
as Egghead, Inc. ("the Company") for the benefit of JONATHAN W. BRODEUR
("Executive").
RECITALS:
The Company and Executive have entered into that certain Employment
Agreement effective as of October 25, 1999, the "Employment Agreement") pursuant
to which the Company and Executive agreed to enter into a pledge agreement.
This Agreement sets forth the terms and conditions upon which the Company
pledges to Executive the collateral described in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the Company agrees as follows:
1. DEFINITIONS, ETC.
1.1 Terms Defined
For the purposes of this Agreement, the following terms shall have the
following meanings:
"Account" means that certain account established with Broker in the name of
the Company, currently designated as account no. 00704132241 8, together with
all replacements and substitutions for such account.
"Broker" means American Express Financial Advisors, Inc. and any successors
in interest to American Express Financial Advisors, Inc.
"Event of Default" means the failure, within ten days following demand by
Executive, to pay Executive any amount due pursuant to Section 4.2(a) of the
Employment Agreement.
"Pledged Assets" means the Account, together with (a) all assets now or
hereafter in the Account, including, without limitation, all securities
accounts, securities entitlements, investment property, financial assets,
certificated securities, and uncertificated securities (as those terms are
defined in the Uniform Commercial Code adopted in the state of Washington, as
amended from time to time), and (b) all
<PAGE>
income, products, proceeds, dividends and distributions from any of the
foregoing, including, without limitation, proceeds in the nature of accounts,
general intangibles, and insurance proceeds.
"Required Pledge Amount" means a sum equal to the Executive's monthly gross
salary on the Effective Date hereof for a period of twelve months, less any
lawful withholding.
"Secured Obligations" means the obligation of the Company to pay Executive
all amounts due pursuant to Section 4.2(a) of the Employment Agreement.
1.2 Incorporation of Recitals and Exhibits
The foregoing recitals are incorporated into this Agreement by reference.
All references to "Exhibits" contained herein are references to exhibits
attached hereto, the terms of which are made a part hereof for all purposes.
2. PLEDGE AND CREATION OF SECURITY INTEREST
2.1 Pledge and Grant of Security Interest
As security for the full, prompt and complete payment by the Company of
each of the Secured Obligations, the Company hereby pledges, assigns,
hypothecates, and transfers to Executive the Pledged Assets and grants to
Executive a security interest under the Uniform Commercial Code of the state of
Washington, as amended, in and to the Pledged Assets.
2.2 Voting Rights
Unless and until an Event of Default occurs, the Company may exercise all
voting, corporate, consensual and other rights with respect to the Pledged
Assets, provided, however, that no vote shall be cast or corporate right
exercised or other action taken which, in Executive's reasonable judgment, would
impair the Pledged Assets or which would be inconsistent with or result in any
violation of any provision of this Agreement.
2.3 Value of Collateral
(a) Within ten days of the execution of this Agreement, the Company shall
cause to be deposited into the Account cash in the amount of the Required Pledge
Amount.
(b) If the market value of the Pledged Assets ever exceeds 110% of the
Required Pledge Amount (whether or not an Event of Default exists) during the
term
<PAGE>
of this Agreement, the Company shall be entitled to a release and distribution
from the Account of assets selected by the Company in excess of the Required
Pledge Amount. Executive agrees to fully cooperate with the Company in obtaining
such a distribution from the Account.
(c) If the market value of the Pledged Assets is ever less than 90% of the
Required Pledge Amount during the term of this Agreement, the Company shall,
within ten days of written demand by Executive to the Company, deposit cash into
the Account in an amount necessary to bring the market value of the Pledged
Assets to the Required Pledge Amount.
(d) If Executive's monthly gross salary increases during the term of this
Agreement, then Executive may require, by written notice to the Company, that
the Required Pledge Amount be increased to reflect his then-current monthly
gross salary (the "Adjusted Required Pledge Amount"), and that the Company
deposit cash into the Account in an amount necessary to bring the market value
of the Pledged Assets to the Adjusted Required Pledge Amount.
(e) During the term of this Agreement the Company shall be permitted to
invest funds in the Account in accordance with the investment guidelines
attached to this Agreement as Exhibit A.
---------
3. REPRESENTATIONS AND WARRANTIES
The Company hereby represents and warrants that:
3.1 No Approvals
No consent, license, permit, approval or authorization of, or filing with,
or notice or report to, or registration, filing or declaration with, any person
(including, without limitation, any governmental authority or creditors of the
Company), is required in connection with the execution, delivery, performance,
validity or enforceability by or against the Company of this Agreement.
3.2 Enforceability
This Agreement has been duly executed and delivered by the Company and
constitutes a legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms.
<PAGE>
3.3 Other Agreements
The execution, delivery and performance of this Agreement do not and will
not violate any requirement of law or any contractual obligation applicable to
or binding upon the Company.
3.4 Ownership
The Company is the owner of and has good and marketable title to the
Pledged Assets and will, at its own expense, defend Executive's right, title and
security interest in and to the Pledged Assets against the claims of any person
or entity.
3.5 No Encumbrances
The Company represents that all of the Pledged Assets are owned by the
Company free of any pledge, mortgage, hypothecation, lien, charge, encumbrance
or security interest in such shares or the proceeds thereof, except for that
granted hereunder.
3.6 First Priority Lien
The lien against the Pledged Assets granted pursuant to this Agreement
constitutes a valid, perfected first priority lien on the Pledged Assets,
enforceable as such against all creditors of the Company and any persons
purporting to purchase any of the Pledged Assets from the Company.
4. COVENANTS
The Company covenants and agrees with Executive that, from and after the
date of this Agreement until the Secured Obligations are paid in full:
4.1 No Other Liens
The Company will not create or permit the existence of any lien on or
security interest in the Pledged Assets (other than that hereby created) without
the written consent of Executive.
4.2 Sale or Encumbrance
Without the prior written consent of Executive and except as otherwise
provided in Section 2.3(e) hereof, the Company will not (a) sell, assign,
transfer, exchange or otherwise dispose of, or grant any option with respect to,
the Pledged Assets, (b) create, incur or permit to exist any lien or option in
favor of, or any claim of any person with respect to, any of the Pledged Assets,
or any interest therein, except
<PAGE>
for the lien provided for by this Agreement. The Company will defend the right,
title and interest of Executive in and to the Pledged Assets against the claims
and demands of all persons whomsoever. Notwithstanding the foregoing, the
Company may sell one or more of the Pledged Assets so long as the proceeds from
such sale remain in the Account subject to the security interest granted by the
Company to Executive pursuant to this Agreement.
4.3 Further Assurances
At any time and from time to time, upon the written request of Executive,
and at the sole expense of the Company, the Company will promptly and duly
execute and deliver such further instruments and documents and take such further
actions as Executive may reasonably request for the purposes of obtaining or
preserving the full benefits of this Agreement and of the rights and powers
herein granted.
4.4 Indemnification
The Company agrees to pay, and to save Executive harmless from, any and all
liabilities with respect to, or resulting from any delay in paying, any and all
stamp, excise, sales or other taxes (except for the tax imposed on the overall
net income of Executive) which may be payable or determined to be payable with
respect to any of the Pledged Assets or in connection with any of the
transactions contemplated by this Agreement.
5. RIGHTS AND REMEDIES
5.1 Remedies
Executive may exercise, in addition to all other rights and remedies
granted in this Agreement and in any other instrument or agreement securing,
evidencing or relating to the Secured Obligations, all rights and remedies of a
secured party under the Uniform Commercial Code of the state of Washington.
Without limiting the generality of the foregoing, Executive, without demand of
performance or other demand, presentment, protest, advertisement or notice of
any kind (except any notice required by law or referred to in this Agreement) to
or upon the Company or any other person (all and each of which demands,
defenses, advertisements and notices are hereby waived to the extent not
prohibited by law), may in such circumstances forthwith collect, receive,
appropriate and realize upon the Pledged Assets, or any part thereof, and/or may
forthwith withdraw from the Account, sell, assign, give option or options to
purchase or otherwise dispose of and deliver the Pledged Assets or any part
thereof (or contract to do any of the foregoing), in one or more parcels at
public or private sale or sales, in the over-the-counter market, at any exchange
broker's board or
<PAGE>
at Executive's offices or elsewhere upon such terms and conditions as he may
deem advisable, for cash or on credit or for future delivery without assumption
of any credit risk. Executive shall have the right upon any such public sale or
sales and, to the extent permitted by law, upon any such private sale or sales
to purchase the whole or any part of the Pledged Assets so sold, free and clear
of any right or equity of redemption in the Company, which right or equity is
hereby waived or released to the extent not prohibited by law. Executive shall
apply the net proceeds of any such collection, recovery, receipt, appropriation,
realization or sale, after deducting all reasonable costs and expenses of every
kind incurred therein or incidental to the care or safekeeping of any of the
Pledged Assets or in any way relating to the Pledged Assets or the rights of
Executive hereunder, including, without limitation, reasonable attorneys' fees
and disbursements, to the payment in whole or in part of the Secured Obligations
in such order as Executive may elect, and only after such application and after
the payment by Executive of any other amount required by any provision of law,
including, without limitation, RCW 62A.9-504(1)(c), need Executive account for
the surplus, if any, to the Company.
5.2 Rights Regarding Pledged Assets
If an Event of Default shall occur: (a) Executive shall have the right to
receive any and all cash dividends paid in respect of the Pledged Assets and
make application thereof to the Secured Obligations in such order as he may
determine and (b) the Pledged Assets shall be registered in the name of
Executive or his nominee, and Executive or his nominee may thereafter exercise
(i) all voting, corporate, consensual and other rights pertaining to such shares
of the Pledged Assets and (ii) any and all rights of conversion, exchange,
subscription and any other rights, privileges or options pertaining to such
shares of the Pledged Assets as if he were the absolute owner thereof
(including, without limitation, the right to exchange at his discretion any and
all of the Pledged Assets upon the merger, consolidation, reorganization,
recapitalization or other fundamental change in the corporate structure of the
issuer of the Pledged Assets, or upon the exercise by the Company or Executive
of any right, privilege or option pertaining to such Pledged Assets, and in
connection therewith, the right to deposit and deliver any and all of the
Pledged Assets with any committee, depositary, transfer agent, registrar or
other designated agency upon such terms and conditions as he may determine), all
without liability except to account for property actually received by him, but
Executive shall have no duty to exercise any such right, privilege or option and
shall not be responsible for any failure to do so or delay in so doing.
<PAGE>
5.3 Right to Proceed Against Pledged Assets
The rights of Executive hereunder shall not be conditioned or contingent
upon the pursuit by Executive of any right or remedy against the Company or
against any other person which may be or become liable in respect of all or any
part of the Secured Obligations or against any other collateral therefor,
guarantee thereof or right of offset with respect thereto. Executive shall not
be liable for any failure to demand, collect or realize upon all or any part of
the Pledged Assets or for any delay in doing so, nor shall he be under any
obligation to sell or otherwise dispose of any Pledged Assets upon the request
of the Company or any other person or to take any other action whatsoever with
regard to the Pledged Assets or any part thereof except that Executive shall be
required to exercise reasonable care with respect to the safe keeping of
collateral in his possession.
5.4 Waiver; Notice of Sale
To the extent permitted by applicable law, the Company waives all claims,
damages and demands it may acquire against Executive arising out of the exercise
by Executive of any of his rights hereunder. If any notice of a proposed sale
or other disposition of Pledged Assets shall be required by law, such notice
shall be deemed reasonable and proper if given at least ten days before such
sale or other disposition. To the extent not prohibited by applicable law, the
Company further waives and agrees not to assert any rights or privileges which
it may acquire under RCW 62A.9-112.
6. GENERAL PROVISIONS
6.1 Limitation on Duties Regarding Pledged Assets
Executive shall not be liable for failure to demand, collect or realize
upon any of the Pledged Assets or for any delay in doing so nor shall Executive
be under any obligation to sell or otherwise dispose of any Pledged Assets upon
the request of the Company or otherwise.
6.2 Expenses Incurred by Executive
Executive is not required to, but may at his option, pay any tax or other
charge or expense payable by the Company and any filing or recording fees, and
any amounts so paid shall be repayable by the Company upon demand. The Company
will also repay upon demand all of Executive's reasonable expenses incurred in
collecting, conserving or protecting the Pledged Assets. All such sums shall
bear interest at 8% per annum from the date of Executive's payment until the
Company's repayment. All such sums and interest thereon shall be secured by the
security interest granted herein.
<PAGE>
The rights granted by this Section 6.2 are not a waiver of any other rights of
Executive arising from breach of any of the Company's covenants.
6.3 Nonwaivers
This Agreement shall not be qualified or supplemented by course of dealing.
No waiver or modification by Executive of any of the terms or conditions hereof
shall be effective unless in writing signed by Executive. No waiver or
indulgence by Executive as to any required performance by the Company shall
constitute a waiver as to any subsequent required performance or other
obligations of the Company hereunder.
6.4 Attorneys' Fees and Costs
In the event of an arbitration or litigation between the parties to enforce
a right or rights under this Agreement, the prevailing party shall be entitled
to recover from the nonprevailing party all costs and expenses, including
reasonable attorneys' fees, incurred by the prevailing party in protecting or
enforcing rights under the terms of this Agreement. Attorneys' fees shall
include services rendered at arbitration, trial and any appeal therefrom, in
bankruptcy, as well as services rendered subsequent to judgment and obtaining
execution thereon.
6.5 Term of Agreement
This Agreement shall be a continuing agreement until such time as the
Company has paid the Secured Obligations as described in Section 4.2(a) of the
Employment Agreement. Upon payment of the Secured Obligations, the Company
shall be entitled to a distribution of all of the Pledged Assets and a written
acknowledgment in a form reasonably designated by the Company executed by
Executive that this Agreement has terminated. Executive agrees to cooperate
with the Company in obtaining such a distribution of all of the Pledged Assets
and a written acknowledgment of termination.
6.6 Successors
All obligations, rights, powers and privileges herein provided shall inure
to the benefit of and shall bind the heirs, executors, administrators and
successors of the parties hereto.
6.7 Governing Law
This Agreement and the Secured Obligations are subject to the laws of the
state of Washington and are to be construed in accordance therewith.
<PAGE>
6.8 Consent to Jurisdiction, Service and Venue
For the purpose of performance of the obligations under or otherwise in
connection herewith, the parties hereby consent to the jurisdiction and venue of
the courts of the state of Washington or of any federal court located in such
state. The parties hereby waive the right to contest the jurisdiction and venue
of courts located in the state of Washington on the ground of inconvenience or
otherwise.
6.9 Severability
Any provision of this Agreement which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
6.10 Satisfaction of Obligation
The parties agree that the execution of this Agreement and consummation of
the pledge of the Pledge Assets in accordance with the provisions of this
Agreement shall satisfy the requirement set forth in Section 4.2(d) of the
Employment Agreement.
6.11 Counterparts
This Agreement may be executed in one or more counterparts, each of which
shall constitute an original Agreement, but all of which together shall
constitute one and the same instrument.
EGGHEAD.COM, INC.
By: /s/ GEORGE P. ORBAN
---------------------------------
Title: CEO
--------------------------------
Accepted By:
/s/ JONATHAN W. BRODEUR
--------------------------------------
Jonathan W. Brodeur
<PAGE>
Exhibit 10.10
SUPPLEMENTAL RETENTION BONUS AGREEMENT
BETWEEN EGGHEAD.COM, INC. AND JAMES KALASKY
THIS RETENTION BONUS AGREEMENT (the "Agreement") between Egghead.com, Inc.
(the "Company") and James Kalasky ("Employee") is entered into as of October 1,
1999.
WHEREAS, the Company desires to create an incentive for retention of
Employee, and whereas Employee is willing to receive a retention bonus in the
circumstances set forth in this Agreement.
In consideration of the mutual promises and agreements contained herein,
the parties hereto agree as follows:
1. Retention Bonus. As an incentive for retention of Employee, the
Company agrees to pay to Employee a lump sum bonus, in the amount of $135,000,
to be paid on December 16, 1999, if Employee remains employed with the Company
(or any successor, or parent of successor, of the Company) through such date;
provided, however, that such retention bonus shall also be payable in the event
Employee is terminated without Cause (as defined in the Employment Agreement
effective January 22, 1998 between the Company and Employee, as amended by
Amendment No. 1 thereto effective January 28, 1999) by the Company (or any
successor, or parent of successor, of the Company) prior to December 16, 1999.
In the event Employee remains employed by the Company through January 31, 2000,
this bonus shall be applied toward any bonus payable under the terms of the
Retention Bonus Agreement dated July 13, 1999.
2. Successors. This Agreement shall be binding upon, and inure to the
benefit of, the successors and assigns of the parties hereto. This Agreement
may not be assigned by Executive without the prior written consent of the
Company.
3. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington without application of
principles of conflicts of laws.
-1-
<PAGE>
IN WITNESS WHEREOF, this Agreement is entered into as of the date first
above written.
EMPLOYEE EGGHEAD.COM, INC.
/s/ JAMES KALASKY By: /s/ GEORGE P. ORBAN
-------------------------- --------------------------
Name: George P. Orban
Chairman and Chief Executive
Officer
-2-
<PAGE>
Exhibit 10.11
PROMISSORY NOTE
$100,000 Vancouver, Washington
Effective Date: January, 21, 1999
FOR VALUE RECEIVED, the undersigned, James F. Kalasky ("Maker"), hereby
promises to pay to the order of Egghead.com, Inc. (Egghead.com, Inc., including,
without limitation, any successor thereof, "Holder"), at such place as the
holder of this promissory note (this "Note") may designate from time to time,
the principal sum of $100,000. This Note is being made in connection with a
loan by Holder to Maker of $100,000. This note shall bear interest at a rate of
5.82%, compounded monthly.
Payments of Principal and Interest; Forgiveness. All accrued, unpaid and
unforgiven principal and interest shall be due and payable upon the earliest
date (the "Due Date") of the following: (1) January 22, 2002 or (2) the 90th day
following termination of Maker's employment with Holder either by Maker
voluntarily or by the Holder for "Cause" (as that term is defined in the
Executive Employment Agreement between the Maker and the Holder, effective
January 22, 1998, as amended January 22, 1999. Prior to the Due Date, the
principal amount of $2,777.78 plus the interest accrued for the preceding month
shall be forgiven on the 21st day of each month following the Effective Date.
All principal and interest hereunder shall be paid in lawful money of the United
States.
Prepayment. Maker may at any time upon at least five days prior notice to
the Holder prepay in whole or in part the principal and interest due under this
Note without premium or penalty.
Default. The entire unpaid and unforgiven principal and interest under
this Note shall become immediately due and payable upon the occurrence of any
one or more of the following events of default (each, an "Event of Default") (i)
Maker's being made the subject of any proceeding under the Bankruptcy Code of
the United States, as amended, or any similar statute and such proceeding not
being dismissed within 60 days after its institution, (ii) Maker's admitting in
writing his inability to pay his debts generally as they become due, (iii) Maker
voluntarily seeking the benefit of the Bankruptcy Code of the United States, as
amended, or any other applicable liquidation, conservatorship, bankruptcy,
moratorium, rearrangement, receivership, insolvency, reorganization, or similar
debtor relief laws, from time to time in effect, affecting the rights of
creditors generally (collectively, "Debtor Relief Laws"), or (iv) Maker's being
made the subject of any proceeding provided for by any Debtor Relief Laws that
suspends or otherwise materially affects any of the rights of Holder under this
Note and such proceeding not being dismissed within 60 days after its
institution.
Liability and Waiver. Maker hereby waives presentment, notice of dishonor,
protest, notice of protest and diligence in collection, and consents that the
time of payment on any part of this Note may be extended by Holder without
otherwise modifying, altering, releasing, affecting or limiting Maker's
liability.
Costs of Collection. Maker agrees to pay all costs of collection and
attorneys' fees incurred by the Holder of this Note in case of any default of,
or failure to make, any payment due under this Note.
<PAGE>
Governing Law. This Note shall be governed by and construed in accordance
with the laws of the state of Washington.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND
CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT
ENFORCEABLE UNDER WASHINGTON LAW.
/s/ JAMES F. KALASKY
---------------------
James F. Kalasky
-2-
<PAGE>
Exhibit 10.12
PROMISSORY NOTE
$150,000 Vancouver, Washington
Effective Date: January 21, 1999
FOR VALUE RECEIVED, the undersigned, Tommy E. Collins ("Maker"), hereby
promises to pay to the order of Egghead.com, Inc. (Egghead.com, Inc., including,
without limitation, any successor thereof, "Holder"), at such place as the
holder of this promissory note (this "Note") may designate from time to time,
the principal sum of $150,000. This Note is being made in connection with a
loan by Holder to Maker of $150,000. This note shall bear interest at a rate of
5.80%, compounded monthly.
Payment of Principal and Interest; Forgiveness. All accrued, unpaid and
unforgiven principal and interest shall be due and payable upon the earliest
date (the "Due Date") of the following: (1) January 22, 2003 or (2) the 90th day
following termination of Maker's employment with Holder either by Maker
voluntarily or by the Holder for "Cause" (as that term is defined in the
Executive Employment Agreement between the Maker and the Holder, effective
January 22, 1998, as amended January 22, 1999. Prior to the Due Date, the
principal amount of $3,125 plus the interest accrued for the preceding month
shall be forgiven on the 21st day of each month following the Effective Date.
All principal shall be paid in lawful money of the United States.
Prepayment. Maker may at any time upon at least five days prior notice to
the Holder prepay in whole or in part the principal and interest due under this
Note without premium or penalty.
Default. The entire unpaid and unforgiven principal and interest under
this Note shall become immediately due and payable upon the occurrence of any
one or more of the following events of default (each, an "Event of Default"):
(a) Maker's being made the subject of any proceeding under the Bankruptcy Code
of the United States, as amended, or any similar statute and such proceeding not
being dismissed within 60 days after its institution, (b) Maker's admitting in
writing his inability to pay his debts generally as they become due, (c) Maker
voluntarily seeking the benefit of the Bankruptcy Code of the United States, as
amended, or any other applicable liquidation, conservatorship, bankruptcy,
moratorium, rearrangement, receivership, insolvency, reorganization, or similar
debtor relief laws, from time to time in effect, affecting the rights of
creditors generally (collectively, "Debtor Relief Laws"), or (d) Maker's being
made the subject of any proceeding provided for by any Debtor Relief Laws that
suspends or otherwise materially affects any of the rights of Holder under this
Note and such proceeding not being dismissed within 60 days after its
institution.
Liability and Waiver. Maker hereby waives presentment, notice of dishonor,
protest, notice of protest and diligence in collection, and consents that the
time of payment on any part of this Note may be extended by Holder without
otherwise modifying, altering, releasing, affecting or limiting Maker's
liability.
Costs of Collection. Maker agrees to pay all costs of collection and
attorneys' fees incurred by the Holder of this Note in case of any default of,
or failure to make, any payment due under this Note.
<PAGE>
Governing Law. This Note shall be governed by and construed in accordance
with the laws of the state of Washington.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT,
OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT
ENFORCEABLE UNDER WASHINGTON LAW.
/s/ TOMMY COLLINS
------------------
Tommy E. Collins
-2-
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