<PAGE>
As filed with the Securities and Exchange Commission on March 11, 1999
Registration 333-71907
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
EGGHEAD.COM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Washington 5045 91-1296187
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
521 S.E. Chkalov Drive
Vancouver, Washington 98683
(360) 883-3447
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Brian W. Bender
Chief Financial Officer
Egghead.com, Inc.
521 S.E. Chkalov Drive
Vancouver, Washington 98683
(360) 883-3447
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
<TABLE>
<S> <C>
David F. McShea James N. Strawbridge
Patrick J. Devine Jon C. Gonzales
Perkins Coie LLP Wilson Sonsini Goodrich & Rosati,
1201 Third Avenue, 40th Floor Professional Corporation
Seattle, Washington 98101-3099 650 Page Mill Road
(206) 583-8888 Palo Alto, California 94304
(650) 493-9300
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. +
+Underwriters may not confirm sales of these securities until the registration +
+statement filed with the Securities and Exchange Commission becomes +
+effective. This prospectus is not an offer to sell these securities and it is +
+not soliciting offers to buy these securities in any state where the offer or +
+sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 11, 1999
PROSPECTUS
5,030,000 Shares
[LOGO OF EGGHEAD.COM(R)]
Common Stock
Of the 5,030,000 shares of common stock offered in this prospectus,
Egghead.com, Inc. is selling 5,000,000 shares and certain shareholders of
Egghead.com are selling 30,000 shares. Egghead.com will not receive any of the
proceeds from the sale of shares by these selling shareholders.
Egghead.com's common stock is traded on the Nasdaq National Market under the
symbol "EGGS." On March 10, 1999, the last reported sale price for the common
stock on the Nasdaq National Market was $14.88 per share. See "Price Range of
Common Stock."
--------
<TABLE>
<CAPTION>
Per Share Total
<S> <C> <C>
Public offering price................................... $ $
Underwriting discount and commissions................... $ $
Proceeds, before expenses, to Egghead.com............... $ $
Proceeds to selling shareholders........................ $ $
</TABLE>
Egghead.com has granted the underwriters an option for a period of 30 days to
purchase up to 750,000 additional shares of common stock.
The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares against payment in New York, New York
on , 1999.
--------
Investing in the common stock involves a high degree of risk.
See "Risk Factors" beginning on page 6.
--------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
HAMBRECHT & QUIST
BANCBOSTON ROBERTSON STEPHENS
PRUDENTIAL SECURITIES
U.S. BANCORP PIPER JAFFRAY
, 1999
<PAGE>
[PICTURE OF EGGHEAD.COM'S HOME PAGE, WITH INSET PICTURES OF THE EGGHEAD
COMPUTER, EGGHEAD SOFTWARE, EGGHEAD SURPLUS DIRECT AND EGGHEAD AUCTIONS PAGES,
ACCOMPANIED BY TEXT: "In December 1998, Egghead.com was the leader, in terms of
total unique visitors, among Web sites that primarily sell computer-related
products (based on data from rankings by Media Metrix in the online shopping
category)."]
[TEXT: "www.egghead.com]
---------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................................................. 3
Risk Factors........................................................ 6
Forward-Looking Statements.......................................... 17
Use of Proceeds..................................................... 18
Price Range of Common Stock......................................... 18
Dividend Policy..................................................... 18
Corporate Information............................................... 19
Capitalization...................................................... 20
Dilution............................................................ 20
Selected Consolidated Financial Data................................ 21
Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 22
Business............................................................ 34
Management.......................................................... 45
Principal and Selling Shareholders.................................. 47
Underwriting........................................................ 49
Legal Matters....................................................... 50
Experts............................................................. 50
Additional Information.............................................. 50
Information Incorporated by Reference............................... 51
Index to Consolidated Financial Statements.......................... F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in our common stock. You should read the entire
prospectus carefully, including "Risk Factors" and the financial statements,
before making an investment decision. Except where we state otherwise, the
information we present in this prospectus assumes no exercise of the
underwriters' over-allotment option.
Egghead.com
Business
Egghead.com is a leading online retailer of personal computer hardware,
software, peripherals and accessories. In February 1998, Egghead.com became the
first significant traditional retailer to close all of its retail stores and
shift its primary business emphasis to online retailing. In December 1998,
Egghead.com was the leader, in terms of total unique visitors, among Web sites
that primarily sell computer-related products (based on data from rankings by
Media Metrix in the online shopping category). We have a prominent, well-
recognized brand and bring to the Internet over 14 years of retailing
experience. We have grown our online and related revenues from approximately
$23.7 million in the quarter ended December 27, 1997 to approximately $41.9
million in the quarter ended December 26, 1998. From March 28, 1998 to December
26, 1998, the number of our customer accounts grew from approximately 460,000
to over 750,000. Repeat customers generated over 65% of the orders at our
online store in the quarter ended December 26, 1998. We believe we are uniquely
positioned to compete in online retailing because of our strong brand name, our
merchandising expertise and the distinctive three-format shopping experience
offered by our online store. In addition to computer-related products, we sell
consumer electronics and other consumer and business goods, and we intend to
significantly expand over time the categories of products we offer.
The Market Opportunity
The growth of the Internet represents a substantial opportunity for companies
to conduct business online. International Data Corporation estimates that sales
to households over the Internet will increase worldwide from approximately $5
billion in 1997 to over $93 billion in 2002. In addition, personal computer
hardware and software sales to consumers over the Internet are expected to grow
from approximately $2.8 billion in 1998 to over $11 billion in 2002. The
computer products retail industry is large and growing. International Data
Corporation estimates that the market for personal computer products and
software in the United States is expected to grow from approximately $145
billion in 1997 to approximately $218 billion in 2001.
The Egghead.com Advantage
Egghead.com believes that it is well positioned to capitalize on the
expanding online retail market because of its brand name, its merchandising
expertise and the distinctive three-format shopping experience offered by its
online store. Our strong, long-standing brand name gives us a distinct
advantage over many new entrants in the online retail market. We believe that
our brand name attracts a significant number of customers to our online
shopping site, enabling us to reduce our costs of customer acquisition, and
lays the foundation for long-term customer loyalty. Our merchandising history
and strong supplier relationships enable us to identify, source and create
compelling product offerings in a variety of categories to satisfy a wide range
of customer shopping needs. We believe our merchandising expertise and skill
will allow us to leverage our existing relationships with suppliers and add new
suppliers and product categories to increase the breadth and number of products
we offer. In addition, we have pioneered an innovative three-format shopping
experience at our online store that enables customers to "Shop Three Times
Smarter SM." Our online store's three shopping formats attract a broad base of
customers and satisfy a variety of budget needs
3
<PAGE>
by offering a wide selection of competitively priced products at different
points in their product life cycle. Our online store's Egghead Superstores
(Egghead Computer and Egghead Software) offer customers a large selection of
new, current-version computer hardware and software products at competitive
prices. Our online store's SurplusDirect liquidation center offers customers
excess, close-out, refurbished and reconditioned merchandise at liquidation
prices. Our online store's Egghead Auctions section enables customers to bid on
computer products and other consumer and business goods. We flexibly
merchandise a wide variety of products among these three formats, and move
products between formats, in an effort to increase revenues and accelerate our
inventory turns.
Strategy
Our objective is to be a leading online retailer of consumer and business
products sold at competitive prices, building on our strong foundation as a
retailer of computers and computer-related products. We plan to achieve this
goal through the following key strategies:
. Leverage Brand Recognition
. Promote Customer Loyalty by Providing an Outstanding Shopping Experience
. Strengthen Core Product Offerings and Expand into Other Merchandise
Categories
. Expand into New Markets
. Maintain and Strengthen Relationships with Suppliers and Distributors
. Increase Focus on Technology
. Attract and Retain Exceptional Employees
The Offering
<TABLE>
<S> <C>
Common stock offered by Egghead.com............. 5,000,000 shares
Common stock offered by selling shareholders.... 30,000 shares
Common stock to be outstanding after the
offering....................................... 29,795,384 shares(1)
Use of proceeds................................. For working capital and other general corporate
purposes
Nasdaq National Market symbol................... "EGGS"
</TABLE>
- --------------------
(1) This information is based on the number of shares outstanding at December
26, 1998. It includes the shares being offered by the selling shareholders
pursuant to the exercise of fully vested stock options, but excludes the
remaining 4,454,469 shares of common stock reserved for issuance under our
stock option and stock purchase plans, of which 2,623,198 shares were
subject to outstanding options as of December 26, 1998 at a weighted
average exercise price of $7.04 per share. See "Capitalization" and Notes 1
and 4 of Notes to Consolidated Financial Statements.
4
<PAGE>
Summary Consolidated Financial Information
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended Nine Months Ended
------------------------------- -------------------------
March 30, March 29, March 28, December 27, December 26,
1996 1997 1998 1997 1998
--------- --------- --------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net sales:
Online................ $ 149 $ 1,408 $ 59,737 $ 33,150 $106,449
Retail................ 403,692 359,307 233,342 185,420 --
-------- -------- -------- -------- --------
Total net sales..... 403,841 360,715 293,079 218,570 106,449
-------- -------- -------- -------- --------
Gross profit:
Online................ 54 249 7,721 5,060 10,124
Retail................ 69,208 56,215 28,183 31,100 --
-------- -------- -------- -------- --------
Total gross profit.. 69,262 56,464 35,904 36,160 10,124
Other income, net....... 2,652 3,729 2,940 2,496 5,691
Loss from continuing
operations............. (11,121) (48,961) (54,531) (15,191) (21,613)
Net loss................ $(10,745) $(39,640) $(50,231) $(15,191) $(21,613)
======== ======== ======== ======== ========
Basic loss from
continuing operations
per share(1)........... $ (0.64) $ (2.78) $ (2.60) $ (0.75) $ (0.90)
======== ======== ======== ======== ========
Basic net loss per
share(1)............... $ (0.62) $ (2.25) $ (2.40) $ (0.75) $ (0.90)
======== ======== ======== ======== ========
Shares used in per share
calculations........... 17,437 17,581 20,967 20,241 24,123
</TABLE>
<TABLE>
<CAPTION>
At December 26, 1998
-----------------------
Pro Forma
Actual As Adjusted(2)
-------- --------------
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents............................... $ 59,017 $128,677
Working capital......................................... 39,505 109,165
Total assets............................................ 116,395 186,055
Total shareholders' equity.............................. 78,757 148,417
</TABLE>
- --------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for information
about how we calculated basic net loss per share.
(2) The "pro forma as adjusted" column reflects the application of the proceeds
from the sale of 5,000,000 shares of common stock offered by Egghead.com in
this prospectus at an assumed public offering price of $14.88 per share
after deducting estimated underwriting discounts and commissions and
estimated offering expenses.
5
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Any of the
following risks could materially adversely affect our business, operating
results and financial condition and could result in a complete loss of your
investment.
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.
To address these risks and uncertainties, we must take several steps,
including:
. improving our customer service and providing outstanding order
fulfillment;
. continuing to develop and upgrade our technology, infrastructure and
systems that support our online store;
. expanding the number of products and categories of merchandise offered at
our online store;
. increasing our customer base to achieve economies of scale;
. attracting, retaining and motivating qualified personnel; and
. making our online store more user-friendly and appealing to customers.
We may not be successful in implementing any of our strategies or in
addressing these risks and uncertainties. Even if we accomplish these
objectives, we still may not be profitable in the future.
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 December 26, 1998, we had a retained deficit of $96.4 million.
We have not achieved profitability as an electronic commerce company, and we
expect to continue to incur substantial net losses through at least the fiscal
year 2001. We plan to continue to enhance our brand name through 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.
6
<PAGE>
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;
. price competition;
. 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;
. 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 and the
availability of merchandise from our suppliers. We cannot forecast the number
of future customers or the future availability of merchandise with any degree
of certainty. It is clear, however, that if the number of customers does not
increase 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 good indicators of
our future performance. If our future operating results are below the
expectations of securities analysts and investors, our stock price may decline.
Our operating results may fluctuate depending on the season, and such
fluctuations may affect our stock price
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
7
<PAGE>
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 fall below the expectations of securities analysts and investors and,
consequently, our stock may decline.
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
communications systems are located at a single leased facility in Vancouver,
Washington. 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. Prior to the launch of our
redesigned Web site in November 1998, our online store experienced periodic
temporary capacity constraints from time to time, and we continue to experience
capacity constraints at our customer support center primarily related to
inbound customer telephone inquiries. Capacity constraints could prevent
customers from gaining access to our online store or our customer support
center for extended periods of time and decrease our ability to fulfill
customer orders or decrease our level of customer acquisition or retention.
Such constraints would also decrease the appeal of our online store and
decrease our sales. If the amount of traffic, the number of orders or the
amount of auction bidding at our redesigned 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. Also, we may be unable to increase our
capacity at our customer support center to handle the amount of current or
future customer telephone inquiries.
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
and to make certain elements of the systems Year 2000 compliant. We will also
need to upgrade and expand our systems for the Egghead Auctions format of our
online store, particularly to improve its scaleability. We also plan to upgrade
and expand our systems to add automated customer service, proactive e-mail and
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, 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.
8
<PAGE>
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, customer service 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 to keep control
over our strategic direction 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 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:
. 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.;
. Companies with electronic commerce sites such as Beyond.com Corporation,
Buy.com Inc., Cyberian Outpost, Inc. and 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. and eBay 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.
and Computer City;
. Manufacturers such as Dell Computer Corporation and Gateway 2000, 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.
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
9
<PAGE>
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.
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. 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 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, we 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 rely heavily 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
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approximately 9.3% of our aggregate merchandise purchases for the nine months
ended December 26, 1998. 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
manufacturers or suppliers, 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 is not favorably received by consumers could damage our
reputation or the Egghead.com brand.
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. Not 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 begun to identify and initiate 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
11
<PAGE>
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 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 personnel, 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 personnel have entered into employment agreements,
none of these agreements prevents any of them from leaving Egghead.com. Mr.
Orban is currently a consultant to Egghead.com and is currently negotiating an
employment agreement with Egghead.com. There can be no assurance that an
employment agreement will be entered into. The loss of the services of any
executive officer or other key personnel could materially adversely affect our
business. Additionally, we believe we will need to expand significantly our
information technology staff in the near future, and we 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.
We face risks relating to the relocation and consolidation of our facilities
We recently moved our customer support and service center from Hood River,
Oregon to our corporate office in Vancouver, Washington. We also plan to
consolidate several of our distribution facilities into a single distribution
center in Vancouver, Washington. We anticipate that these changes will be
completed in the summer of 1999. During this period, we will have the burden of
operating multiple customer support and service sites and multiple distribution
facilities. We may also incur additional expenses related to the relocations
and consolidation. Finally, our customer support, service and distribution
could be disrupted during the transition, which could damage our reputation and
result in reduced customer satisfaction.
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 World Wide Web in particular, especially as a means
of conducting commercial transactions.
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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.
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 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.
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<PAGE>
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 involve 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.
Electronic commerce may not gain market acceptance
The market for Internet products and services has only recently begun to
develop and is rapidly changing. If this market fails to develop, develops more
slowly than expected or becomes saturated with competitors, or if our online
store does not achieve market acceptance, our business may suffer. As is
typical for a new and rapidly evolving industry, demand and market acceptance
for recently introduced services and products over the Internet are subject to
a high level of uncertainty and there exist few proven services and products.
The success of our online store depends upon the adoption of the Internet as a
medium for commerce by a broad base of customers and suppliers. We cannot
assure you that widespread acceptance of electronic commerce in general, or of
our online store in particular, will occur. In the past we have relied on
customers and suppliers who have historically used traditional means of
commerce to purchase and sell merchandise. If we are to be successful, these
customers and suppliers must accept and use new ways of conducting business and
exchanging information, and suppliers must be persuaded to adopt new selling
models. We cannot assure you that there will be broad acceptance of the
Internet as an effective medium for commerce by consumers and suppliers or that
the markets for our online store will develop successfully.
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
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<PAGE>
acquire or maintain relevant domain names in all jurisdictions in which we
conduct business. The acquisition and maintenance of domain names generally are
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 may have future capital needs
We currently anticipate that the net proceeds of this offering, together with
our available funds, 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
eighteen 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. If additional funds are raised through the issuance
of common stock or securities convertible into or exercisable for common stock,
the percentage ownership of the shareholders of Egghead.com at that time will
decrease and such shareholders may experience additional dilution. In addition,
such securities may have rights, preferences and privileges more favorable than
those of the common stock. 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 face risks associated with potential acquisitions
We intend to make investments in complementary businesses, products, services
or technologies on an opportunistic basis when they will assist us in carrying
out our business strategy. If we buy a company, we could have difficulty in
assimilating that company's personnel and operations. In addition, the key
personnel of the acquired company may decide not to work for us. If we acquire
products, services or technologies, we could have difficulty in assimilating
them into our operations. These difficulties could disrupt our ongoing
business, distract our management and employees and increase our expenses.
Furthermore, we may have to incur debt or issue equity securities to pay for
any future acquisitions, the issuance of which could be dilutive to our
existing shareholders.
We face risks associated with the closing of our retail network
On January 28, 1998, we announced that we were changing our name to
Egghead.com, Inc. and shifting our entire business emphasis to electronic
commerce. During the subsequent transition, we closed our remaining retail
store network and our distribution center in Sacramento, California. In
addition, we combined our management and operations with those of Surplus
Software, Inc. ("Surplus Direct"), a subsidiary that we acquired in August
1997. Although we have recorded reserves for liabilities associated with the
closure of the retail store network, we cannot assure you that these reserves
will be adequate to cover any remaining obligations or liabilities.
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, however, remains largely unsettled, even in areas where there has
been some legislative action. It may take years to
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determine whether and how existing laws such as those governing intellectual
property, privacy, libel and taxation apply to the Internet. 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 to traditional
retail purchasing. In 1998, the U.S. Congress passed legislation limiting for
three years the ability of the states to impose new taxes on Internet-based
transactions. Failure to renew this legislation could result in the imposition
by various states of taxes on electronic commerce. In addition, this
legislation does not prevent the application of existing state tax laws to
electronic commerce.
Our management has discretion as to the use of the proceeds from this offering
Our management has broad discretion as to the use of the proceeds that
Egghead.com will receive from this offering. We intend to use these net
proceeds, over time, for working capital (such as, without limitation,
marketing and advertising expenses) and other general corporate purposes. We
may also use a portion of the net proceeds to acquire or invest in businesses,
products, services or technologies that are complementary to our business,
although we have no such specific plans at this time. We cannot assure you that
management will apply such funds effectively, nor can we assure you that the
proceeds will be invested to yield a favorable return. See "Use of Proceeds."
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. Investors may be unable to resell their shares of our
common stock at or above the offering price. 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 our management's
attention and resources. See "Price Range of Common Stock."
Purchasers of shares of common stock in this offering will incur immediate and
substantial dilution
Purchasers of shares of common stock in this offering will incur immediate
and substantial dilution of $10.97 per share in the net tangible book value of
their purchased shares of common stock based on an assumed public offering
price of $14.88 per share. See "Dilution." Investors may also experience
additional dilution as a result of the issuance of shares of common stock in
future business acquisitions and as a result of the issuance and exercise of
employee stock options, warrants and grants.
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
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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 extent permitted by the
Washington Business Corporation 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 antitakeover 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. Also, 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. 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 a three-year term,
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. This provision may delay or prevent a change of control of
Egghead.com, even if such change of control would benefit our shareholders.
FORWARD-LOOKING STATEMENTS
Certain statements under the captions "Prospectus Summary," "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business," and elsewhere in this prospectus,
are "forward-looking statements." These forward-looking statements include, but
are not limited to, statements about our plans, objectives, expectations and
intentions and other statements contained in this prospectus that are not
historical facts. When used in this prospectus, the words "expect,"
"anticipate," "intend," "plan," "believe," "seek," "estimate" and similar
expressions are generally intended to identify forward-looking statements.
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 our
plans, objectives, expectations and intentions and other factors discussed
under "Risk Factors."
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USE OF PROCEEDS
Egghead.com will receive an estimated $69.7 million in net proceeds from the
sale of 5,000,000 shares of common stock offered by us ($80.2 million if the
underwriters' over-allotment option is exercised in full) at an assumed public
offering price of $14.88 per share, after deducting underwriting commissions
and discounts and estimated expenses. We will not receive any proceeds from the
sale of common stock by the selling shareholders.
We intend to use the net proceeds from this offering for working capital and
other general corporate purposes. In addition, we may use a portion of the net
proceeds to acquire complementary businesses, products, services or
technologies; however, we currently have no commitments or agreements and are
not involved in any negotiations with respect to any such transactions. Pending
use of the net proceeds, we intend to invest the net proceeds in interest-
bearing, investment-grade securities.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol
"EGGS." The following table sets forth, for the periods indicated, the high and
low sale prices per share of our common stock as reported on the Nasdaq
National Market.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
1997 Fiscal Year (ended March 29, 1997)
First Quarter............................................... $13.63 $ 9.50
Second Quarter.............................................. $10.88 $ 5.88
Third Quarter............................................... $ 6.63 $ 5.00
Fourth Quarter.............................................. $ 6.00 $ 4.38
1998 Fiscal Year (ended March 28, 1998)
First Quarter............................................... $ 5.13 $ 3.75
Second Quarter.............................................. $ 9.75 $ 3.81
Third Quarter............................................... $11.00 $ 5.94
Fourth Quarter.............................................. $12.19 $ 5.88
1999 Fiscal Year (ending April 3, 1999)
First Quarter............................................... $12.25 $ 6.88
Second Quarter.............................................. $28.13 $ 5.50
Third Quarter............................................... $40.25 $ 4.31
Fourth Quarter (through March 10, 1999)..................... $26.63 $12.00
</TABLE>
On March 10, 1999, the last reported sale price of our common stock on the
Nasdaq National Market was $14.88 per share. As of December 26, 1998, there
were approximately 1,283 shareholders of record of the common stock.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our capital stock during
any of the periods presented above. We currently intend to retain future
earnings, if any, for use in the operation and expansion of our business and do
not anticipate paying any cash dividends in the foreseeable future.
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CORPORATE INFORMATION
Our predecessor, DJ&J Software Corporation, was incorporated in Washington in
1983. We incorporated in Washington in 1984 under the name Egghead, Inc. and
became the parent company of DJ&J Software Corporation. We reincorporated in
Delaware in 1985 and then reincorporated in Washington in 1988. We changed our
name to Egghead.com, Inc. in 1998. References in this prospectus to
"Egghead.com," "Egghead," "we," "our," and "us" refer to Egghead.com, Inc. and
our wholly owned subsidiaries, Surplus Direct, DJ&J Software Corporation, EH
Direct, Inc. and MPI Corporation. Our principal executive offices are located
at 521 S.E. Chkalov Drive, Vancouver, Washington 98683 and our telephone number
is (360) 883-3447. Information contained on our Web sites, including the
Egghead.com Web site and the Surplusauction.com Web site, does not constitute
part of this prospectus.
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CAPITALIZATION
The following table shows the capitalization of Egghead.com as of December
26, 1998 on an actual basis and as adjusted to give effect to Egghead.com's
receipt of the estimated net proceeds from the sale of 5,000,000 shares of
common stock offered by Egghead.com at an assumed public offering price of
$14.88 per share and the application of these net proceeds as set forth in "Use
of Proceeds." The capitalization information set forth in the table below
should be read in conjunction with the more detailed Consolidated Financial
Statements of Egghead.com and the notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
December 26, 1998
---------------------
Actual As Adjusted
-------- -----------
(in thousands)
<S> <C> <C>
Long-term liabilities................................. $ -- $ --
-------- --------
Shareholders' equity:
Common Stock, $0.01 par value per share:
50,000,000 shares authorized, 24,765,384 shares
issued and outstanding, actual; 29,795,384 shares
issued and outstanding, as adjusted(1)........... 248 298
Additional paid-in capital........................ 174,939 244,549
Retained deficit.................................. (96,430) (96,430)
-------- --------
Total shareholders' equity.................... 78,757 148,417
-------- --------
Total capitalization........................ $ 78,757 $148,417
======== ========
</TABLE>
- ---------------------
(1) This "as adjusted" number includes the shares being offered by the selling
shareholders pursuant to the exercise of fully vested stock options, but
excludes the remaining 4,454,469 shares of common stock reserved for
issuance under our stock option and stock purchase plans, of which
2,623,198 shares were subject to outstanding options as of December 26,
1998. See Notes 1 and 4 of Notes to Consolidated Financial Statements.
DILUTION
As of December 26, 1998, Egghead.com had a net tangible book value of
approximately $46.7 million or $1.89 per share of common stock. Net tangible
book value per share represents total tangible assets less total liabilities
divided by the number of shares of common stock outstanding at that date. After
giving effect to the receipt by Egghead.com of the net proceeds from the sale
of the 5,000,000 shares of common stock offered by us at an assumed public
offering price of $14.88 per share, the net tangible book value at December 26,
1998 would have been approximately $116.4 million or $3.91 per share. This
represents an immediate increase in net tangible book value of $2.02 per share
to existing shareholders and an immediate dilution of $10.97 per share to new
investors purchasing shares of common stock in this offering. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share....................... $14.88
Net tangible book value per share at December 26, 1998...... $1.89
Increase in net tangible book value per share attributable
to new investors(1)........................................ 2.02
-----
Pro forma net tangible book value per share after the
offering(1).................................................. 3.91
------
Dilution in net tangible book value per share to new
investors(1)................................................. $10.97
======
</TABLE>
- ---------------------
(1) Includes the shares being offered by the selling shareholders pursuant to
the exercise of fully vested stock options, but excludes the remaining
4,454,469 shares of common stock reserved for issuance under our stock
option and stock purchase plans, of which 2,623,198 shares were subject to
outstanding options as of December 26, 1998. See Notes 1 and 4 of Notes to
Consolidated Financial Statements.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of
Egghead.com and the Notes thereto included elsewhere in this prospectus. The
consolidated statement of operations data set forth below for fiscal years
1996, 1997 and 1998 and the nine-month period ended December 26, 1998 and the
balance sheet data as of March 29, 1997, March 28, 1998 and December 26, 1998
have been derived from our consolidated financial statements included elsewhere
in this prospectus, which have been audited by Arthur Andersen LLP, independent
auditors. The consolidated statement of operations data set forth below for
fiscal years 1994 and 1995 and the balance sheet data as of April 2, 1994,
April 1, 1995 and March 30, 1996 have been derived from consolidated financial
statements not included in this prospectus, which have been audited by Arthur
Andersen LLP, independent auditors. The consolidated statement of operations
data for the nine-month period ended December 27, 1997 are derived from
unaudited financial statements included in this prospectus, which, in the
opinion of our management, reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial data for such
period. The historical results are not necessarily indicative of results to be
expected for any future period. We use a 52/53-week fiscal year ending on the
Saturday nearest March 31. All consolidated statement of operations amounts
reflect the activities of our former Corporate, Government and Educational
Sales Division as discontinued operations because we sold that division on May
13, 1996. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
Fiscal Year Ended Nine Months Ended
--------------------------------------------------- -------------------------
April 2, April 1, March 30, March 29, March 28, December 27, December 26,
1994 1995 1996 1997 1998 1997 1998
-------- -------- --------- --------- --------- ------------ ------------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net sales:
Online............... $ -- $ -- $ 149 $ 1,408 $ 59,737 $ 33,150 $106,449
Retail............... 373,510 434,021 403,692 359,307 233,342 185,420 --
-------- -------- -------- -------- -------- -------- --------
Total net sales.... 373,510 434,021 403,841 360,715 293,079 218,570 106,449
-------- -------- -------- -------- -------- -------- --------
Cost of sales:
Online............... -- -- 95 1,159 52,016 28,090 96,325
Retail............... 303,039 361,567 334,484 303,092 205,159 154,320 --
-------- -------- -------- -------- -------- -------- --------
Total cost of
sales............. 303,039 361,567 334,579 304,251 257,175 182,410 96,325
-------- -------- -------- -------- -------- -------- --------
Gross profit........... 70,471 72,454 69,262 56,464 35,904 36,160 10,124
Selling and marketing
expenses:
Online............... -- -- 29 382 10,118 6,448 23,664
Retail............... 56,627 54,256 59,210 56,970 38,453 29,827 --
-------- -------- -------- -------- -------- -------- --------
Total selling and
marketing
expenses.......... 56,627 54,256 59,239 57,352 48,571 36,275 23,664
General and
administrative
expenses.............. 20,664 19,594 23,257 24,065 19,495 13,287 10,892
Depreciation and
amortization
expenses.............. 7,603 7,363 7,569 7,352 5,809 4,285 2,872
Restructuring and
impairment charges.... -- -- -- 15,597 19,500 -- --
-------- -------- -------- -------- -------- -------- --------
Operating loss......... (14,423) (8,759) (20,803) (47,902) (57,471) (17,687) (27,304)
Other income, net(1)... 723 3,362 2,652 3,729 2,940 2,496 5,691
-------- -------- -------- -------- -------- -------- --------
Loss from continuing
operations before
income taxes.......... (13,700) (5,397) (18,151) (44,173) (54,531) (15,191) (21,613)
Income tax benefit
(provision)........... 5,343 2,106 7,030 (4,788) -- -- --
-------- -------- -------- -------- -------- -------- --------
Loss from continuing
operations............ (8,357) (3,291) (11,121) (48,961) (54,531) (15,191) (21,613)
Income (loss) from
discontinued
operations, net of
tax................... 7,843 5,959 376 (12,254) 4,300 -- --
Gain on disposal of
discontinued
operations, net of
tax................... -- -- -- 22,286 -- -- --
-------- -------- -------- -------- -------- -------- --------
Income from
discontinued
operations............ 7,843 5,959 376 10,032 4,300 -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)
before cumulative
effect of change in
accounting
principles............ (514) 2,668 (10,745) (38,929) (50,231) (15,191) (21,613)
Cumulative effect of
change in accounting
principles, net of
tax................... -- -- -- (711) -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $ (514) $ 2,668 $(10,745) $(39,640) $(50,231) $(15,191) $(21,613)
======== ======== ======== ======== ======== ======== ========
Basic earnings (loss)
per share:
Continuing
operations........... $ (0.49) $ (0.19) $ (0.64) $ (2.78) $ (2.60) $ (0.75) $ (0.90)
Discontinued
operations, net...... 0.46 0.34 0.02 0.57 0.20 -- --
Cumulative effect of
change in accounting
principle, net....... -- -- -- (0.04) -- -- --
-------- -------- -------- -------- -------- -------- --------
Basic net income
(loss) per share...... $ (0.03) $ 0.15 $ (0.62) $ (2.25) $ (2.40) $ (0.75) $ (0.90)
======== ======== ======== ======== ======== ======== ========
Shares used in per
share calculations.... 17,088 17,281 17,437 17,581 20,967 20,241 24,123
<CAPTION>
April 2, April 1, March 30, March 29, March 28, December 26,
1994 1995 1996 1997 1998 1998
-------- -------- --------- --------- --------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents........... $ 25,677 $ 42,592 $ 49,590 $ 83,473 $ 67,381 $ 59,017
Working capital........ 119,838 118,728 105,113 87,250 50,135 39,505
Total assets........... 256,010 270,141 284,232 175,520 131,152 116,395
Total shareholders'
equity................ 143,416 146,416 139,269 100,047 86,087 78,758
</TABLE>
- -------------------
(1) Other income, net for fiscal 1995 includes $1.7 million of theft insurance
recovery and for the first nine months of fiscal 1999 includes $3.3 million
for sale of our equity interest in Elekom Corporation. See Note 10 of Notes
to Consolidated Financial Statements.
21
<PAGE>
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 prospectus. Our discussion contains forward-looking
statements based upon current expectations that involve risks and
uncertainties, such as our plans, objectives, expectations and intentions.
Egghead.com's actual results and the timing of certain events could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors,"
"Business" and elsewhere in this prospectus.
Overview
Egghead.com is a leading online retailer of personal computer hardware,
software, peripherals and accessories. In addition to computer-related
products, Egghead.com sells 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. The Corporate, Government and Educational Sales Division results
are reported separately in this prospectus as discontinued operations. See Note
9 of Notes to Consolidated Financial Statements. 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, close-out 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. In the fourth quarter of
fiscal 1998, we recorded a $37.6 million charge related to this closure of the
retail stores and the related restructuring.
Online Operations. Online net sales, online cost of sales, online gross
profit and online 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. Alternatively, customers 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.
Online Pro Forma. To provide meaningful comparisons for the nine months ended
December 27, 1997, we have disclosed, on an online pro forma basis, online net
sales, online cost of sales, online gross profit and online selling and
marketing expenses. The online pro forma amounts include the results of
operations of Surplus Direct before we acquired it in August 1997. This
acquisition was recorded under the purchase method of accounting and the
results of operations of Surplus Direct are included in our historical
financial results from the date of the acquisition.
Set forth below for the nine months ended December 27, 1997 are certain
online pro forma operations data:
<TABLE>
<CAPTION>
As a Percentage
of Online
Amount Pro Forma
Online Pro Forma Results (in thousands) Net Sales
------------------------ -------------- ---------------
<S> <C> <C>
Online net sales.............................. $54,750 100.0%
Online cost of sales.......................... 45,800 83.7
------- -----
Online gross profit........................... 8,950 16.3
Online selling and marketing expenses......... $11,833 21.6%
</TABLE>
22
<PAGE>
Retail Operations. Retail net sales, retail cost of sales and retail selling
and marketing expenses consist of the results of the retail stores and the
direct response and catalog/mail-order divisions. We completed the closure of
the retail stores and these divisions on February 28, 1998 and therefore they
did not contribute to revenues in the first nine months of fiscal 1999.
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 December 26, 1998, we had a retained deficit of $96.4 million. We
have not achieved profitability as an electronic commerce company and expect to
continue to incur substantial net losses through at least fiscal 2001. We plan
to continue to enhance our brand name, increase our visibility on other
companies' Web sites, offer additional categories of merchandise for sale on
our Web site, improve and enhance our technology and transaction-processing
systems, and improve our infrastructure. These improvements are expected to
result in operating expenses that are higher than current operating expenses.
We will need to generate significantly higher revenues to achieve and maintain
profitability. Although our net sales from electronic commerce have grown in
recent quarters, such growth rates may not be sustainable and we may not become
profitable in the future. Also, because our business is rapidly evolving and
because we have a limited operating history in electronic commerce, we believe
that period-to-period comparisons of our operating results, including our
revenue growth, gross profit and operating expenses as a percentage of net
sales, are not necessarily meaningful and that investors in our common stock
should not use our past results to predict future results.
Results of Operations--Nine Months Ended December 27, 1997 Compared to Nine
Months Ended December 26, 1998
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
----------------------------
Nine months ended
----------------------------
Dec. 27, 1997 Dec. 26, 1998
-------------- -------------
(unaudited)
<S> <C> <C>
Net sales:
Online........................................... 15.2% 100.0%
Retail........................................... 84.8 --
----- -----
Total net sales................................ 100.0 100.0
----- -----
Cost of sales(1):
Online........................................... 84.7 90.5
Retail........................................... 83.2 --
----- -----
Total cost of sales............................ 83.5 90.5
----- -----
Gross margin....................................... 16.5 9.5
Selling and marketing expenses(2):
Online........................................... 19.5 22.2
Retail........................................... 16.1 --
----- -----
Total selling and marketing expenses........... 16.5 22.2
General and administrative expense................. 6.1 10.2
Depreciation and amortization expense.............. 2.0 2.7
----- -----
Operating loss..................................... (8.1) (25.6)
Other income, net.................................. 1.1 5.3
----- -----
Loss before income taxes........................... (7.0)% (20.3)%
===== =====
</TABLE>
- ---------------------
(1) These percentages are calculated by dividing the online and retail cost of
sales by the respective net sales.
(2) These percentages are calculated by dividing the online and retail selling
and marketing expenses by the respective net sales.
23
<PAGE>
Net Sales. Total online net sales for the first nine months of fiscal 1999
increased 94% to $106.4 million as compared to the online pro forma net sales
of $54.8 million for the first nine months of fiscal 1998. Net sales through
the online store during the first nine months of fiscal 1999 increased 255% to
$83.0 million from $23.4 million (online pro forma) for the first nine months
of fiscal 1998. The increase in net sales through our online store was
partially due 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, and
an increase in the categories and amount of merchandise offered. In addition,
our online net sales benefited from an increase in our customer accounts to
over 750,000 as of December 26, 1998 from approximately 460,000 as of March 28,
1998. As a result of a decrease in the frequency and volume of direct mail
flyers, net sales from inbound telephone orders during the first nine months of
fiscal 1999 decreased 25% to $23.4 million from $31.4 million (online pro
forma) during the first nine months of fiscal 1998. Management intends to
reduce the level of emphasis on inbound telephone operations because these
operations have higher operating costs as a percentage of related sales as
compared to online operations.
Total net sales for the first nine months of fiscal 1999 decreased 51% to
$106.4 million from $218.6 million for the first nine months of fiscal 1998.
This decrease was primarily due to the closure of the retail store chain, which
accounted for net sales of $185.4 million for the first nine months of fiscal
1998, and was partially offset by the increase in online net sales.
Gross Profit. Gross profit consists of net sales 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). The gross profit from online net sales for the first nine months of
fiscal 1999 increased to $10.1 million compared to the gross profit of $9.0
million (online pro forma) for the first nine months of fiscal 1998. The gross
margin from online net sales for the first nine months of fiscal 1999 was 9.5%
as compared to the gross margin of 16.3% (online pro forma) for the first nine
months of fiscal 1998. The fiscal 1999 gross margin reflects a decrease in
selling prices and an increase in inventory obsolescence expense partially
offset by an increase in net shipping revenue as compared to the first nine
months of fiscal 1998. The decrease in selling prices was primarily due to an
increase in net sales from online auctions and a decrease in inbound telephone
net sales, which typically carry higher margins than online sales.
Total gross profit for the first nine months of fiscal 1999 decreased to
$10.1 million as compared to $36.2 million for the first nine months of fiscal
1998. This decrease was primarily due to the closure of the retail store chain,
which contributed gross profit of $31.1 million, and was partially offset by
the increase in online net sales.
Initial margin is primarily affected by sales volume and the mix of sales
from each of our three shopping formats, and, to a lesser extent, the mix of
merchandise sold. We typically realize higher initial margins on our Egghead
Superstore sales than on our Egghead SurplusDirect liquidation center sales,
higher initial margins on our Egghead SurplusDirect liquidation center sales
than on our Egghead Auctions sales, and higher initial margins on software
sales than on hardware sales. Recently, we experienced a shift towards lower
initial margin auction sales, which constituted approximately 51% of online net
sales for the first nine months of fiscal 1999. If the percentage of Egghead
Auctions sales continues to increase, our initial margins may be adversely
affected.
Selling and Marketing Expenses. Selling and marketing expenses consist
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, in addition to retail occupancy costs prior to the closure of the
retail store network. The selling and marketing expenses for the first nine
months of fiscal 1999 increased 100% to $23.7 million as compared to the
selling and marketing expenses of $11.8 million (online pro forma) for the
first nine months of fiscal 1998. Selling and marketing expenses as a
24
<PAGE>
percentage of online net sales increased to 22.2% for the first nine months of
fiscal 1999 as compared to 21.6% (online pro forma) for the first nine months
of fiscal 1998. The increase in selling and marketing expenses was primarily
due to increased promotion related to the shift in primary business emphasis to
electronic commerce in February 1998. Retail selling and marketing expenses
were eliminated with the closure of the retail stores in February 1998. We
expect selling and marketing expenses to increase significantly as we endeavor
to enhance our brand name recognition, expand our online shopping capabilities
and increase our market share. However, we cannot assure you that the increase
in such expenses will actually result in enhanced brand name recognition,
expanded Web site capabilities or increased market share.
The total selling and marketing expenses for the first nine months of fiscal
1999 decreased 35% to $23.7 million as compared to $36.3 million for the first
nine months of fiscal 1998. This decrease was primarily due to the closure of
the retail store chain and was partially offset by the increase in expenses
related to the online store and expenses related to acquired operations of
Surplus Direct.
General and Administrative Expenses. General and administrative expenses
consist 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 first nine months of
fiscal 1999 decreased 18% to $10.9 million as compared to $13.3 million for the
first nine months of fiscal 1998. This decrease was primarily due to the
recapitalization of our wholly owned subsidiary Elekom Corporation in November
1997 and expenses incurred in the first nine months of fiscal 1998 related to
the acquisition of Surplus Direct. See Notes 7 and 10 of Notes to Consolidated
Financial Statements. Prior to the recapitalization of Elekom, expenses of
$2.2 million were recorded in general and administrative expenses for the first
nine months of fiscal 1998. After the recapitalization, the results of Elekom
were recorded using the equity method of accounting. General and administrative
expenses as a percentage of net sales increased to 10.2% for the first nine
months of fiscal 1999 as compared to 6.1% for the first nine months of fiscal
1998. This increase was due primarily to a reduction in net sales. We expect
our general and administrative expenses to increase as we continue to build our
business and, in particular, increase our information systems support.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses primarily include depreciation of our capital equipment and
amortization of the goodwill recorded in connection with the acquisition of
Surplus Direct in August 1997. The depreciation expense for the first nine
months of fiscal 1999 decreased to $1.6 million as compared to $3.7 million for
the first nine months of fiscal 1998, primarily due to the closure of the
retail stores in February 1998. Amortization expense for the first nine months
of fiscal 1999 increased to $1.3 million as compared to $577,000 for the first
nine months of fiscal 1998. This increase in amortization expense reflects the
goodwill recorded for the Surplus Direct acquisition. See Note 7 of Notes to
Consolidated Financial Statements.
Other Income, Net. Other income for the first nine months of fiscal 1999
increased to $5.7 million from $2.5 million for the first nine months of fiscal
1998. The increase was primarily due to a gain of $3.3 million from the
November 1998 sale of all our equity interest in Elekom Corporation. See Note
10 of Notes to Consolidated Financial Statements. Interest income for the first
nine months of fiscal 1999 was $2.7 million as compared to $2.6 million for the
first nine months of fiscal 1998.
Income Taxes. Due to our net operating losses, we did not record a provision
for income taxes for the first nine months of fiscal 1999 or fiscal 1998. Given
our recent losses, we have determined that our deferred tax assets do not meet
the realization criteria of Statement of Financial Accounting Standards No. 109
(SFAS 109). Under SFAS 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 3 of Notes to Consolidated
Financial Statements.
25
<PAGE>
Results of Operations--Fiscal Years 1998, 1997 and 1996
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
---------------------
Fiscal Year
---------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Net sales:
Online................................................ -- % 0.4% 20.4%
Retail................................................ 100.0 99.6 79.6
----- ----- -----
Total net sales..................................... 100.0 100.0 100.0
----- ----- -----
Cost of sales(1):
Online................................................ -- 82.3 87.1
Retail................................................ 82.8 84.4 87.9
----- ----- -----
Total cost of sales................................. 82.8 84.3 87.7
----- ----- -----
Gross margin............................................ 17.2 15.7 12.3
Selling and marketing expenses(2):
Online................................................ 19.5 27.1 16.9
Retail................................................ 14.7 15.9 16.5
----- ----- -----
Total selling and marketing expenses................ 14.7 15.9 16.6
General and administrative expenses..................... 5.8 6.7 6.6
Depreciation and amortization expenses.................. 1.9 2.0 2.0
Restructuring and impairment charges.................... -- 4.3 6.7
----- ----- -----
Operating loss.......................................... (5.2) (13.2) (19.6)
Other income, net....................................... 0.7 1.0 1.0
----- ----- -----
Loss before income taxes................................ (4.5)% (12.2)% (18.6)%
===== ===== =====
</TABLE>
- ---------------------
(1) These percentages are calculated by dividing the online and retail cost of
sales by the respective net sales.
(2) These percentages are calculated by dividing the online and retail selling
and marketing expenses by the respective net sales.
Net Sales. On February 28, 1998, we completed the closure of our retail
stores and shifted our primary business emphasis to electronic commerce. Sales
through our retail stores, prior to their closure, constituted the principal
component of our total net sales. Our consolidated net sales of $293.1 million
for fiscal 1998 represents a decrease of 18.8% from fiscal 1997 and 27.4% from
fiscal 1996. The decrease in net sales reflects the decrease in the average
number of stores open during each fiscal year to 78 for fiscal 1998 from 145
for fiscal 1997 and 166 for fiscal 1996. We closed 70 stores during the fourth
quarter of fiscal 1997.
Net sales for fiscal 1997 were $360.7 million, a decrease of 11% from $403.8
million in fiscal 1996. The decrease in sales was primarily due to the closure
of 84 stores during fiscal 1997 and a decrease in overall sales volume.
Gross Profit. The gross profit for fiscal 1998 was $35.9 million, or 12.3% of
sales, as compared to $56.5 million, or 15.7% of sales for fiscal 1997. The
fiscal 1998 gross profit was impacted by the liquidation of retail inventory in
connection with the closure of the remaining retail stores in the fourth
quarter of fiscal 1998. Excluding the $6.2 million restructuring charge
reflected in gross profit and the related sales, fiscal 1998 gross margin would
have been 15.7%.
The gross profit for fiscal 1997 was $56.5 million, or 15.7% of net sales,
compared to $69.3 million, or 17.2% of net sales for fiscal 1996. The decrease
in fiscal 1997 gross margin was primarily due to the
26
<PAGE>
inventory liquidation associated with the closure of 70 stores in connection
with the reorganization and restructuring in the fourth quarter of fiscal 1997.
Excluding the $6.2 million restructuring charge, gross profit in fiscal 1997
would have been $62.7 million or 17.9% of net sales. Gross margin was also
reduced by increased sales of lower margin computer hardware products.
Selling and Marketing Expenses. The selling and marketing expenses for fiscal
1998 were $48.6 million, a reduction from $57.4 million for fiscal 1997 and
$59.2 million for fiscal 1996. Selling and marketing expenses as a percentage
of net sales increased to 16.6% for fiscal 1998 as compared to 15.9% for fiscal
1997 and 14.7% for fiscal 1996. Fiscal 1998 and fiscal 1997 selling and
marketing expenses include restructuring and reorganization costs of
approximately $6.4 million and $1.8 million, respectively. Without these
expenses, the selling and marketing expenses as a percentage of sales would
have been 15.7% for fiscal 1998 and 15.8% for fiscal 1997. The decrease in
fiscal 1998 selling and marketing expense was primarily due to the closure of
70 stores in January 1997. The increase in selling and marketing expenses as a
percentage of net sales for fiscal 1997 as compared to fiscal 1996 was
primarily due to an increase in retail store operating expenses related to
larger format stores.
General and Administrative Expenses. The general and administrative expenses
for fiscal 1998 were $19.5 million, a reduction from $24.1 million in fiscal
1997 and $23.3 million in fiscal 1996. The decrease in fiscal 1998 expenses as
compared to fiscal 1997 was primarily due to the decrease in the number of
retail stores. General and administrative expenses as a percentage of net sales
remained fairly constant for fiscal 1998 and 1997 at 6.6% and 6.7%,
respectively. The fiscal 1997 general and administrative expenses as a
percentage of sales increased from 5.8% for fiscal 1996. This increase was
primarily due to an increase in operating expenses of Elekom Corporation.
Depreciation and Amortization Expenses. The depreciation expense for fiscal
1998 was $4.8 million, a reduction from $7.4 million for fiscal 1997, primarily
due to the closure of 70 retail stores in February 1997. The depreciation
expense for fiscal 1997 of $7.4 million increased from $7.1 million for fiscal
1996 due to the opening of additional retail stores during the year.
Amortization expense of $1.0 million in fiscal 1998 reflects the amortization
of goodwill from the Surplus Direct acquisition. The fiscal 1996 amortization
expense of $424,000 reflects the final amortization of goodwill from a prior
acquisition.
Restructuring and Impairment Charges. Our fiscal 1998 results were
significantly affected by the fourth quarter reorganization involving closure
of our retail store network, a significant reduction in headquarters staff and
the closure of the Sacramento distribution center. The $37.6 million charge
recorded in the fourth quarter of fiscal 1998 includes $17.1 million for retail
lease terminations and related fixed asset disposals, $10.0 million for store
close-out operating costs, $6.2 million for the liquidation of inventory,
$2.1 million for closure of the Sacramento distribution facility and $2.2
million for severance, fixed asset disposals and other miscellaneous expenses
related to the reduction of the headquarters operations. The $37.6 million
restructuring charge was recorded as a $6.2 million charge to gross profit, a
$6.4 million charge to selling and marketing expenses, a $516,000 charge to
general and administrative expenses and a $24.5 million charge to restructuring
and impairment charges. The $24.5 million fiscal 1998 restructuring and
impairment charge was partially offset by a reduction of $5.0 million in fiscal
1997 restructuring and impairment reserves.
The fiscal 1997 restructuring and impairment charges related to the closure
of 70 retail stores totaled $24.0 million before income taxes. The charges
included $6.2 million for the liquidation of inventory, $5.8 million for
settlement of store and warehouse leases, $4.4 million for fixed asset
dispositions and miscellaneous expenses, $3.3 million in store closing costs
and related fixed asset dispositions, $1.0 million for the impairment and
disposition of real estate and $3.3 million for severance and related benefits.
The $24.0 million restructuring charge was recorded as a $6.2 million charge to
gross profit, a $1.8 million charge to selling and marketing expenses, a
$326,000 charge to general and administrative expenses and a $15.6 million
charge to restructuring and impairment charges. See Note 8 of Notes to
Consolidated Financial Statements.
27
<PAGE>
Other Income, Net. Other income, net includes interest income of $3.2 million
in fiscal 1998, $3.4 million in 1997 and $2.3 million in 1996. Changes in
interest income were primarily due to the decreases and increases in cash
balances discussed under "--Liquidity and Capital Resources."
Income Taxes. Given our recent losses, we have determined that our deferred
tax assets do not meet the realization criteria of SFAS 109. Accordingly, we
recorded a net noncash charge in fiscal 1997 of $10.7 million for the
establishment of a deferred tax valuation allowance in accordance with SFAS
109. See Note 3 of Notes to Consolidated Financial Statements.
Discontinued Operations
All results for the operations of the Corporate, Government and Educational
Sales Division are reported as a discontinued operation. Certain general,
administrative and distribution areas supported all of our business lines, and
the expenses included in the results of the discontinued operations reflect
only those activities directly related to the Corporate, Government and
Educational Sales Division.
Income from operations of the Corporate, Government and Educational Sales
Division for fiscal 1998 reflects final adjustments on the settlement and
disposition of this division's related liabilities and assets of $4.3 million.
Gain on the disposition of discontinued operations during fiscal 1997 was $36.5
million ($22.3 million after tax). The sales price for this division was $45.0
million in cash, excluding accounts receivable, which were collected during
fiscal 1997. The reported gain is net of fixed assets and lease write-offs of
$1.2 million, transaction, legal and accounting fees of $2.0 million,
transition period employment costs of $1.8 million and costs of $3.4 million
related to the fulfillment of post-sale obligations.
Loss from discontinued operations was $20.1 million ($12.3 million net of
tax) for fiscal 1997. The major components of the loss were inventory write-
offs of $6.9 million, accounts receivable write-offs of $5.1 million, fixed
asset dispositions and equipment lease buyouts of $3.2 million, warehouse
closing costs of $1.9 million and operating losses, severance and other costs
of $3.0 million. See Note 9 of Notes to Consolidated Financial Statements.
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<PAGE>
Selected Quarterly Results of Operations
The following table sets forth certain unaudited consolidated statement of
operations data for the four quarters ended December 26, 1998. This data has
been derived from unaudited financial statements not included in this
prospectus which, in the opinion of our management, reflect all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the financial data for such periods.
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------
Fiscal 1998 Fiscal 1999
----------- ------------------------------------
March 28, June 27, September 26, December 26,
1998 1998 1998 1998
----------- -------- ------------- ------------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales:
Online....................... $ 26,587 $29,520 $35,054 $41,875
Retail....................... 47,922 -- -- --
-------- ------- ------- -------
Total net sales............. 74,509 29,520 35,054 41,875
-------- ------- ------- -------
Cost of sales:
Online....................... 23,926 26,463 31,342 38,520
Retail....................... 50,839 -- -- --
-------- ------- ------- -------
Total cost of sales......... 74,765 26,463 31,342 38,520
-------- ------- ------- -------
Gross profit................... (256) 3,057 3,712 3,355
Selling and marketing expenses:
Online ...................... 5,327 5,768 6,920 10,976
Retail....................... 7,618 -- -- --
-------- ------- ------- -------
Total selling and marketing
expenses................... 12,945 5,768 6,920 10,976
General and administrative
expenses...................... 5,560 3,068 3,687 4,137
Depreciation and amortization.. 1,523 784 936 1,152
Restructuring and impairment
charges....................... 19,500 -- -- --
Other income, net.............. 443 1,014 632 4,045
-------- ------- ------- -------
Net loss from continuing
operations.................... $(39,341) $(5,549) $(7,199) $(8,865)
======== ======= ======= =======
Basic loss per share, from
continuing operations......... $ (1.70) $ (0.24) $ (0.30) $ (0.36)
======== ======= ======= =======
Weighted average shares
outstanding................... 23,144 23,570 24,281 24,519
======== ======= ======= =======
<CAPTION>
Percentage of Total Net Sales
------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C>
Net sales:
Online....................... 35.7% 100.0% 100.0% 100.0%
Retail....................... 64.3 -- -- --
-------- ------- ------- -------
Total net sales............. 100.0 100.0 100.0 100.0
-------- ------- ------- -------
Cost of sales(1):
Online....................... 90.0 89.6 89.4 92.0
Retail....................... 106.1 -- -- --
-------- ------- ------- -------
Total cost of sales......... 100.3 89.6 89.4 92.0
-------- ------- ------- -------
Gross margin................... (0.3) 10.4 10.6 8.0
Selling and marketing
expenses(2):
Online....................... 20.0 19.5 19.7 26.2
Retail....................... 15.9 -- -- --
-------- ------- ------- -------
Total selling and marketing
expenses................... 17.4 19.5 19.7 26.2
General and administrative
expenses...................... 7.5 10.4 10.5 9.9
Depreciation and amortization.. 2.0 2.7 2.7 2.8
Restructuring and impairment
charges....................... 26.2 -- -- --
Other income, net.............. 0.6 3.4 1.8 9.7
-------- ------- ------- -------
Net loss from continuing
operations.................... 52.8% 18.8% 20.5% 21.2%
======== ======= ======= =======
</TABLE>
- ---------------------
(1) These percentages are calculated by dividing the online and retail cost of
sales by the respective net sales.
(2) These percentages are calculated by dividing the online and retail selling
and marketing expenses by the respective net sales.
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<PAGE>
Gross Margin. Our gross margin for the third quarter of fiscal 1999 was 8.0%,
a decrease from the prior two fiscal quarters. The gross margin was affected by
a decrease in selling prices, an increase in obsolescence charges for aging
inventory and a free shipping promotion in support of the November 1998 launch
of the redesigned online store. Gross margin for the fourth quarter of fiscal
1998 was negative 0.3%. Excluding the $6.2 million restructuring charge
reflected in gross margin and related sales, fourth quarter fiscal 1998 gross
margin would have been 11.9%.
Selling and Marketing Expenses. Our selling and marketing expenses for the
third quarter of fiscal 1999 increased $4.1 million to $11.0 million as
compared to expenses of $6.9 million for the second quarter of fiscal 1999. Our
selling and marketing expenses as a percentage of net sales for the third
quarter of fiscal 1999 increased to 26.2% from 19.7% in the previous quarter.
The selling and marketing expenses for the third quarter of fiscal 1999 were
affected by the expenses associated with an online and offline advertising
campaign initiated in late November 1998 to promote the launch of the
redesigned online store and increase our brand recognition.
General and Administrative Expenses. Our general and administrative expenses
as a percentage of net sales increased to 10.4% for the first quarter of fiscal
1999 as compared to 7.5% for the fourth quarter of fiscal 1998. The increase in
general and administrative expenses as a percentage of net sales was primarily
affected by the decrease in net sales with the February 1998 closure of the
retail stores. We expect our general and administrative expenses to increase as
we continue to build our business, and, in particular, increase our information
systems support.
Other Income, Net. The other income, net for the first quarter of fiscal 1999
includes a $270,000 gain on the sale of our former headquarters building in
Liberty Lake, Washington. The other income, net for the third quarter of fiscal
1999 includes a $3.3 million gain on the sale of our equity interest in Elekom
Corporation. See Notes 10 and 11 of Notes to Consolidated Financial Statements.
We have 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 may be expected to be encountered
by early-stage companies in the new and rapidly evolving market of electronic
commerce.
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 and the
availability of merchandise from our suppliers. We cannot forecast the number
of future customers or the future availability of merchandise with any degree
of certainty.
We have plans to continue to enhance our brand name through marketing and
advertising programs, offer additional categories of merchandise for sale at
our online store, improve and enhance our technology, infrastructure and
systems. These initiatives will likely result in operating expenses that are
higher than current operating expenses. As a result, we expect to continue to
incur substantial quarterly net losses through at least fiscal 2001. 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.
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. If our future operating results are below the
expectations of securities analysts or investors, our stock price may decline.
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<PAGE>
Liquidity and Capital Resources
In recent fiscal years, we have funded our operations through cash provided
by operations, 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 $59.0 million as of December 26, 1998
from $67.4 million at March 28, 1998. The decrease in the cash balance was
primarily due to the net operating loss of $21.6 million, the decrease in
restructuring liabilities of $9.3 million and the increase in merchandise
inventories of $1.7 million, partially offset by $14.3 million in stock
issuances under our stock option and stock purchase plans, net proceeds of $7.1
million from the sale of our former headquarters building and net proceeds of
$3.3 million on the sale of our interest in Elekom Corporation. Cash and cash
equivalents decreased $16.1 million from $83.5 million at the end of fiscal
1997 to $67.4 million at March 28, 1998. The decrease in the cash balance was
primarily due to a reduction in accounts payable and restructuring liabilities,
partially offset by a reduction in accounts receivable and merchandise
inventories.
Cash used by operating activities of $27.4 million for the first nine months
of fiscal 1999 was primarily due to the net loss of $21.6 million, a decrease
in restructuring liabilities of $9.3 million and an increase in merchandise
inventories of $1.7 million, partially offset by a decrease in accounts
receivable of $4.0 million. Cash used by operating activities of $10.9 million
for the year ended March 28, 1998 was primarily due to the net loss of $50.2
million and reductions in accounts payable of $25.8 million, partially offset
by a reduction in accounts receivable of $12.2 million and a reduction in
merchandise inventories of $29.9 million. For fiscal 1997, operating activities
used $7.8 million in cash related to a reduction in accounts payable partially
offset by a decrease in accounts receivable and merchandise inventories.
Net cash provided by investing activities was $4.7 million for the first nine
months of fiscal 1999 and primarily consisted of net proceeds of $7.1 million
from the sale of the former headquarters building and net proceeds of $3.3
million from the sale of our equity interest in Elekom Corporation, partially
offset by capital expenditures of $5.7 million primarily related to the
upgrading of the Web site software platforms and related hardware. See Note 10
of Notes to Consolidated Financial Statements. Net cash used in investing
activities was $2.7 million for fiscal 1998 and primarily consisted of asset
purchases of $2.8 million, primarily for retail store leasehold improvements
and computer hardware. For fiscal 1997, investing activities provided net cash
of $41.7 million primarily related to the $45.0 million proceeds from the sale
of the Corporate, Government and Educational Sales Division, partially offset
by capital expenditures of $5.1 million.
Cash provided by financing activities of $14.3 million for the first nine
months of fiscal 1999 consisted of proceeds from stock issuances under our
stock option and stock purchase plans. Cash used in financing activities of
$2.5 million for fiscal 1998 consisted primarily of payment of notes payable
relating to the Surplus Direct acquisition of $6.0 million, partially offset by
$3.6 million received from the exercises of stock options. For fiscal 1997,
financing activities provided $47,000 primarily due to exercises of stock
options, partially offset by payment on capital leases obligations.
As of December 26, 1998, our principal source of liquidity was $59.0 million
of cash. In December 1998, we obtained a credit line of $5.0 million for the
financing of inventory. The credit line is fully secured by the inventory
purchased through an agreement with the lender, Finova Capital Corporation. As
of December 26, 1998 there were no borrowings outstanding under this line of
credit. As of December 26, 1998, 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 at least $12.5 million. See Note 6 of Notes to
Consolidated Financial Statements.
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<PAGE>
We believe that the net proceeds from this offering combined with our current
cash and cash equivalent balances will be sufficient to meet our anticipated
cash needs for working capital and capital expenditures for at least the next
eighteen months. Our future liquidity and capital requirements will depend upon
numerous factors discussed under the section entitled "Risk Factors." In
addition, we will, 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 the net proceeds from this offering
combined with our current cash and cash equivalent balances will be sufficient
for at least the next eighteen months, 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. We have already identified and evaluated our
major internal information technology and data processing systems for Year 2000
compliance. Certain critical internal information technology and data
processing systems have already been modified, upgraded or replaced to remedy
Year 2000 issues. We are currently completing a plan to address our remaining
significant internal systems for Year 2000 compliance. We expect to
substantially complete the assessment and planning phase by the end of March
1999. Management intends to complete the implementation and verification phases
for our remaining critical internal systems by November 1999.
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 recently
replaced our telecommunications equipment and voicemail systems with systems
that the suppliers state are Year 2000 compliant. We are currently evaluating
our property security systems for Year 2000 compliance, but we do not believe
that any problems with this system would materially affect our business
operations. As a result, we do not expect Year 2000 costs relating to our
property security systems to be material.
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 begun to identify and initiate 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
32
<PAGE>
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 expect to fund the Year
2000-related costs through funds provided by operations and do not expect these
costs to have a material adverse effect on our liquidity or results of
operations. Our estimates of the cost 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 are taking 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, 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 attempt 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. We currently expect our Year 2000 project to
be completed in 1999. However, not all of the systems on which we rely are Year
2000 compliant and we cannot assure you that these systems will be made Year
2000 compliant in a timely manner, 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 Statement
of Financial Accounting Standards (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 133 will be effective for fiscal 2001.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for proceeds of computer software originally developed or obtained
for internal use and then subsequently sold to the public. It also provides
guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. We have not capitalized any costs that
will need to be written off to comply with SOP 98-1. Our current policies for
capitalizing costs incurred for computer software development or obtained for
internal use comply with SOP 98-1.
33
<PAGE>
BUSINESS
Overview
Egghead.com is a leading online retailer of personal computer hardware,
software, peripherals and accessories. In February 1998, Egghead.com became the
first significant traditional retailer to close all of its retail stores and
shift its primary business emphasis to online retailing. In December 1998,
Egghead.com was the leader, in terms of total unique visitors, among Web sites
that primarily sell computer-related products (based on data from rankings by
Media Metrix in the online shopping category). We have a prominent, well-
recognized brand and bring to the Internet over 14 years of retailing
experience as a merchandiser of computer products through our former national
retail network of over 200 stores. We have leveraged our strong brand name and
merchandising expertise to grow our online and related revenues from
approximately $23.7 million in the quarter ended December 27, 1997 to
approximately $41.9 million in the quarter ended December 26, 1998. In addition
to computer-related products, we sell consumer electronics and other consumer
and business goods, and we intend to significantly expand over time the
categories of products we offer. Our online store, business operations,
technology and infrastructure are designed to enable the rapid launch of
additional product categories.
We have pioneered an innovative three-format shopping experience at our
online store that enables customers to "Shop Three Times SmarterSM." Our online
store's three shopping formats attract a broad base of customers and satisfy a
variety of budget needs by offering a wide selection of competitively priced
products at different points in their product life cycles. The three shopping
formats are Egghead Superstores, Egghead SurplusDirect and Egghead Auctions.
The Egghead Superstores, which include Egghead Computer and Egghead Software,
offer customers a large selection of new, current-version computer hardware and
software products at competitive prices. The Egghead SurplusDirect liquidation
center offers customers excess, close-out, refurbished and reconditioned
merchandise at liquidation prices. Egghead Auctions offers customers computer
and consumer goods and the opportunity to impact prices through auction-style
bidding. Customers can move seamlessly among these three distinct shopping
formats to satisfy a variety of their product and budget needs. From March 28,
1998 to December 26, 1998, the number of our customer accounts grew from
approximately 460,000 to over 750,000. Repeat customers generated over 65% of
the orders at our online store in the quarter ended December 26, 1998. With our
strong brand name, our merchandising expertise and distinctive three-format
shopping experience offered by our online store, we believe we are uniquely
positioned to compete in online retailing.
Industry Background
Growth of the Internet. The Internet has emerged as a global communication
medium that enables millions of people to share information and conduct
business electronically. International Data Corporation estimates that there
were approximately 97 million worldwide users of the Internet in 1998 and that
the number of users will grow to approximately 320 million in 2002. This
dramatic growth is expected to come from factors such as an increase in
personal computers in the home and office, an increase in easier, faster and
cheaper ways to access and navigate the Internet, and an increase in the
information and services offered on the Internet.
Growth of Electronic Commerce. The growth of the Internet represents a
substantial opportunity for companies to conduct business online. International
Data Corporation estimates that sales to households over the Internet will
increase worldwide from approximately $5 billion in 1997 to over $93 billion in
2002. In addition, personal computer hardware and software sales to consumers
over the Internet are expected to grow from approximately $2.8 billion in 1998
to over $11 billion in 2002. In 1997, computer hardware and software were the
leading categories of products purchased online by households. Online sales of
office products and consumer electronics are expected to grow from $1.1 billion
in 1998 to $16 billion in 2002.
The Internet is dramatically affecting the way consumers and businesses are
buying and selling products and services. It has rapidly emerged as a unique
marketing channel, just as other channels such as retail
34
<PAGE>
stores, mail order catalogs and television shopping have emerged in the past.
Online retailers can interact with customers in real time by frequently
adjusting their product mix, pricing and visual presentation and can tailor
their product offerings based on individuals' preferences. In addition, the
global reach of the Internet allows retailers to attract customers more quickly
than traditional retailers and catalog marketers, without geographical
limitations. Online retailers do not have the burdensome costs of significant
retail store infrastructure or store personnel, and do not have the continuous
printing and mailing costs of catalog marketers.
Computer Products Retail Industry. The computer products retail industry is
large and growing. International Data Corporation estimates that the market for
personal computer products and software in the United States is expected to
grow from approximately $145 billion in 1997 to over $218 billion in 2001.
The computer products retail industry traditionally has been highly
fragmented. Computer products manufacturers have sold their products directly
to consumers and through a variety of distributors, resellers and catalog
companies. In addition, the traditional computer products retail industry has a
number of inefficiencies. Physical store-based resellers must make significant
investments in real estate, inventory (which is limited due to space
constraints and cost) and personnel for each retail location. Catalog companies
are constrained by practical catalog size limitations, which limit both the
number of products and the information on those products that can be included
in the catalogs. They are also constrained by printing expenses, mailing costs
and inherent delays in reacting to the frequent price and product changes that
characterize this industry. These constraints often limit the product selection
available to consumers. Furthermore, traditional manufacturers and resellers
may not be able to readily obtain demographic and behavioral data about their
customers, which could limit their opportunities for direct marketing as
compared to online retailers.
Disposing of excess, close-out, refurbished and reconditioned computer
products has traditionally represented a substantial challenge for
manufacturers and distributors. Such goods have been sold through auction
houses, catalogs, outlet stores and specialized retailers, as well as through
superstores and mass merchants. The variety of distribution channels dispersing
such goods creates an opportunity to concentrate the sale of this merchandise
online.
The electronic commerce market for computer products is new, rapidly growing
and evolving. Currently, there are many different approaches for selling
computer products over the Internet. These include traditional resellers,
liquidation outlets, auction-style selling, direct sales by manufacturers, and
referral sites where buyers receive advice from a third party on what to
purchase. Each of these approaches involves many risks related to customer
acquisition, product procurement and fulfillment, profitable pricing and
inventory management, all of which pose significant business challenges.
Online Retail Challenges
As the competition for online customers has intensified, online retailers
have faced a number of challenges to acquiring and retaining customers and
promoting and sustaining successful Web sites, including:
. Establishing Brand Recognition. Although a few online retailers have
begun to establish strong brands, the majority are still in the early
stages of brand formation. Online retailers understand that brand
recognition is especially important in attracting customers, developing
customer trust and loyalty in the absence of face-to-face interaction and
maintaining high levels of customer traffic. Creating a strong brand,
however, can be difficult and expensive. Online retailers often must
devote a significant amount of time and resources in order to establish
their brands, and many retailers rely heavily on costly agreements with
Internet portal providers to promote their brands. A strong brand may
help customers overcome concerns about trying a new retail experience
such as online shopping, and therefore may lower the costs of customer
acquisition.
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<PAGE>
. Acquiring Merchandising and Retailing Experience. A number of "Internet
only" retailers have begun operations without any significant traditional
merchandising, product procurement or other retailing experience. These
retailers may not have established the strong relationships with
manufacturers, distributors and other suppliers that are critical to
sourcing attractive products and efficiently managing inventory. As a
result, these online retailers may offer only a few product categories or
a limited selection of products within categories. Online merchants
without significant retail experience may lack critical traditional
merchandising skills such as those involved in sourcing and managing
inventory, bundling various products together to create attractive
offerings, evaluating consumer behavior, developing effective marketing
initiatives and managing through seasonality and economic cycles.
The Egghead.com Advantage
Egghead.com is a leading online retailer of personal computer hardware,
software, peripherals and accessories. In December 1998, Egghead.com was the
leader, in terms of total unique visitors, among Web sites that primarily sell
computer-related products (based on data from rankings by Media Metrix in the
online shopping category). In the quarter ended December 26, 1998, we had net
sales of approximately $41.9 million, and repeat customers generated over 65%
of the orders at our online store. We believe we are uniquely positioned to
compete in online retailing because of the following key strengths:
Strong Brand Recognition. We have a distinct advantage over many entrants
into electronic commerce because of our well-developed and long-standing brand
name. During our 14-year history as a traditional retailer, we conducted
extensive advertising promotions and campaigns which built our nationally
recognized brand as a software and computer products retailer. In addition,
through our recent online and offline marketing and advertising campaigns, we
have increased awareness of our online presence. We believe that our strong
brand name and reputation for product knowledge is attractive to customers and
lays the foundation for long-term customer loyalty. We believe that our brand
name may attract a significant number of customers to our online store,
enabling us to reduce our costs of customer acquisition and make us less
dependent on Internet portal relationships. We intend to leverage this strong
brand name into additional product categories.
Merchandising Focus and Retail Expertise. In contrast to many new entrants to
electronic commerce, Egghead.com brings to online retailing over 14 years of
experience in merchandising and retailing computer hardware, software and
peripherals. We believe that our merchandising history and strong relationships
with suppliers and distributors enable us to identify, source and create
compelling product offerings in a variety of categories, to satisfy a wide
range of customer shopping needs and to better manage our inventory turns. In
addition, we create strong relationships with suppliers by:
. providing suppliers with the ability to quickly and efficiently reach a
geographically diverse customer base at a lower cost;
. providing an outlet for suppliers for excess, close-out, refurbished and
reconditioned goods, which generates incremental revenues for our
suppliers without creating conflicts within their traditional sales
channels; and
. minimizing product returns to suppliers through the effective use of our
online store's three shopping formats.
We employ a staff of buyers with extensive experience in purchasing and
pricing computer, consumer and surplus products. The retailing experience of
our merchandising staff enables them to bundle products to create attractive
offerings and develop compelling product promotions. Our merchandising staff
can use our online store's three formats to test-market customer demand and
price sensitivity for specific products. We believe our merchandising focus and
skill will allow us to leverage our existing relationships and add new
suppliers and product categories to increase the breadth and number of products
we offer.
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Three Shopping Formats--Shop Three Times SmarterSM. We believe that our
online store's three shopping formats enable us to attract and retain a broader
customer base than online retailers pursuing a single sales format. In November
1998, we launched a redesigned online store that enables customers to move
seamlessly among three innovative shopping formats--Egghead Superstores,
Egghead SurplusDirect and Egghead Auctions. The multiple shopping formats
enable our online store to satisfy a broad array of customer needs and budgets,
whether for new, current-version goods, products sold at close-out or
liquidation prices, or auction-style purchases. Because customers' needs and
budgets may change over their lifetimes, the ability of our three formats to
satisfy a range of needs and budgets should help us increase repeat purchases
from our customers. In addition, we can flexibly and efficiently merchandise a
wide variety of products among the three shopping formats, and strategically
place products in the different shopping formats in an effort to manage our
margins or increase sales volume. In addition, our ability to move particular
products among the shopping formats (for example, from the Egghead Superstores
into Egghead Auctions) helps us accelerate our inventory turns.
. Egghead Superstores. At our online store's Superstores (Egghead Computer
and Egghead Software), customers can purchase a broad array of new or
current-version computer hardware, software and related products. The
Egghead Superstores currently offer over 30,000 products, including name
brand computers and peripherals by manufacturers such as International
Business Machines Corporation (IBM), Compaq Computer Corporation, NEC
Corporation, 3COM Corporation, Toshiba America, Inc. and Digital
Equipment Corporation, and computer software from Microsoft Corporation,
Lotus Development Corporation, Intuit, Inc., Network Associates Inc. and
Adobe Systems Incorporated. We offer these products at competitive prices
that are, in many cases, at a discount.
. Egghead SurplusDirect. At our online store's SurplusDirect liquidation
center, our customers can purchase off-price merchandise, including
excess, close-out, refurbished and reconditioned goods. This site has a
regular rotation of a broad array of merchandise, including personal
computers, computer software, consumer electronics, jewelry, sporting
goods, housewares and other consumer and business products. Many of these
products have shorter remaining life cycles and are sold at prices that
are significantly below the manufacturers' suggested retail prices.
. Egghead Auctions. At our online store's Egghead Auctions, we provide
customers with an interactive format to purchase a wide variety of
merchandise offered by Egghead.com through auction-style bidding.
Currently, we auction over 1,300 products each week, including computer
hardware, software, consumer electronics, jewelry, sporting goods and
used/reconditioned products. Each week, we auction, on average, over
60,000 units of product, and conduct over 20 auctions, consisting of
hyper auctions (a one-hour auction concept pioneered by Egghead.com),
daily auctions (24 hours), mega auctions (Friday through Monday), and
specialty auctions of varying lengths in specific product categories such
as software for children, networking and mobile computing. By comparison
to the fixed-price format of our Egghead Superstores and Egghead
SurplusDirect liquidation center, the auction format enables the customer
to affect the price through auction-style online bidding. We have sold up
to 1,500 units of a given product in a single auction. Starting bids in
the auctions have ranged from $1 to $4,400.
Business Strategy
Our objective is to be a leading online retailer of consumer and business
products sold at competitive prices, building on our strong foundation as a
retailer of computers and computer-related products. We plan to achieve this
goal through the following key strategies:
Leverage Brand Recognition. We established a nationally recognized brand name
as a retailer of computer and computer-related products. We intend to leverage
this brand recognition to become the preeminent online retailer of consumer and
business goods offered at competitive prices. Our strategy is to promote our
brand through (1) marketing and promotional campaigns, including online
advertising as well as
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television, print and radio advertising, (2) superior product offerings and (3)
excellent customer service. We believe our strong brand will help us reduce
customer acquisition costs and increase customer loyalty.
Promote Customer Loyalty by Providing an Outstanding Shopping Experience. We
strive to provide our customers with an outstanding shopping experience by
offering three shopping formats, extensive product selection, helpful product
information, competitive pricing, and a convenient, easy-to-use site. Repeat
customers generated over 65% of the orders at our online store in the quarter
ended December 26, 1998. We will continue to enhance our online store to
encourage repeat visits by customers and new visits by potential customers.
Among our top priorities is to improve and expand our online, automated
customer service features, make business process improvements to enhance our
customers' shopping experience, increase the quality and depth of product
information and add additional search features at our online store. We
regularly rotate merchandise within our shopping formats to encourage the
customer to revisit our online store to view new merchandise offers. The
Egghead Auctions section of our online store encourages bidders to return on a
frequent basis to determine the status of their bids and find out if they have
won their bid for merchandise. By improving customer service and striving to
deliver the highest quality online experience to our customers, we seek to
expand our customer base and build strong customer loyalty.
Strengthen Core Product Offerings and Expand into Other Merchandise
Categories. We intend to strengthen our core product offerings in computer,
software and related products by adding new products and releases in these
categories, and increasing the number of software titles that we distribute
electronically. We intend to capitalize on our loyal customer base attracted by
our three shopping formats by aggressively expanding into additional product
categories. We believe that our merchandising expertise and current technology
will enable us to efficiently launch offerings in new product categories. We
have recently increased our merchandise offerings to include consumer
electronics, jewelry, sporting goods, housewares, consumer warranties and other
consumer and business products. In many cases, we can expand our product
offerings without increasing inventory, exposure to inventory risk or handling
costs, through "direct-ship" programs with certain suppliers using electronic
data interchange links. In addition, we may opportunistically acquire
complementary businesses and technologies to expand our offerings.
Expand into New Markets. We believe that online retailing to small and
medium-sized businesses is a growing and attractive opportunity. We intend to
tailor a greater number of offerings of nationally branded products to small
and medium-sized businesses. We believe that we will be able to create a
compelling shopping experience focused on this segment.
Maintain and Strengthen Relationships with Suppliers and Distributors. We
believe that our merchandising history and well-established relationships with
suppliers and distributors enable us to provide our customers with compelling
product offerings while giving us access to additional sources of merchandise.
We intend to maintain and strengthen these existing relationships while
establishing new relationships with additional suppliers and distributors to
increase the breadth and number of products we offer.
Increase Focus on Technology. We will continue to devote substantial
resources to develop, acquire and implement technological improvements to our
online store and transaction-processing systems because speed, scalability and
ease of use are essential to electronic commerce. We intend to continue to
enhance our online store to provide an even more compelling shopping
experience, improve customer service functions and streamline order processing.
Attract and Retain Exceptional Employees. We believe that talented employees
and management are among our most valuable assets, and provide significant
advantages in the rapidly evolving electronic commerce industry. We have
devoted and will continue to devote substantial effort to maintaining a
talented employee base and to attracting the best talent available.
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Egghead.com's Online Store
Egghead.com's online store is designed for fast download, quick navigation
and ease of use. It offers a variety of shopping options attractive to a broad
spectrum of customers with differing needs and budgets. Upon entering our
online store, the customer can navigate to either of our Egghead Superstores,
which include Egghead Computer and Egghead Software, or to the Egghead
SurplusDirect liquidation center or the Egghead Auctions site. Customers can
seamlessly move within and among our three shopping formats to select an
assortment of goods that match the customers' varying price and value
preferences. For example, a customer can buy a top-line laser printer for a
small business at our Egghead Superstores and then move, in one click, to our
Egghead SurplusDirect liquidation center to buy a low-priced computer for
family use. Our online store is designed to enable customers to "Shop Three
Times SmarterSM" and satisfy their range of needs at one online location.
The key components of the customer's shopping experience are our online
store's broad product offering, easy navigation and searchability, efficient
ordering and helpful product information, and convenience.
Broad Product Offering. As an online store, our unlimited shelf space allows
us to offer a broad variety of personal computer products, consumer electronics
and other consumer and business products from a large number of leading
manufacturers, suppliers and distributors. Our online store's Egghead
Superstores, Egghead SurplusDirect liquidation center and Egghead Auctions
offer over 40,000 products, including certain hard-to-find goods, at a range of
competitive prices. In moving products through their life cycles to the
different sales formats on the site, and especially when using the auction
format, we are rotating the merchandise offered on our online store, keeping
the site fresh and appealing to encourage customers to revisit the site
frequently. We currently offer stock keeping units in the following categories:
. Personal Computer Hardware. We offer a wide variety of computers,
including name-brand desktops, notebooks and personal organizers by
manufacturers such as IBM, Compaq, NEC, Digital and 3COM. We also sell
laser printers, laser jet and color jet printers, monitors and flatbed
scanners.
. Personal Computer Software. We offer a wide variety of computer software
in the business and personal productivity, utility, language, educational
and entertainment categories, including word processing, spreadsheet and
database software. We offer over 10,000 software titles, including over
3,800 titles through electronic distribution. Electronic distribution
allows the customer to place orders for selected software products online
and to have the products downloaded directly onto his or her personal
computer.
. Personal Computer Peripherals and Accessories. We sell memory chips, disc
drives, CD-ROMs, multimedia accessories, modems, video and sound cards,
cables and various other computer peripherals and accessories.
. Other Consumer Products. By leveraging our strong brand name we have been
able to expand our product offering outside of computer-related products
to consumer products such as: consumer electronics, including
televisions, audio and car stereo equipment, facsimile machines,
answering machines, telephones, video cameras and photography equipment;
jewelry, including a wide selection of cut gemstones of various sizes,
designs and qualities, and rings, necklaces, earrings and watches;
housewares, including coffee makers, juice makers, bread machines, vacuum
cleaners and pet products; and sporting goods, including golf clubs,
fitness equipment, sportswear and apparel, and a variety of other
equipment and memorabilia.
. Consumer Warranties. We offer competitively priced extended warranties
for the majority of the personal computer hardware and consumer
electronics products we sell.
Navigation and Searching. The navigation options at our online store are
clear, simple and intuitive. They enable the customer to navigate among the
Egghead Superstores, the Egghead SurplusDirect
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liquidation center and Egghead Auctions, and to move easily among product
categories and subcategories within these three shopping formats. Each shopping
format is color-coded so that customers intuitively know their location within
the online store. Customers can move among the shopping formats with one click.
Within each shopping format, the navigation options permit customers to move,
via scroll-down bars, to specific product categories, subcategories and lists
of products. To make navigation more intuitive and to stimulate impulse buys,
our online store displays images of over 600 featured products among the
formats, categories and subcategories within the site.
A primary feature of our online store is its interactive, searchable database
of over 40,000 products. A key word search option is available on every page of
our Egghead Superstores and the Egghead SurplusDirect liquidation center.
Ordering and Auction Buying.
. Superstores and SurplusDirect Ordering. To purchase products from the
Egghead Superstores or Egghead SurplusDirect liquidation center,
customers simply click on a button to add the products to their virtual
shopping baskets. Customers can add and remove products as they browse,
prior to making a final purchase decision. To execute orders, customers
click on the buy button and are prompted to supply shipping and credit
card details.
. Auction Buying. To participate in our online auctions, a first-time
bidder must complete the simple electronic registration form found at
Egghead Auctions. The bidder is given a unique account number and chooses
a password. The bidder then enters credit card information and authorizes
us to charge the card for winning bids. Once registered, the customer can
bid and buy products from us at will. After a customer bids on a product,
the bid list for that product is promptly updated and the customer can
see his or her name and new position. When the auction closes, the
highest bidders win the available inventory at their actual bid prices.
When bidders' prices are equal, bids for larger quantities and with
earlier initial bid times win. Using our proprietary software, we
determine the winning bidders and send them an e-mail message to
congratulate them and notify them of their product purchase. The
customer's credit card is charged and we ship the product after receiving
approval from the applicable credit card institutions.
Product Information. We display product information and images on thousands
of products offered at our online store. Product information at our online
store typically includes product descriptions and specifications, as well as
condition and warranty information.
Customer Convenience. Our online store brings retail shopping directly into
our customers' homes and offices. Customers do not need to travel to fixed
locations during limited hours to shop. Our online store allows customers to
purchase at any time during the day or night, 365 days a year, with a number of
delivery options, in an unintimidating atmosphere and without reliance on
salespeople or auctioneers.
Marketing and Promotion
Egghead.com's marketing strategy is designed to promote the Egghead.com brand
name, increase customer traffic, build strong customer loyalty and encourage
repeat purchases. During the first nine months of fiscal 1999, we spent an
average of over $1.3 million per month on advertising and promotional expenses,
principally for online and off-line promotions and affiliate advertising. We
expect to increase our investment in marketing and promotion to increase our
brand recognition, to continue to build our customer base and to encourage
frequent repeat visits and purchases by customers. We are currently using
various media and promotional tools, including:
Marketing Agreements and Online Advertising. We enter into marketing
agreements to increase our access to online customers, build brand recognition
and expand our online presence. We currently have agreements with America
Online, Inc., At Home Corporation, CNET, Inc., Geocities, Microsoft Corporation
(MSN.com), USA.Net, Inc., Yahoo! Inc. and Ziff-Davis Inc. (owner of ZDNET and
ZDTV), among others,
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to promote the Egghead.com Web site through their current search engines,
community, information and/or e-mail sites. We recently entered into an
agreement with Be Free, Inc. to build and maintain our affiliate sales channel.
We are aggressively pursuing and evaluating other marketing and content
arrangements. In addition, we place advertisements on various high-profile and
high-traffic Web sites to promote Egghead.com and encourage Internet users to
click through directly to our Web site.
Traditional Advertising. In November 1998, we launched an advertising
campaign to promote the launch of our redesigned online store and increase our
brand name recognition. This campaign included television advertising on CNN
Headline News, ESPN and the Discovery Channel. The campaign also included print
advertising in national newspaper and magazine publications such as The Wall
Street Journal, USA Today and Business Week, as well as radio commercials. We
intend to conduct additional advertising campaigns in the future.
Customer Electronic Mail Broadcasts. We actively market to our customers
through e-mail broadcasts. Visitors to the Egghead.com site may sign up for
promotional and informational e-mail broadcasts, which include weekly
announcements of sales and special promotions. As of December 26, 1998, over
2.7 million e-mail addresses received these weekly announcements.
Circulars. We currently distribute an internally produced newspaper-style
circular on a monthly basis to select customers. This circular is distributed
to customers in the United States and to a limited number of foreign customers.
It is created by our internal design team and production department using
computer-based desktop publishing systems.
Supplier Relationships and Distribution
We obtain merchandise directly from manufacturers, distributors and
suppliers, including companies with which we have revenue-sharing agreements.
Because merchandise availability is unpredictable, strong supplier
relationships are critical to our success. Accordingly, our buying staff
maintains ongoing contact with our suppliers, frequently on a daily basis, to
learn when new merchandise will become available. We employ a buying staff with
extensive experience in purchasing computer, consumer and surplus products to
maintain a satisfactory mix and quantity of inventory and acceptable product
availability. At our principal distribution center in Vancouver, Washington, we
receive and ship products, bundle and re-package merchandise, and process
returned products.
We obtain merchandise from suppliers through three primary arrangements:
direct purchase, distributor fulfillment and revenue sharing.
Direct Purchase. We directly purchase most of our off-price merchandise,
including excess, close-out, refurbished and reconditioned and liquidation
goods. Each year manufacturers dispose of significant volumes of such
merchandise. Many manufacturers are attracted to our sales channels for
liquidating these types of goods, typically at discounted prices. Through our
online store, we can provide manufacturers and software publishers with an
alternative means of generating incremental sales without creating conflicts
with their traditional sales channels. Providing this alternative to
manufacturers allows customers to recognize values in discounted products. We
believe our ability to sell merchandise quickly through the auction format
helps us to reduce inventory risks.
Distributor Fulfillment. We purchase a significant amount of our current-
version personal computer and computer-related products from distributors on an
order-fulfilled basis. Once a customer orders a product, the distributor ships
the product directly to the customer, allowing us to expand our product
offering without increasing our inventory and handling costs or exposure to
inventory obsolescence. We have established electronic data interchange links
with Ingram Micro Inc., Tech Data Corporation and Merisel, Inc. which enable us
to coordinate customer order processing electronically. Purchases from Ingram
Micro Inc., a distributor of computers and related products, accounted for
approximately 9.3% of our aggregate merchandise purchases for the nine months
ended December 26, 1998. We do not have any long-term contracts or arrangements
with these distributors that guarantee availability of merchandise.
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Revenue Sharing. We also have entered into revenue sharing agreements with
several suppliers to share the proceeds from sales of products obtained from
such suppliers on an agreed-upon percentage basis. These suppliers ship the
product directly to customers, allowing us to expand our product offering
without increasing our inventory and handling costs or exposure to inventory
obsolescence. We believe these revenue sharing arrangements are attractive to
suppliers because they permit the suppliers to broaden their distribution at a
lower cost. We, in turn, benefit by avoiding most of the inventory risk and we
are compensated at an agreed-upon percentage of the final sales price.
Customer Support and Service
We believe that our ability to establish and maintain long-term relationships
and encourage repeat visits and purchases in part depends on the strength of
our customer support and service operations and staff. We employ a staff of
customer support and service personnel who are responsible for handling
customer inquiries and questions, taking customer telephone orders,
investigating customer merchandise and shipment problems, and acting as a
liaison between the customer and the product supplier. In addition, we have
automated certain of our customer support and service functions. This automated
response system can be accessed through the customer service page of our Web
site. We are striving to increase our online, automated customer service
features to include additional interactive, real-time responses to customer
inquiries.
Technology
We have implemented an array of site management, search, customer
interaction, transaction-processing and fulfillment services and systems using
a combination of our own proprietary technologies and third-party technology.
Our current strategy is to focus our resources on creating and enhancing our
existing systems and to license commercially developed technology where
available and appropriate. We use a set of software applications for accepting
and validating customer orders, organizing, placing and managing orders with
suppliers, managing inventory, assigning inventory to customer orders, creating
distribution processing instructions, managing shipment of products to
customers and managing and tracking customer orders and balances. These
applications also manage the process of accepting, authorizing and charging
customer credit card orders with an address verification and approval system
provided by First USA Bank, through its relationship with First USA Paymentech,
Inc.
We use a set of continuously running application programs that manage the
auctions and sales processes, update merchandise Web pages to show the
currently leading bidders, and list active and recent winning and losing bids.
We have developed a set of e-mail applications for sending broadcast e-mails to
customers on a frequent basis. This software extracts e-mail addresses from the
Egghead.com mailing list, sends e-mails to the designated recipients and
automatically services requests from customers requesting to be added to or
removed from the mailing list.
A group of systems administrators and network managers monitor and operate
our Web site, transaction processing systems and network operations. The
continued uninterrupted operation of our Web site and transaction-processing
systems is essential to our business and it is the duty of our site operations
staff to ensure, to the greatest extent possible, its reliability. We use the
services of two Internet service providers to maintain connectivity to the
Internet over multiple dedicated lines.
Competition
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 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
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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 or 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:
. 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.;
. Companies with electronic commerce sites such as Beyond.com Corporation,
Buy.com Inc., Cyberian Outpost, Inc. and 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. and eBay 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.
and Computer City;
. Manufacturers such as Dell Computer Corporation and Gateway 2000, Inc.
who 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.
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. To improve our competitive position, we
are focused on increasing our level of customer service.
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. 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.
Employees
As of December 26, 1998, we had 308 employees. No employees are parties to
collective bargaining agreements. We believe our employee relations are
generally good. Competition for qualified personnel in the electronic commerce
industry is intense, particularly for software development and other technical
staff. Our future success will depend in part on our continued ability to
attract, hire and retain qualified personnel.
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Facilities
Our principal executive offices are located in Vancouver, Washington under a
lease that expires in 2004 and has two five-year renewal options. Our customer
service facilities were recently relocated to Vancouver from Hood River,
Oregon. Our accounting facilities are located in Liberty Lake, Washington under
a lease that expires in April 1999. Our primary warehousing and distribution
operations are located in an approximately 46,000 square-foot facility in
Vancouver, Washington under leases that expire in July 1999.
Compliance with federal, state and local laws enacted for the protection of
the environment has had no material effect on our capital expenditures,
earnings or competitive position. We do not anticipate any material adverse
effects in the future based on the nature of our operations and the current
focus of such laws.
Trademarks and Trade Names
"EGGHEAD(R)," "EGGSPERT(R)," "SURPLUS SOFTWARE(R)," "SURPLUS DIRECT(R)," the
"PROFESSOR EGGHEAD(R)" design and "Shop Three Times SmarterSM" are registered
in the United States Patent and Trademark Office as service marks or trademarks
of Egghead.com. We also do business under the trade names "Egghead.com,"
"Egghead," "Egghead Computer," "Egghead Software," "Egghead Discount Software,"
"Surplus Direct," "SurplusDirect" and "Surplusauction.com." In addition, we are
the owner of a number of common law trademarks and service marks, including
certain "EGG" combination words. We believe the strength of our trademarks and
service marks benefits our business and we intend to continue to protect and
promote our registered and common law trademarks and service marks.
Legal Proceedings
Various claims and lawsuits arising in the normal course of business are
pending against us. The subject matter of these proceedings primarily includes
commercial disputes and employment issues. The results of these proceedings are
not expected to have a material adverse effect on our consolidated financial
position or results of operations.
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MANAGEMENT
Executive Officers and Directors
The executive officers and directors of Egghead.com, and their ages and
positions as of December 26, 1998, are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
George P. Orban......... 52 Chairman of the Board, Chief Executive Officer and Director
Brian W. Bender......... 50 Chief Financial Officer, Vice President of Finance and Secretary
Tommy E. Collins........ 41 Vice President of Information Systems and Chief Technology Officer
Norman F. Hullinger..... 39 Vice President of Sales and Operations
James F. Kalasky........ 48 Vice President of Merchandising and Advertising
Gregory J. Boudreau..... 35 Director
Jonathan W. Brodeur..... 39 Director
C. Scott Gibson(1)(2)... 46 Director
Eric P. Robison(2)...... 38 Director
Robert T. Wall(1)....... 53 Director
Karen White(1).......... 36 Director
Melvin A. Wilmore(2).... 52 Director
</TABLE>
- ---------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
George P. Orban has served as our Chairman of the Board since May 1996 and as
Egghead.com's Chief Executive Officer since January 1997. He is currently
serving in these capacities and is a consultant to Egghead.com. He has been a
director of Egghead.com since November 1985. Mr. Orban is Managing Partner of
Orban Partners, a private investment company, and a director and cofounder of
Ross Stores, Inc. Mr. Orban is a former director of Surplus Direct.
Brian W. Bender joined us in May 1995, and served as Chief Financial Officer,
Vice President of Finance and Secretary until May 1996. From May 1996 to
November 1996, Mr. Bender served as Senior Vice President and Chief Financial
Officer of Proffitts, Inc., an operator of department stores. Mr. Bender
rejoined Egghead.com in November 1996 and since that time has served as Chief
Financial Officer, Vice President and Secretary. Since August 1997, Mr. Bender
has also served as Secretary and Treasurer of Surplus Direct. From May 1993 to
May 1995, Mr. Bender served as Senior Vice President, Controller and Assistant
Treasurer of Younkers, Inc., a department store chain. From May 1990 to May
1993, Mr. Bender served as Chief Financial Officer of May D&F, a department
store chain that was consolidated into Foley's by its parent, the May
Department Stores Company. Mr. Bender spent 16 years with the May Department
Stores Company, during which time he held various senior executive and other
positions.
Tommy E. Collins joined us in July 1995. He has served as Vice President of
Information Systems since May 1996 and as Chief Technology Officer since April
1998. He served as Director of Information Systems from July 1995 to May 1996.
From August 1990 to July 1995, Mr. Collins served as Director of Corporate
Information Services and Material Requirements Planning at Key Tronic
Corporation, an independent computer peripheral manufacturing company.
Norman F. Hullinger joined us in September 1996. Since April 1998, he has
served as Vice President of Sales and Operations. He served as Vice President
of Store Operations from September 1996 to April 1998. From December 1993 to
September 1996, he was Vice President of Store Operations, Distribution and
Real Estate at Aaron Brothers, Inc., a retail art supply chain and wholly owned
subsidiary of Michaels Stores Inc., a crafts and art supply chain.
James F. Kalasky joined us in July 1995. Since April 1998, he has served as
Vice President of Merchandising and Advertising. He served as Vice President of
Merchandising from May 1996 to April 1998,
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and as Merchandising Manager from July 1995 to May 1996. From November 1994 to
July 1995, Mr. Kalasky was Director of Merchandising at Damark International, a
membership-driven consumer direct-marketing company, and from April 1992 to
November 1994, Vice President of Merchandising at Best Buy Co., Inc., a
consumer electronics retail chain.
Gregory J. Boudreau has been a director of Egghead.com since August 1997. Mr.
Boudreau is one of the founders of Surplus Direct and served as its Chief
Executive Officer, Secretary and a director from its inception in June 1992 to
February 1998. From October 1985 to June 1992, Mr. Boudreau owned and operated
Software Wholesalers, a liquidation-oriented wholesaler of computer products.
Jonathan W. Brodeur has been a director of Egghead.com since August 1997 and
has served as our Chief Marketing Officer since February 1998. Since July 1995,
Mr. Brodeur has served as a director and President of Surplus Direct. From June
1993 to July 1995, Mr. Brodeur was the Chief Operating/Operations Improvement
Officer for Connecticut Spring and Stamping, a high-precision manufacturing
company. Mr. Brodeur served as Senior Manager at KPMG Peat Marwick LLP's
National Consulting Practice from August 1988 to June 1993.
C. Scott Gibson has been a director of Egghead.com since September 1998.
Since March 1992, Mr. Gibson has served as a strategic advisor to nine high-
technology companies spanning computer hardware, enterprise software and the
Internet. From 1983 to March 1992, Mr. Gibson served as President of Sequent
Computer Systems, a computer manufacturing company which he co-founded. He is a
member of the Board of Directors of Radisys Corporation, Integrated Measurement
Systems, Inc., TriQuint Semiconductor, Inc. and Inference Corporation.
Eric P. Robison has been a director of Egghead.com since July 1996. Since
January 1994, Mr. Robison has been a Business Development Associate for Vulcan
Ventures, Inc., a venture capital firm wholly owned by Paul G. Allen, where Mr.
Robison is responsible for providing strategic business consultation to the
companies controlled by Mr. Allen. From January 1992 to December 1993, Mr.
Robison served as Vice President of The Stanton Robison Group, Inc., a business
development, marketing and advertising consulting firm which he co-founded. He
also serves as a director of ARI Network Services, Inc. and CNET, Inc.
Robert T. Wall has been a director of Egghead.com since September 1998. Mr.
Wall is President of On Point Developments, LLC, a venture management company
which he founded in 1984. From June 1997 to November 1998, Mr. Wall served as
Chief Executive Officer and as a director of Clarity Wireless, Inc., a broad
band wireless data communications company. From April 1994 until August 1997,
Mr. Wall served as Chairman, President and Chief Executive Officer of Theatrix
Interactive, Inc., a consumer educational software publisher. Mr. Wall is a
director of Network Appliance, Inc., a network data server company.
Karen White has been a director of Egghead.com since September 1998. Since
May 1998, Ms. White has served as the Senior Vice President, World Wide
Business Development and Emerging Markets, for Oracle Corporation, a leading
supplier of software for information management. From June 1997 to May 1998,
she served as head of World Wide Marketing for Oracle. From February 1996 to
June 1997, she served as head of Strategic Marketing & Business Development for
Oracle. From August 1994 to February 1996, she served as Senior Vice President
of Strategy & Planning for Oracle. Ms. White joined Oracle in July 1993,
serving as Vice President of Strategy until August 1994. Prior to July 1993,
Ms. White was Chief Executive Officer for EGIS Corporation, an international
high-technology consulting company.
Melvin A. Wilmore has been a director of Egghead.com since July 1996. Since
March 1993, Mr. Wilmore has served as President and as a director of Ross
Stores, Inc., which operates a nationwide chain of retail off-price apparel
stores. Since December 1991, he has served as Chief Operating Officer of Ross
Stores, Inc. From October 1989 to December 1991, Mr. Wilmore was President and
Chief Executive Officer of Live Specialty Retail, a division of LIVE
Entertainment, Inc., which operates a chain of prerecorded software home
entertainment stores. He also serves as a director of Hechinger Company.
46
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our outstanding common stock as of December 26, 1998, and as
adjusted to reflect the sale of our common stock offered in this prospectus for
(1) each shareholder known by us to beneficially own more than 5% of our common
stock, (2) our Chief Executive Officer and our four next most highly
compensated executive officers for the fiscal year ended March 28, 1998, (3)
each of our directors, (4) all of our directors and executive officers as a
group, and (5) each selling shareholder. As of December 26, 1998, there were
24,765,384 shares of common stock outstanding.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO NUMBER OF OWNED AFTER
OFFERING(1) SHARES OFFERING(1)(2)
----------------- BEING -----------------------
NAME AND ADDRESS NUMBER PERCENT OFFERED NUMBER PERCENT
- ---------------- --------- ------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Vulcan Ventures, Inc.(3).... 1,368,934 5.5% -- 1,368,934 4.6%
110-110th Avenue NE, #550
Bellevue, WA 98004
Brian W. Bender............. -- * -- * *
Tommy E. Collins(4)......... 99,722 * -- 99,722 *
James F. Kalasky(5)......... 60,000 * 20,000 40,000 *
George P. Orban(6).......... 1,076,294 4.2% -- 1,076,294 3.5%
Norman F. Hullinger(7)...... -- * 10,000 * *
Gregory J. Boudreau(8)...... 986,064 4.0% -- 986,064 3.3%
Jonathan W. Brodeur(9)...... 47,223 * -- 47,223 *
C. Scott Gibson............. 450 * -- 450 *
Eric P. Robison(10)......... 17,750 * -- 17,750 *
Robert T. Wall.............. 10,000 * -- 10,000 *
Karen White................. -- * -- -- *
Melvin A. Wilmore(11)....... 25,250 * -- 25,250 *
Directors and executive
officers as a group
(12 persons)(12)........... 2,322,753 8.9% 30,000 2,302,753 7.4%
</TABLE>
- ---------------------
* less than one percent
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission and includes shares over which the
indicated beneficial owner exercises voting and/or investment power.
Shares of our common stock subject to options currently exercisable or
exercisable within 60 days are deemed outstanding for computing the
percentage ownership of the person holding the options but are not deemed
outstanding for computing the percentage ownership of any other person.
This information is based on 24,765,384 shares outstanding on December 26,
1998 and 29,795,384 shares outstanding after this offering.
(2) Assumes no exercise of the underwriters' over-allotment option.
(3) Vulcan Ventures, Inc. is a private venture capital firm of which Paul G.
Allen, a former director of Egghead.com, is President and sole
shareholder.
(4) Represents 9,722 shares held directly by Mr. Collins and 90,000 shares
subject to options that are exercisable currently or within 60 days of
December 26, 1998.
(5) Represents 60,000 shares subject to options held by Mr. Kalasky that are
exercisable currently or within 60 days of December 26, 1998.
(6) Represents 38,794 shares held by Orban Partners, a general partnership of
which Mr. Orban is Managing Partner, and 1,037,500 shares subject to
options held by Mr. Orban that are exercisable currently or within 60 days
of December 26, 1998.
47
<PAGE>
(7) Represents 10,000 shares held by Mr. Hullinger upon exercise of options
that were not exercisable within 60 days of December 26, 1998.
(8) Represents 924,270 shares held directly by Mr. Boudreau and 61,794 shares
held in trusts for the benefit of Mr. Boudreau's children. Mr. Boudreau
disclaims beneficial ownership of the 61,794 shares held in such trusts.
(9) Represents 27,615 shares held directly by Mr. Brodeur, 3,358 shares held
in trusts for the benefit of Mr. Brodeur's children, and 16,250 shares
subject to options that are exercisable currently or within 60 days of
December 26, 1998. Mr. Brodeur disclaims beneficial ownership of the 3,358
shares held in such trusts.
(10) Represents 17,750 shares subject to options held by Mr. Robison that are
exercisable currently or within 60 days of December 26, 1998.
(11) Represents 25,250 shares subject to options held by Mr. Wilmore that are
exercisable currently or within 60 days of December 26, 1998.
(12) Includes 1,246,750 shares subject to options held by such directors and
executive officers that are exercisable currently or within 60 days of
December 26, 1998.
48
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, Hambrecht & Quist LLC,
BancBoston Robertson Stephens Inc., Prudential Securities Incorporated and U.S.
Bancorp Piper Jaffray Inc. have severally agreed to purchase from us and the
selling shareholders the following respective number of shares of our common
stock:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Hambrecht & Quist LLC..............................................
BancBoston Robertson Stephens Inc..................................
Prudential Securities Incorporated.................................
U.S. Bancorp Piper Jaffray Inc.....................................
---------
Total.............................................................. 5,030,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions that we and the selling shareholders must
satisfy, including the receipt of certain certificates, opinions and letters
from us, the selling shareholders, counsel and the independent auditors. The
nature of the underwriters' obligation is such that they are committed to
purchase all shares of common stock offered in this prospectus if any of such
shares are purchased.
The underwriters propose to offer the shares of our common stock directly to
the public at the public offering price set forth on the cover page of this
prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The underwriters may allow and such dealers may reallow a
concession not in excess of $ per share to certain other dealers. After the
public offering of the shares, the underwriters may change the offering price
and other selling terms.
We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to 750,000 additional
shares of our common stock at the public offering price, less the underwriting
discount set forth on the cover page of this prospectus. To the extent that the
underwriters exercise this option, each underwriter will have a firm commitment
to purchase a number of shares that approximately reflects the same percentage
of total shares said underwriter purchased in the above table. We will be
obligated to sell shares to the underwriters to the extent the option is
exercised. The underwriters may exercise such option only to cover over-
allotments made in connection with the sale of common stock offered in this
prospectus.
The following table shows the per share and total underwriting discounts and
commissions that we will pay to the underwriters. Such amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase 750,000 additional shares.
<TABLE>
<CAPTION>
No
Exercise Full Exercise
-------- -------------
<S> <C> <C>
Per share........................................... $ $
----- -----
Total............................................... $ $
===== =====
</TABLE>
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
We and the selling shareholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act,
and to contribute to payments the underwriters may be required to make in
respect thereof.
49
<PAGE>
Executive officers, directors and a shareholder that beneficially owns
greater than 5% of our outstanding common stock have agreed that, with certain
exceptions, they will not, directly or indirectly, without the prior written
consent of Hambrecht & Quist LLC, sell, offer, contract to sell, transfer the
economic risk of ownership in, make any short sale, pledge or otherwise dispose
of any shares of our common stock or any securities convertible into or
exchangeable or exercisable for or any rights to purchase or acquire our common
stock during the 90-day period following the effective date of the registration
statement relating to this prospectus.
In general, the rules of the Securities and Exchange Commission will prohibit
the underwriters from making a market in our common stock during the "cooling
off" period immediately preceding the commencement of sales in the offering.
The Commission has, however, adopted exemptions from these rules that permit
passive market making under certain conditions. These rules permit an
underwriter to continue to make a market subject to the conditions, among
others, that its bid not exceed the highest bid by a market maker not connected
with the offering and that its net purchases on any one trading day not exceed
prescribed limits. Pursuant to these exemptions, certain underwriters, selling
group members (if any) or their respective affiliates intend to engage in
passive market making in our common stock during the cooling off period.
Certain persons participating in this offering may over-allot or effect
transactions that stabilize, maintain or otherwise affect the market price of
our common stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting of any purchase, for the purpose of pegging,
fixing or maintaining the price of the common stock. A syndicate covering
transaction means the placing of any bid on behalf of the underwriting
syndicate or the effecting of any purchase to reduce a short position created
in connection with the offering. A penalty bid means an arrangement that
permits the underwriters to reclaim a selling concession from a syndicate
member in connection with the offering when shares of common stock sold by the
syndicate member are purchased in syndicate covering transactions. Such
transactions may be effected on the Nasdaq National Market, in the over-the-
counter market or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.
LEGAL MATTERS
Certain legal matters will be passed on for Egghead.com by Perkins Coie llp,
Seattle, Washington. Certain legal matters will be passed on for the
underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California.
EXPERTS
The consolidated balance sheets as of April 2, 1994, April 1, 1995, March 30,
1996, March 29, 1997, March 28, 1998 and December 26, 1998 and the consolidated
statements of operations, cash flows and shareholders' equity for the fiscal
years ended April 2, 1994, April 1, 1995, March 30, 1996, March 29, 1997 and
March 28, 1998 and the nine months ended December 26, 1998 included in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto and are included herein in reliance upon the
authority of Arthur Andersen LLP as experts in auditing and accounting in
giving said reports.
ADDITIONAL INFORMATION
We have filed with the Commission a registration statement on Form S-3 under
the Securities Act with respect to the shares of common stock offered in this
prospectus. This prospectus does not contain all the information set forth in
the registration statement and the exhibits and schedules thereto. For further
information about us and our common stock, we refer you to the registration
statement and to the exhibits
50
<PAGE>
and schedules filed with it. Statements contained in this prospectus as to the
contents of any contract or other document referred to are not necessarily
complete; we refer you to those copies of contracts or other documents that
have been filed as exhibits to the registration statement, and statements
relating to such documents are qualified in all respects by such reference.
Anyone may inspect a copy of the registration statement without charge at the
Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. You may obtain copies of all or any portion of the registration
statement by writing to the Commission's Public Reference Room, 450 Fifth
Street, N.W., Washington, D.C. 20549, and paying prescribed fees. You may
obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0300. In addition, the Commission maintains a Web site
at http://www.sec.gov that contains reports, proxy and information statements
and other information regarding companies such as Egghead.com that file
electronically with the Commission.
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and therefore we file reports, proxy statements and
other information with the Commission. You can inspect and copy the reports,
proxy statements and other information that we file at the public reference
facilities maintained by the Commission at the Public Reference Room, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices
located at 7 World Trade Center, Suite 1300, New York, New York 10048 and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. You can also obtain
copies of such material from the Commission's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
also makes electronic filings publicly available on its Web site within
24 hours of acceptance. Our common stock is quoted on the Nasdaq National
Market under the trading symbol "EGGS." Reports, proxy and information
statements and other information about us may be inspected at the National
Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington,
D.C. 20006.
INFORMATION INCORPORATED BY REFERENCE
The following documents, which we have filed with the Commission, are
incorporated by reference into this prospectus: (1) our annual report on Form
10-K for the fiscal year ended March 28, 1998; (2) our quarterly reports on
Form 10-Q for the quarters ended June 27, 1998, September 26, 1998 and
December 26, 1998; (3) the description of our capital stock contained in our
registration statement on Form 8-A filed with the Commission on May 13, 1988,
as amended by our registration statement on Form 8-A/A filed with the
Commission on March 11, 1999; and (4) our current reports on Form 8-K dated
May 23, 1998 and September 2, 1998.
All documents that we file with the Commission pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this prospectus and
before the termination of the offering of the common stock offered in this
prospectus shall be deemed incorporated by reference into this prospectus and
to be a part of this prospectus from the respective dates of filing such
documents.
We will provide without charge to each person to whom a copy of this
prospectus is delivered, upon such person's written or oral request, a copy of
any or all of the information incorporated by reference in this prospectus
(other than exhibits to such documents, unless such exhibits are specifically
incorporated by reference into the information that this prospectus
incorporates). Requests should be directed to Egghead.com, Inc., 22705 East
Mission, Liberty Lake, Washington, 99019, Attention: Brian W. Bender, telephone
number (509) 922-7031.
Any statement contained in a document incorporated or deemed to be
incorporated by reference in this prospectus shall be deemed modified,
superseded or replaced for purposes of this prospectus to the extent that a
statement contained in this prospectus or in any subsequently filed document
that also is or is deemed to be incorporated by reference in this prospectus
modifies, supersedes or replaces such statement. Any statement so modified,
superseded or replaced shall not be deemed, except as so modified, superseded
or replaced, to constitute a part of this prospectus.
51
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
EGGHEAD.COM, INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets as of March 29, 1997, March 28, 1998 and
December 26, 1998....................................................... F-3
Consolidated Statements of Operations for the fiscal years ended March
30, 1996, March 29, 1997 and March 28, 1998 and the nine months ended
December 27, 1997 and December 26, 1998................................. F-4
Consolidated Statements of Cash Flows for the fiscal years ended March
30, 1996, March 29, 1997 and March 28, 1998 and the nine months ended
December 27, 1997 and December 26, 1998................................. F-5
Consolidated Statement of Shareholder's Equity for fiscal years ended
March 30, 1996, March 29, 1997 and March 28, 1998 and the nine months
ended December 26, 1998................................................. F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Egghead.com, Inc.:
We have audited the accompanying consolidated balance sheets of Egghead.com,
Inc. (a Washington corporation) and subsidiaries as of December 26, 1998, March
28, 1998 and March 29, 1997, and the related statements of operations,
shareholders' equity and cash flows for the nine months ended December 26, 1998
and for each of the three fiscal years in the period ended March 28, 1998.
These financial statements are the responsibility of Egghead.com, Inc.'s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Egghead.com, Inc. and
subsidiaries as of December 26, 1998, March 28, 1998 and March 29, 1997, and
the results of their operations and their cash flows for the nine months ended
December 26, 1998 and for each of the three fiscal years in the period ended
March 28, 1998, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Seattle, Washington
January 22, 1999
F-2
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
March 29, March 28, December 26,
1997 1998 1998
--------- --------- ------------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................... $ 83,473 $ 67,381 $ 59,017
Accounts receivable, net of allowance for
doubtful accounts of $5,319, $2,611 and
$1,079, respectively....................... 17,917 5,670 1,660
Merchandise inventories, net................ 49,087 12,923 14,591
Prepaid expenses and other current assets... 4,116 999 651
Property held for sale...................... 7,692 8,224 1,224
-------- -------- --------
Total current assets...................... 162,285 95,197 77,143
-------- -------- --------
Property and equipment, net................... 12,018 2,394 6,921
Goodwill, net................................. -- 33,225 32,061
Other assets.................................. 1,217 336 270
-------- -------- --------
$175,520 $131,152 $116,395
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................ $ 43,027 $ 15,834 $ 16,916
Accrued liabilities......................... 12,996 12,002 12,584
Liabilities related to disposition of CGE
division................................... 7,754 -- --
Reserves and liabilities related to
restructuring.............................. 11,258 17,226 8,138
-------- -------- --------
Total current liabilities................. 75,035 45,062 37,638
Long-term liabilities......................... 438 3 --
-------- -------- --------
Total liabilities......................... 75,473 45,065 37,638
-------- -------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value:
16,569,848 authorized No shares issued and
outstanding ............................... -- -- --
Common stock, $.01 par value:
50,000,000 shares authorized; 17,591,087,
23,492,502 and 24,765,384 shares issued and
outstanding, respectively.................. 176 235 248
Additional paid-in capital.................. 124,457 160,669 174,939
Retained deficit............................ (24,586) (74,817) (96,430)
-------- -------- --------
Total shareholders' equity................ 100,047 86,087 78,757
-------- -------- --------
$175,520 $131,152 $116,395
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Nine Months Ended
---------------------------- -------------------------
December 27, December 26,
1996 1997 1998 1997 1998
-------- -------- -------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales:
Online................. $ 149 $ 1,408 $ 59,737 $ 33,150 $106,449
Retail................. 403,692 359,307 233,342 185,420 --
-------- -------- -------- -------- --------
Total net sales...... 403,841 360,715 293,079 218,570 106,449
-------- -------- -------- -------- --------
Cost of sales:
Online................. 95 1,159 52,016 28,090 96,325
Retail................. 334,484 303,092 205,159 154,320 --
-------- -------- -------- -------- --------
Total cost of sales
.................... 334,579 304,251 257,175 182,410 96,325
-------- -------- -------- -------- --------
Gross profit:
Online................. 54 249 7,721 5,060 10,124
Retail................. 69,208 56,215 28,183 31,100 --
-------- -------- -------- -------- --------
Total gross profit... 69,262 56,464 35,904 36,160 10,124
Selling and marketing
expenses............... 59,239 57,352 48,571 36,275 23,664
General and
administrative
expenses............... 23,257 24,065 19,495 13,287 10,892
Restructuring and
impairment charges..... -- 15,597 19,500 -- --
Amortization of
goodwill............... 424 -- 1,009 577 1,278
Depreciation............ 7,145 7,352 4,800 3,708 1,594
-------- -------- -------- -------- --------
Operating loss.......... (20,803) (47,902) (57,471) (17,687) (27,304)
Other income, net....... 2,652 3,729 2,940 2,496 5,691
-------- -------- -------- -------- --------
Loss from continuing
operations before
income taxes........... (18,151) (44,173) (54,531) (15,191) (21,613)
Income tax benefit
(provision)............ 7,030 (4,788) -- -- --
-------- -------- -------- -------- --------
Net loss from continuing
operations before
discontinued operations
and change in
accounting principle... (11,121) (48,961) (54,531) (15,191) (21,613)
-------- -------- -------- -------- --------
Discontinued operations:
Gain on disposal of
discontinued
operations, net of
tax expense of
$14,249............... -- 22,286 -- -- --
Income (loss) from
discontinued
operations, net of
tax benefit
(provision) of $241,
$(7,833) and $0,
respectively.......... 376 (12,254) 4,300 -- --
-------- -------- -------- -------- --------
Net loss before
cumulative effect of
change in accounting
principle.............. (10,745) (38,929) (50,231) (15,191) (21,613)
Cumulative effect of
change in accounting
principle, net of tax
of $451................ -- (711) -- -- --
-------- -------- -------- -------- --------
Net loss................ $(10,745) $(39,640) $(50,231) $(15,191) $(21,613)
======== ======== ======== ======== ========
Basic earnings (loss)
per share:
Continuing
operations............ $ (0.64) $ (2.78) $ (2.60) $ (0.75) $ (0.90)
Discontinued
operations:
Gain on disposal of
discontinued
operations.......... -- 1.27 -- -- --
Income (loss) from
discontinued
operations.......... 0.02 (0.70) 0.20 -- --
Change in accounting
principle............. -- (0.04) -- -- --
-------- -------- -------- -------- --------
Basic loss per share.... $ (0.62) $ (2.25) $ (2.40) $ (0.75) $ (0.90)
======== ======== ======== ======== ========
Weighted average
common shares
outstanding........... 17,437 17,581 20,967 20,241 24,123
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Fiscal Year Nine Months Ended
---------------------------- -------------------------
December 27, December 26,
1996 1997 1998 1997 1998
-------- -------- -------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss from
operations............ $(10,745) $(39,640) $(50,231) $(15,191) $(21,613)
-------- -------- -------- -------- --------
Adjustments to
reconcile net loss to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization........ 10,721 7,099 5,809 3,963 2,872
Deferred rent........ (411) (465) (435) (332) (3)
Deferred income
taxes............... (729) 10,750 -- -- --
(Gain) loss on
disposition of
assets.............. (55) 2,490 216 (6) (270)
(Gain) on sale of
equity investment... -- -- -- -- (3,349)
(Gain) on sale of CGE
division, before
taxes............... -- (36,535) -- -- --
Restructuring
charges............. -- 23,000 32,591 -- --
Provisions for asset
impairment.......... -- 2,343 -- -- --
Changes in assets and
liabilities:
Accounts
receivable, net... (3,585) 6,162 12,247 7,938 4,010
Merchandise
inventories....... 13,831 30,495 29,947 (18,821) (1,668)
Prepaid expenses &
other current
assets............ (5,410) 3,669 2,306 (2) 348
Other assets....... 128 (658) (218) (727) (48)
Discontinued
operations, net... 3,005 67,101 (7,648) (2,666) --
Accounts payable... 14,916 (76,373) (25,848) 8,959 1,082
Restructuring
reserves.......... -- -- (11,157) (4,967) (9,323)
Accrued
liabilities....... (903) (7,268) 1,556 3,433 582
-------- -------- -------- -------- --------
Total
adjustments...... 31,508 31,810 39,366 (3,228) (5,767)
-------- -------- -------- -------- --------
Net cash provided
by (used in)
operating
activities........ 20,763 (7,830) (10,865) (18,419) (27,380)
-------- -------- -------- -------- --------
Cash flows from
investing activities:
Additions to property
and equipment......... (16,174) (5,091) (2,824) (2,247) (5,725)
Proceeds from sale of
property and
equipment............. 86 1,757 87 7 7,110
Proceeds from sale of
equity investment..... -- -- -- -- 3,348
Proceeds from sale of
CGE division.......... -- 45,000 -- -- --
Discontinued
operations, net....... (788) -- -- -- --
-------- -------- -------- -------- --------
Net cash provided
by (used in)
investing
activities........ (16,876) 41,666 (2,737) (2,240) 4,733
-------- -------- -------- -------- --------
Cash flows from
financing activities:
Payments on notes
payable of acquired
subsidiary............ -- -- (6,000) (6,000) --
Proceeds from stock
issuances............. 3,536 353 3,635 311 14,283
Payments made on
capital lease
obligations........... (487) (306) (125) (125) --
-------- -------- -------- -------- --------
Net cash provided
by (used in)
financing
activities........ 3,049 47 (2,490) (5,814) 14,283
-------- -------- -------- -------- --------
Effect of exchange rates
on cash................ 62 -- -- -- --
-------- -------- -------- -------- --------
Net increase (decrease)
in cash and cash
equivalents............ 6,998 33,883 (16,092) (26,473) (8,364)
-------- -------- -------- -------- --------
Cash and cash
equivalents at
beginning of period.... 42,592 49,590 83,473 83,473 67,381
-------- -------- -------- -------- --------
Cash and cash
equivalents at end of
period................. $ 49,590 $ 83,473 $ 67,381 $ 57,000 $ 59,017
======== ======== ======== ======== ========
Supplemental disclosures
of cash paid (received)
during the year :
Interest............... $ 77 $ 30 $ 32 $ 32 $ 16
Income taxes........... $ 334 $ -- $ (732) $ (699) $ (234)
Supplemental disclosure
of non-cash investing
and financing
activities:
</TABLE>
During fiscal 1998, the Company acquired Surplus Software, Inc. for the
issuance of 5.3 million shares of common stock. See Note 7.
Capital lease obligations totaling $0.7 million were recorded in fiscal 1996
when Egghead.com acquired new equipment.
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands)
<TABLE>
<CAPTION>
Common Stock Additional Retained
------------- Paid-in Earnings
Shares Amount Capital (Deficit) Total
------ ------ ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance, April 1, 1995.......... 17,166 $172 $120,572 $ 25,672 $146,416
Stock issued for cash, pursuant
to employee stock purchase
plan........................... 46 1 286 -- 287
Stock issued for cash, pursuant
to stock option plan........... 335 3 3,246 -- 3,249
Translation adjustment.......... -- -- -- 62 62
Net loss........................ -- -- -- (10,745) (10,745)
------ ---- -------- -------- --------
Balance, March 30, 1996......... 17,547 176 124,104 14,989 139,269
Stock issued for cash, pursuant
to employee stock purchase
plan........................... 17 -- 161 -- 161
Stock issued for cash, pursuant
to stock option plan........... 27 -- 192 -- 192
Translation adjustment.......... -- -- -- 65 65
Net loss........................ -- -- -- (39,640) (39,640)
------ ---- -------- -------- --------
Balance, March 29, 1997......... 17,591 176 124,457 (24,586) 100,047
Stock issued for acquisition of
subsidiary..................... 5,311 53 32,522 -- 32,575
Stock issued for cash, pursuant
to employee stock purchase
plan........................... 23 -- 78 -- 78
Stock issued for cash, pursuant
to stock option plan........... 568 6 3,612 -- 3,618
Net loss........................ -- -- -- (50,231) (50,231)
------ ---- -------- -------- --------
Balance, March 28, 1998......... 23,493 235 160,669 (74,817) 86,087
Stock issued for cash, pursuant
to employee stock purchase
plan........................... 14 -- 47 -- 47
Stock issued for cash, pursuant
to stock option plan........... 1,258 13 14,223 -- 14,236
Net loss........................ -- -- -- (21,613) (21,613)
------ ---- -------- -------- --------
Balance, December 26, 1998...... 24,765 $248 $174,939 $(96,430) $ 78,757
====== ==== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All references herein to fiscal 1996, 1997 and 1998 relate to the fiscal
years ended March 30, 1996, March 29, 1997, and March 28, 1998, respectively.
Note 1 Summary of Significant Accounting Policies
Business
Egghead.com, Inc. is an online retailer of personal computer hardware,
software, peripherals, accessories, other related products, and other consumer
and business products. Its direct and indirect wholly owned subsidiaries are
Surplus Software, Inc. (Surplus Direct, d/b/a Surplus Direct and d/b/a
Egghead.com), DJ&J Software Corporation (DJ&J, d/b/a Egghead Computer), EH
Direct, Inc. (EH Direct) and MPI Corporation (d/b/a Mac's Place). References to
"Egghead.com" include Egghead.com, Inc., its predecessors, and its
subsidiaries. Surplus Direct was acquired as a wholly owned subsidiary on
August 14, 1997. The Company recapitalized a previously wholly owned
subsidiary, Elekom Corporation (Elekom), on November 11, 1997, retaining a 25
percent interest until November 9, 1998 when the remaining ownership was sold
(Note 10).
Consolidation
The consolidated financial statements include the accounts of Egghead.com,
Inc. and its wholly owned subsidiaries, Surplus Direct, DJ&J, EH Direct and MPI
Corporation, and include all such adjustments and reclassifications necessary
to eliminate the effect of significant intercompany accounts and transactions.
Fiscal Years
Egghead.com uses a 52/53-week fiscal year, ending on the Saturday nearest
March 31. 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
1996, 1997 and 1998 each had 52 weeks. Fiscal 1999 will consist of 53 weeks.
Basis of Presentation
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles and pursuant to the rules and
regulations of the Securities and Exchange Commission. The statements of
operations and cash flows for the nine months ended December 27, 1997 are
unaudited. These statements reflect the adjustments which are, in the opinion
of management, necessary to fairly state the results of the interim periods;
however, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements.
These adjustments are of a normal and recurring nature. The results of
operations for the nine-month period ended December 26, 1998 are not
necessarily indicative of the results to be expected for the year ending April
3, 1999.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The most significant
estimates with regard to these financial statements are the restructuring and
reorganization reserves and liabilities and the discontinued operations
reserves and liabilities.
Cash and Cash Equivalents
Egghead.com considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents. The carrying
amount of cash equivalents approximates fair value because of the short-term
maturity of those instruments. Cash and cash equivalents as of March 28,1998
and December 26, 1998 include restricted cash of $1.6 million and $2.5 million,
respectively.
F-7
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accounts Receivable
The Company offers payment terms of 30 days to small businesses, educational
institutions and governmental entities. Egghead.com records a provision for
uncollectible customer accounts receivable based upon historical experience. In
addition, certain advertising and promotional expenditures are reimbursable
from suppliers under cooperative advertising and other promotional and
marketing development fund arrangements. Amounts qualifying for reimbursement
are recorded as receivables from the suppliers and as a corresponding reduction
of net advertising expense in the period the promotion occurs. Also included in
accounts receivable are credit card receivables and amounts due from vendors
for returned inventory and other programs. Egghead.com records a provision for
uncollectible vendor receivables based upon historical experience.
Merchandise Inventories
Merchandise inventories are accounted for using the first-in, first-out cost
method and are stated at the lower of cost or market. Egghead.com maintains
reserves for the obsolescence of merchandise inventory. These reserves totaled
approximately $3.7 million, $3.1 million and $1.8 million at March 29, 1997,
March 28, 1998 and December 26, 1998, respectively. Management has developed a
plan to dispose of this obsolete inventory and believes the reserve is adequate
to cover any losses on disposition. Inventories on the balance sheet are shown
net of reserves.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation of equipment, furniture and fixtures is provided using the
straight-line method over their estimated useful lives ranging from two to
seven years. Depreciation of buildings is provided using the straight-line
method over their estimated useful lives of up to 30 years. Amortization of
leasehold improvements is provided using the straight-line method over the
lesser of the lease term or the assets' estimated useful lives. The Company
periodically reviews its long-lived assets for impairment.
Property Held for Sale
Property held for sale is stated at the lower of carrying value or estimated
net realizable value.
Goodwill
Net assets of businesses acquired in purchase transactions are recorded at
fair value at the date of acquisition. Goodwill is amortized over 20 years.
Goodwill at March 28, 1998 and December 26, 1998 was $33.2 million and $32.1
million, net of accumulated amortization of $1.0 million and $2.3 million,
respectively. The Company periodically reviews goodwill for possible
impairment.
Accounts Payable
Outstanding checks included in accounts payable were $7.0 million, $2.7
million and $2.5 million at March 29, 1997, March 28, 1998 and December 26,
1998, respectively.
Revenue Recognition
Revenue from sales of product is recognized upon merchandise shipment.
Egghead.com records a provision for sales returns and allowances based upon
historical experience.
F-8
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Statement Captions
Online net sales, online cost of sales and online gross profit consist of the
results of the Company's online shopping Web sites and inbound telephone
orders. Retail net sales consist of the results of the retail stores and the
direct response and catalog/mail-order divisions.
Income Taxes
Egghead.com determines its income tax accounts in accordance with Statement
of Financial Accounting Standards (SFAS) No. 109. Deferred income taxes result
primarily from temporary differences in the recognition of certain items for
income tax and financial reporting purposes.
Earnings (Loss) Per Share
Basic earnings (loss) per share amounts are computed by dividing the net
income (loss) by the weighted average number of shares of common stock
outstanding during the year in accordance with SFAS No. 128, "Earnings per
Share." Diluted earnings per common share are not disclosed as potentially
dilutive securities would have been anti-dilutive to the loss per share
calculation in fiscal 1996, 1997, and 1998 and the nine-months ended December
27, 1997 and December 26, 1998.
Stock-based Compensation
The Company accounts for its stock-based awards using the intrinsic value
method in accordance with Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related interpretations and
complies with the disclosure provisions of SFAS No. 123, "Accounting for Stock-
based Compensation."
Advertising Costs
The cost of advertising is expensed the first time the advertising takes
place, except for direct-mail advertising, which is capitalized and amortized
over its expected period of future benefits in accordance with the American
Institute of Certified Public Accountants' Statement of Position (SOP) 93-7.
Direct-mail advertising consists primarily of catalogs. The capitalized costs
of the catalog advertising are amortized over the eight-week period following
the publication of the catalog. At March 29, 1997, March 28, 1998 and December
26, 1998, approximately $0.5 million, $0.1 million and $0.1 million,
respectively, of advertising costs were reported as assets. For the fiscal
years 1996, 1997, 1998, and the nine months ended December 27, 1997 and
December 26, 1998, the Company incurred gross advertising expense of
$40.3 million, $35.8 million, $17.5 million, and $15.1 million and $11.8
million, respectively. These amounts do not include reimbursements received
from vendors for advertisement of their products.
Reclassifications
Certain prior year balances have been reclassified to conform with the fiscal
1998 and the nine-month period ended on December 26, 1998 presentation. These
reclassifications had no effect on retained earnings or net income as
previously reported.
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. Due to
the Company's minimal use of derivatives, the new standard is expected to have
no material impact on its financial position or results of operations. SFAS No.
133 will be effective for the Company's fiscal year 2001.
F-9
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In April 1998, the American Institute of Certified Public Accountants issued
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." SOP 98-1 provides guidance for determining whether computer
software is internal-use software and on accounting for proceeds of computer
software originally developed or obtained for internal use and then
subsequently sold to the public. It also provides guidance on capitalization of
the costs incurred for computer software developed or obtained for internal
use. The Company has not capitalized any costs that will have to be written off
to comply with SOP 98-1. The Company's current policies for capitalizing costs
incurred for computer software developed or obtained for internal use comply
with SOP 98-1.
Note 2 Property and Equipment
The components of property and equipment at March 29, 1997 and March 28,
1998, and December 26, 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
March 29, March 28, December 26,
1997 1998 1998
--------- --------- ------------
<S> <C> <C> <C>
Equipment.................................. $ 16,937 $ 4,857 $10,162
Leasehold improvements..................... 6,078 597 1,172
Furniture and fixtures..................... 8,399 165 387
-------- ------- -------
31,414 5,619 11,721
-------- ------- -------
Less accumulated depreciation and
amortization.............................. (19,396) (3,225) (4,800)
-------- ------- -------
Property and equipment, net................ $ 12,018 $ 2,394 $ 6,921
======== ======= =======
</TABLE>
Property held for sale at March 29, 1997 and March 28, 1998 included
Egghead.com's headquarters building in Liberty Lake, Washington and property in
Kalispell, Montana. Property held for sale at December 26, 1998 included
property in Kalispell, Montana. See Note 11.
The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed of" at the beginning of
the first quarter of fiscal 1997. The cumulative effect of the change in
accounting principle, which was recognized in the first quarter of fiscal 1997,
was a charge of $0.7 million, after tax, or $0.04 per share. This charge
represents the writedown of the Company's property held for sale in Kalispell,
Montana and the related goodwill. In connection with its adoption of SFAS No.
121, the Company also recorded a pretax charge of approximately $0.1 million
related to retail assets, the carrying amount of which was not likely to be
recovered through future cash flows. In connection with the Company's fourth
quarter fiscal 1997 restructuring and reorganization and the corresponding
impairment of certain other real estate assets that became properly classified
as held for sale, the Company recorded an additional $1.0 million charge in the
fourth quarter of fiscal 1997.
F-10
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3 Income Taxes
The provision (benefit) for income taxes from continuing operations is
comprised of the following (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Nine Months Ended
--------------------- -------------------------
December 27, December 26,
1996 1997 1998 1997 1998
------- ------ ----- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Current:
Federal.................... $(4,383) $ -- $ -- $ -- $ --
State...................... (1,917) -- -- -- --
------- ------ ----- ----- -----
(6,300) -- -- -- --
------- ------ ----- ----- -----
Deferred:
Federal.................... (404) 4,170 -- -- --
State...................... (326) 618 -- -- --
------- ------ ----- ----- -----
(730) 4,788 -- -- --
------- ------ ----- ----- -----
Total........................ $(7,030) $4,788 $ -- $ -- $ --
======= ====== ===== ===== =====
</TABLE>
During fiscal 1996, tax expense of $0.2 million was recorded against income
from discontinued operations. During fiscal 1997, Egghead.com also recorded
income tax expense on the sale of the discontinued CGE operations of $14.2
million and income tax benefits against the loss from discontinued operations
and cumulative effect of change in accounting principle of $7.8 million and
$0.5 million, respectively.
Deferred income taxes result primarily from temporary differences in certain
items for income tax and financial reporting purposes. The tax effects of
temporary differences giving rise to the deferred tax assets are as follows:
<TABLE>
<CAPTION>
March 29, March 28, December 26,
1997 1998 1998
--------- --------- ------------
<S> <C> <C> <C>
Accounts receivable..................... $ 2,695 $ 898 $ 427
Merchandise inventories................. 1,595 2,060 1,746
Property and equipment.................. 3,008 2,007 1,658
Net operating loss carryforwards........ 5,000 22,993 30,479
Reserves and liabilities related to
restructuring.......................... 4,391 5,937 2,395
Accrued liabilities and other........... 4,623 2,232 2,651
-------- -------- --------
Total deferred tax assets............... 21,312 36,127 39,356
Less valuation allowance................ (21,312) (36,127) (39,356)
-------- -------- --------
Net deferred tax assets................. $ -- $ -- $ --
======== ======== ========
</TABLE>
F-11
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Given its recent losses, Egghead.com determined that its deferred tax assets
do not 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. Accordingly,
Egghead.com recorded a net noncash charge in fiscal 1997 of $10.7 million for
the establishment of a deferred tax valuation allowance in accordance with SFAS
No. 109. The charge is included in continuing operations as a component of
income tax expense. Egghead.com's net operating loss carryforwards can be
recovered over a 15-year period and begin to expire at the end of the following
fiscal years:
<TABLE>
<S> <C>
2011............................................................. $ 1,680
2012............................................................. 13,381
2013............................................................. 52,421
2014............................................................. 21,613
-------
$89,095
=======
</TABLE>
Egghead.com's income tax provision (benefit) differs from the amount computed
by applying the statutory federal tax rate to loss from continuing operations
before taxes as follows:
<TABLE>
<CAPTION>
Fiscal Year Nine Months Ended
--------------------- -------------------------
December 27, December 26,
1996 1997 1998 1997 1998
----- ----- ----- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statutory federal tax rate.. (34.0)% (34.0)% (34.0)% (34.0)% (34.0)%
State taxes, net of federal
benefit.................... (4.6) (4.0) -- -- --
Tax-exempt interest income.. (1.8) (1.4) -- -- --
Other, net.................. 1.7 2.0 0.1 0.1 0.1
Change in valuation
allowance.................. -- 48.2 33.9 33.9 33.9
----- ----- ----- ----- -----
(38.7)% 10.8% -- % -- % -- %
===== ===== ===== ===== =====
</TABLE>
Note 4 Stock Option and Stock Purchase Plans
Employee Stock Purchase Plan
The Egghead.com, Inc. 1989 Employee Stock Purchase Plan (1989 Plan) provides
options to acquire the Common Stock of Egghead.com to substantially all full-
time and certain other employees at the lesser of 85% of the fair market value
of the Common Stock on July 1, or 85% of the fair market value on the following
June 30 of each plan year. Under the 1989 Plan, a maximum of 650,000 shares
were reserved for issuance. As of December 26, 1998, there were 286,610 shares
available for future issuance.
The 1997 Nonofficer Employee Stock Option Plan
In October 1997, the Board of Directors approved the 1997 Nonofficer Employee
Stock Option Plan (NOE Plan), under which 500,000 shares of Egghead.com's
Common Stock were reserved for issuance. In April 1998, the NOE plan was
amended to increase the number of shares reserved thereunder to 1,000,000.
Options granted under the NOE Plan generally vest over four years and terminate
after 10 years. As of December 26, 1998, 482,658 shares were available for
grant and 500,964 shares were subject to outstanding options, which have been
granted at prices ranging from $5.38 to $22.00 per share. As of December 26,
1998, 18,385 options were vested.
F-12
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Surplus Software, Inc. 1996 Stock Option Plan
In August 1997 as part of the acquisition of Surplus Direct, Egghead.com
assumed all of the outstanding options to purchase common stock of Surplus
Direct under the Surplus Software, Inc. 1996 Stock Option Plan. Appropriate
adjustments were made to the number of shares and exercise price of each
Surplus Direct option to reflect the same ratio at which the Surplus Direct
common stock was converted into Egghead.com common stock under the acquisition.
The options have retained their original option dates, option term and vesting
schedules. The options vest over four years and terminate after 10 years,
unless otherwise noted. No additional stock options will be granted under the
assumed Surplus Software, Inc. 1996 Stock Option Plan. As of December 26, 1998,
65,727 shares were subject to outstanding options, which have exercise prices
ranging from $0.97 to $2.26 per share. As of December 26, 1998, 11,732 options
were vested.
The Amended and Restated 1993 Stock Incentive Compensation Plan
In September 1993, Egghead.com's shareholders approved the 1993 Stock Option
Plan (the 1993 Plan and together with the 1986 Plan, the Plans), under which
2,000,000 shares of Egghead.com's Common Stock were reserved for issuance. The
1993 Plan replaced the 1986 Combined Incentive and Non-Qualified Stock Option
Plan (the 1986 Combined Plan) under which 2,000,000 shares were originally
reserved for issuance. The number of shares reserved for issuance under the
1993 Plan was increased by the shares reserved for issuance under the 1986
Combined Plan that were not subject to outstanding stock options. Shares
presently subject to outstanding stock options under the 1986 Combined Plan,
which subsequently are canceled or expire, will increase the number of shares
reserved for issuance under the 1993 Plan. No additional stock options will be
granted under the 1986 Combined Plan. In October 1997, the 1993 Plan was
amended by the Board of Directors to provide that options granted on or after
October 29, 1997 vest over four years and terminate after 10 years, unless
otherwise noted. Any option granted prior to October 29, 1997 under the 1993
Plan vests annually over three years and terminates after 10 years, unless
otherwise noted. On December 1, 1998, the 1993 Plan was amended and restated by
the Board of Directors to allow the granting of stock awards and to change the
name of the plan to the Amended and Restated 1993 Stock Incentive Compensation
Plan.
F-13
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Options granted, exercised, and canceled under the Plans are summarized as
follows:
<TABLE>
<CAPTION>
Fiscal Year
-----------------------------------------------------------
1996 1997 1998 December 27, 1997 December 26, 1998
------------------- ------------------- ------------------- ------------------- -------------------
Average Average Average Average Average
Exercise Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of period.............. 1,513,089 $ 8.63 1,372,887 $9.33 2,183,528 $ 7.75 2,183,528 $ 7.75 1,748,319 $5.27
Options granted(1)...... 621,100 10.67 1,444,200 6.80 769,682 4.64 949,443 4.84 340,000 9.63
Options exercised....... (55,395) 6.47 (27,891) 7.01 (323,248) 7.49 (52,093) 5.82 (316,611) 4.57
Options canceled........ (705,907) 8.94 (605,668) 9.50 (881,643) 10.06 (851,726) 10.04 (157,701) 5.63
--------- ------ --------- ----- --------- ------ --------- ------ --------- -----
Outstanding, end of
period................. 1,372,887 9.33 2,183,528 7.75 1,748,319 5.27 2,229,152 5.61 1,614,007 6.29
========= ====== ========= ===== ========= ====== ========= ====== ========= =====
Exercisable, end of
period................. 359,277 $10.85 837,156 $8.19 973,499 $ 5.37 1,123,868 $ 5.96 1,056,127 $5.39
========= ====== ========= ===== ========= ====== ========= ====== ========= =====
Available for grant in
future years........... 1,860,873 1,022,341 1,134,302 924,624 952,003
========= ========= ========= ========= =========
</TABLE>
- ---------------------
(1) One million options granted to an officer during fiscal 1997 vest over a
period of 18 months, with 294,400, 823,600, 691,300 and 1,000,000 vested as
of March 29, 1997, March 28, 1998, December 27, 1997 and December 26, 1998,
respectively.
The following table summarizes information regarding all stock options
outstanding at December 26, 1998:
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
------------------------------ ------------------
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Number Life Price Number Price
--------------- --------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.967-$4.8125............. 279,734 8.04 years $ 3.87 51,609 $ 3.88
$5.375-$7.8125............. 1,398,500 8.24 years 5.64 1,070,500 5.42
$8.06-$10.75............... 857,640 8.06 years 9.35 173,311 9.75
$10.9375-$16.00............ 98,824 0.16 years 12.50 98,824 12.50
$17.00-$22.00.............. 18,500 4.48 years 20.54 10,000 20.00
--------- ---------
$0.967-$22.00.............. 2,653,198 7.83 years $ 7.01 1,404,244 $ 6.50
========= =========
</TABLE>
F-14
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Egghead.com accounts for these plans under the intrinsic value-based method
of accounting, under which no compensation cost has been recognized. Had
compensation cost for these plans been determined consistent with SFAS No. 123,
Egghead.com's net income and earnings per share would have been reduced to the
following pro forma amounts:
<TABLE>
<CAPTION>
Fiscal Year Nine Months Ended
---------------------------- -------------------------
December 27, December 26,
1996 1997 1998 1997 1998
-------- -------- -------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net Loss
As Reported....... $(10,745) $(39,640) $(50,231) $(15,191) $(21,613)
Pro Forma......... (11,846) (40,800) (54,697) (17,886) (23,452)
Loss per share
As Reported....... $ (0.62) $ (2.25) $ (2.40) $ (0.75) $ (0.90)
Pro Forma......... (0.68) (2.32) (2.61) (0.88) (0.97)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to options granted
prior to April 1, 1995, and additional grants in future years are anticipated.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model, with the following assumptions used for
grants in fiscal 1996, 1997 and 1998 and the nine-months ended December 27,
1997 and December 26, 1998:
<TABLE>
<CAPTION>
Fiscal Year Nine Months Ended
-------------------------- -------------------------
December 27, December 26,
1996 1997 1998 1997 1998
-------- -------- -------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Dividend yield.......... 0% 0% 0% 0% 0%
Volatility.............. 67% 67% 70% 70% 95%
Risk-free interest
rate................... 5.91% 5.61% 6.27% 6.27% 5.39%
Expected stock option
life................... 4.4 yrs. 4.4 yrs. 3.5 yrs. 3.5 yrs. 4.3 yrs
</TABLE>
Using these assumptions, the weighted average fair value of options granted
was $6.17, $3.67 and $3.06 in fiscal 1996, 1997 and 1998 and $2.97 and $6.32 in
the nine months ended December 27, 1997 and December 26, 1998, respectively.
Option Repricing
On April 23, 1997, the Compensation Committee of the Egghead.com Board of
Directors approved a plan pursuant to which certain executive officers were
offered an opportunity to exchange options having exercise prices in excess of
the then current fair market value for new options having an exercise price of
$4.375 per Egghead.com Common Share. Recipients of the repriced replacement
options received credit for vesting under the original options, but could not
exercise the new options for a one-year period following their date of grant.
The Compensation Committee approved an option repricing on the same terms for
employees other than executive officers on April 4, 1997.
Restated Nonemployee Director Stock Option Plan
In September 1993, Egghead.com's shareholders approved the Nonemployee
Director Stock Option Plan, and in August 1995, Egghead.com's shareholders
approved amendments thereto (as amended, the
F-15
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Director Plan) under which 450,000 shares of Egghead.com's Common Stock were
reserved for issuance. The Director Plan was restated by the Board of Directors
on September 2, 1998. Options granted under the Director Plan generally vest
over three years and terminate after 10 years. As of December 26, 1998,
110,000 shares were available for grant and 272,500 shares were subject to
outstanding options, which have been granted at prices ranging from $5.88 to
$10.75 per share. As of December 26, 1998, options for 118,000 shares were
vested.
The Executive Plan
In February 1989, the Board of Directors approved four-year employment
agreements and stock option agreements for three executive officers who are no
longer with Egghead.com, whereby the officers' compensation was based on equity
incentives. Each drew an annual salary of $1 per year during his term of
employment. Options to acquire up to 1,700,000 shares of Common Stock were
authorized under the Executive Plan. As of December 26, 1998, 325,000 options
approved under the Executive Plan were never granted and 200,000 were subject
to outstanding options, which have been granted to such former executive
officers of Egghead.com at prices ranging from $10.38 to $20.00 per share. All
outstanding options are vested and expire in February 1999. As of December 26,
1998, 1,175,000 of the options had been exercised at prices ranging from $10.38
to $20.00 per share. The Executive Plan is no longer active and no further
options will be granted under the Executive Plan, which will terminate on
February 22, 1999.
Note 5 401(k) Plan
Egghead.com had two 401(k) retirement plans for the benefit of its employees,
a DJ&J plan and a Surplus Direct plan (assumed in the acquisition). After six
months of full-time employment (more than 1,000 hours), an employee was
eligible to participate in the DJ&J plan. Prior to March 29, 1997, employee
contributions were matched by Egghead.com at 50% of the employee's contribution
up to 4% of their compensation. Egghead.com contributions were fully vested
upon the completion of two years of service. Egghead.com contributions were
approximately $228,000 and $466,000 in fiscal years 1996 and 1997,
respectively. Subsequent to March 29, 1997, Egghead.com discontinued the
guaranteed matching of employee contributions. Egghead.com may, however, make
voluntary contributions in the future.
In the Surplus Direct plan, an employee was eligible to participate in the
plan after six months of full-time employment (more than 1,000 hours). Employee
contributions were matched by Egghead.com at 25% of the employee's contribution
up to 5% of their compensation. Egghead.com contributions are fully vested upon
the completion of five years of service. Egghead.com contributions were
approximately $17,000, $9,000 and $29,000 in fiscal year 1998 and the nine
months ended December 27, 1997 and December 26, 1998, respectively.
Effective January 1, 1999, the DJ&J Plan was amended and restated to merge
the Surplus Software Plan into the DJ&J Plan and become the Egghead.com Plan
("the Plan"). In the Plan, employee contributions are matched by Egghead.com at
25% of the employee's contribution up to 5% of their compensation upon the
employee's completion of six months of full-time employment or one year of
eligibility service (more than 1,000 hours).
Note 6 Commitments and Contingencies
Significant Suppliers
In fiscal 1996 and 1997, two primary manufacturing suppliers in the aggregate
accounted for approximately 24% and 25%, respectively, of Egghead.com's
purchases. In fiscal 1997 and 1998, one primary distributor accounted for
approximately 13% and 11%, respectively, of Egghead.com's purchases. In the
F-16
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
nine months ended December 27, 1997 and December 28, 1998, one primary
distributor accounted for approximately 12% and 10%, respectively, of
Egghead.com's purchases. The loss of either of these suppliers or this
distributor could have a material adverse effect on the Egghead.com's operating
results and financial condition.
Credit Line for Inventory Financing
In December 1998, the Company was approved for a credit line of $5 million
for the financing of inventory. The terms of such financing will vary depending
on the vendor terms. The credit line is fully secured by the inventory
purchased through the agreement with the lender, Finova Capital Corporation.
The lender has reserved the right to discontinue the inventory financing at any
time at their discretion. At December 26, 1998, there were no borrowings
outstanding under this line of credit.
Leases
Egghead.com leases corporate offices and distribution facilities under
operating leases with remaining lives on most leases ranging from one to six
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 for fiscal 1996, 1997 and 1998 and the nine months ended
December 27, 1997 and December 26, 1998 was approximately $16.0 million, $15.4
million and $7.8 million and $5.9 million and $1.1 million, respectively. As of
December 26, 1998, future minimum rental payments under noncancelable operating
leases for headquarters and distribution facilities, and equipment consisted of
the following (in thousands):
<TABLE>
<CAPTION>
Operating
Fiscal Year Leases
----------- ---------
<S> <C>
Remainder of 1999............................................. $ 287
2000.......................................................... 816
2001.......................................................... 626
2002.......................................................... 463
Thereafter.................................................... 1,050
------
Total minimum payments........................................ $3,242
======
</TABLE>
The Company has recorded a liability for retail stores and distribution
facility lease terminations in connection with its retail restructure. See Note
8.
Note 7 Acquisition
On August 14, 1997, the Company acquired Surplus Direct by issuing 5,310,888
shares of common stock and 289,112 options to purchase common stock of
Egghead.com, Inc. The transaction included payment of $6.0 million of Surplus
Direct debt. At the time, Surplus Direct was engaged in direct marketing of
off-price computer hardware and software through catalogs and two Internet
commerce sites. This acquisition was recorded using the purchase method of
accounting. Operating results of Surplus Direct are included in the statement
of operations from the date of acquisition. An excess purchase price of
approximately $34.2 million, over identifiable assets, was determined based on
the fair values of assets acquired and liabilities assumed. Amortization of
goodwill will be over a period of 20 years. The following Pro Forma
Consolidated Statement of Operations gives effect to the merger as though it
occurred on March 30, 1997 at the beginning of fiscal 1998 according to
purchase accounting. The Pro Forma Consolidated Statement of Operations have
been prepared from the unaudited historical financial statements of
F-17
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Egghead.com and the unaudited historical financial statements of Surplus Direct
prior to the acquisition on August 14, 1997. The pro forma financial
information is presented for illustrative purposes only and is not necessarily
indicative of the results of operations that would have been reported had the
merger occurred at the beginning of fiscal 1998, nor is it necessarily
indicative of future results of operations, nor does it incorporate any
benefits from cost savings or synergies of operations of the combined company.
<TABLE>
<CAPTION>
Year Ended March 28, 1998
------------------------------------------------------------
Historical Pro Forma (unaudited)
--------------------- --------------------------------------
Net Joint
Surplus Venture Other Pro
Egghead Direct Adjustments(1) Adjustments(2) Forma
-------- ----------- -------------- -------------- --------
(unaudited)
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales............... $293,079 $21,601 $3,425 $ -- $318,105
Cost of sales........... 257,175 17,711 3,062 -- 277,948
-------- ------- ------ ----- --------
Gross profit............ 35,904 3,890 363 -- 40,157
Selling, general and
administrative expenses 68,066 6,098 587 74,751
Depreciation and
amortization........... 5,809 190 66 703 6,768
Restructuring and
impairment charge...... 19,500 -- -- -- 19,500
-------- ------- ------ ----- --------
Operating loss.......... (57,471) (2,398) (290) (703) (60,862)
Other income (expense).. 2,940 (480) 290 -- 2,750
-------- ------- ------ ----- --------
Loss from continuing
operations before
income taxes........... (54,531) (2,878) -- (703) (58,112)
Income tax.............. -- -- -- -- --
-------- ------- ------ ----- --------
Loss from continuing
operations............. $(54,531) $(2,878) $ -- $(703) $(58,112)
======== ======= ====== ===== ========
Basic loss from
continuing operations
per share.............. $ (2.60) $ (1.06) $ (2.53)
======== ======= ========
Shares used in per share
calculations........... 20,967 2,719 22,980 (3)
======== ======= ========
</TABLE>
- ---------------------
(1) Had the merger occurred on March 30,1997 the existing joint venture
(Egghead Computer Surplus) would have been consolidated. The pro forma
adjustments, shown net of eliminating entries, reflect the net sales and
expenses of the joint venture for the period from March 30, 1997 to August
13, 1997.
(2) The excess purchase price over the fair market value of net assets
purchased was $34.2 million which is being amortized over 20 years. The
adjustments reflect amortization of this goodwill from March 30, 1997 to
August 13, 1997.
(3) The shares used in per share calculations have been adjusted to reflect the
5.3 million shares issued as though they were issued on March 30, 1997.
In January 1999, the Company received and subsequently retired 100,000 shares
of Common Stock originally issued in connection with the Surplus Direct
acquisition in settlement of certain pre-acquisition contingencies.
Note 8 Restructuring and Reorganization
In the fourth quarter of fiscal 1997, Egghead.com recorded a $24.0 million
restructuring and impairment charge to reorganize its operations. This plan
involved, among other things, closing 70 of the 156 Egghead stores, a
significant reduction in its headquarters staff and the closure of its
Lancaster,
F-18
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pennsylvania distribution center. This charge included $6.2 million for the
liquidation of inventory, $5.8 million in settlement of store and warehouse
leases, $4.4 million for fixed asset dispositions and miscellaneous expenses,
$3.3 million of store closing costs and related fixed asset dispositions, $3.3
million for severance and related benefits and $1.0 million in disposition and
impairment of real estate. The $24.0 million restructuring charge was recorded
as a $6.2 million charge to gross profit, a $1.8 million charge to selling and
marketing expenses, a $0.3 million charge to general and administrative
expenses and a $15.6 million charge to restructuring and impairment charges.
The Company anticipates that the remaining payables as of December 26, 1998,
related to the restructuring, consisting primarily of $0.6 million in lease
obligations and $0.3 million in severance will be substantially settled by the
end of fiscal 1999.
In the fourth quarter of fiscal 1998, Egghead.com recorded a $37.6 million
restructuring charge to reorganize its operations for a plan involving, among
other things, closing the remaining Egghead stores, a significant reduction in
its headquarters staff and the closure of its Sacramento, California
distribution center. This charge includes approximately $17.1 million for
retail lease terminations and related fixed asset disposals, $10.0 million for
store closing costs, $6.2 million for the liquidation of inventory, $2.1
million for the closure of the Sacramento distribution center and $2.2 million
in severance, fixed asset disposal and other miscellaneous expenses related to
the reduction of the Company's headquarters operation. The $37.6 million
restructuring charge was recorded as a $6.2 million charge to gross profit, a
$6.4 million charge to selling and marketing expenses, a $0.5 million charge to
general and administrative expenses and a $24.5 million charge to restructuring
and impairment charges. The $24.5 million fiscal 1998 restructuring and
impairment charge was partially offset by a reduction of $5.0 million in fiscal
1997 restructuring and impairment reserves. There were no other adjustments to
the restructuring reserves. Egghead.com anticipates that the settlement of all
leases and claims related to the restructuring will be substantially completed
by the end of fiscal 1999. At December 26, 1998, the remaining payables related
to the restructuring consisted primarily of $5.9 million in retail lease
obligations, $0.7 million in severance and employee benefits and $0.4 million
miscellaneous costs.
Note 9 Discontinued Operations
Effective May 13, 1996, Egghead.com sold its CGE (Corporate, Government and
Education) division to Software Spectrum, Inc. (SSI), a Texas corporation, for
$45.0 million in cash pursuant to the terms of an asset purchase agreement
entered into on March 23, 1996. The asset purchase agreement required
Egghead.com to provide SSI with certain support services, for a period not to
exceed 120 days, on Egghead.com's behalf, SSI's collection of Egghead.com's
CGE-related accounts receivable for a period not to exceed 150 days and a lease
to SSI for a period of three years of a portion of Egghead.com's Spokane
facility.
Gain on the disposition of the discontinued operation was $36.5 million
($22.3 million after tax). The sales price for the CGE division was $45.0
million, which did not include the accounts receivable, which were collected
during the fiscal year. The reported gain is net of fixed assets and lease
write-offs of $1.2 million, transaction, legal and accounting fees of $2.0
million, transition period employment costs of $1.8 million and costs of $3.4
million related to the fulfillment of post-sale obligations as noted above.
The net assets and liabilities relating to discontinued operations have been
segregated on the consolidated balance sheet from their historic
classifications to separately identify them as being related to the
discontinued operations. Liabilities related to the disposition of the CGE
division at March 29, 1997 consisted of liabilities relating to CGE activities
and additional reserves deemed necessary to complete the disposition of
remaining CGE assets, including the settlement of any remaining claims. The
balance at
F-19
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
March 30, 1996 consisted of liabilities to be assumed by SSI upon the
completion of the sale. In fiscal 1998, the remaining liabilities and reserves
relating to CGE activities and claims were settled. As of March 28, 1998, there
are no remaining net assets and liabilities relating to discontinued
operations.
The income from discontinued operations for fiscal 1996, 1997 and 1998 is
comprised of the following (in millions):
<TABLE>
<CAPTION>
Fiscal Year
--------------------
1996 1997 1998
------ ------- ----
<S> <C> <C> <C>
Net sales.............................................. $363.3 $ 39.3 $--
Costs and expenses..................................... 362.7 59.4 (4.3)
------ ------- ----
Income (loss) before provision for income taxes........ 0.6 (20.1) 4.3
------ ------- ----
Income tax expense (benefit)........................... 0.2 (7.8) --
------ ------- ----
Income (loss) from discontinued operations............. $ 0.4 $ (12.3) $4.3
====== ======= ====
</TABLE>
There was no income or loss from discontinued operations during the nine
months ended December 27, 1997 and December 26, 1998.
Note 10 Recapitalization and Sale of Subsidiary
On November 11, 1997 Egghead.com recapitalized its wholly owned subsidiary
Elekom. As part of the recapitalization, certain venture capitalists invested
capital in Elekom, reducing the Company's ownership percentage to approximately
26% as of March 28, 1998. Prior to recapitalization, income and expenses of
Elekom were recorded in the Company's operating results. After
recapitalization, the Company's share of the results of operations of Elekom
were included using the equity method of accounting and are reflected in the
other income (expense) in the Company's consolidated statements of operations.
On November 9, 1998, the remaining ownership in Elekom was sold at a gain of
approximately $3.3 million. An additional $0.6 million gain is being deferred
due to a contingency clause in the sales agreement and will be held in escrow
until April 30, 2000, subject to favorable resolution of the contingencies.
Note 11 Sale of Property
On May 1, 1998, the Company sold its previous headquarters building located
in Liberty Lake, Washington, for approximately $7.5 million. The building was
recorded in the Property Held for Sale on the Company's Balance Sheet as of
March 28, 1998. The Company leases approximately 7,000 square feet of the
building over a lease term of one year, including extensions.
Note 12 Subsequent Event
In January 1999, the Company's Board of Directors approved a plan to issue
additional shares of Common Stock in a public offering.
F-20
<PAGE>
[EGGHEAD.COM LOGO ACCOMPANIED BY TEXT: "SHOP THREE TIMES SMARTER(SM)"
"Superstores/over 30,000 products online" "Auctions/Action-packed online
bidding" "SurplusDirect/The online liquidation center"]
[TEXT: "www.egghead.com"]
---------------
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5,030,000 Shares
[LOGO OF EGGHEAD.COM(R)]
Common Stock
------------
PROSPECTUS
------------
Hambrecht & Quist
BancBoston Robertson Stephens
Prudential Securities
U.S. Bancorp Piper Jaffray
------------
, 1999
------------
You should rely only on information contained in this prospectus. We have not
authorized anyone to provide you with information different from that contained
in this prospectus. Egghead.com and the selling shareholders are offering to
sell, and seeking offers to buy, shares of common stock only in jurisdictions
where offers and sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or of any sale of our common stock.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than the
underwriting discounts and commissions, payable by the registrant in
connection with the sale of our common stock being registered hereby. All
amounts shown are estimates, except the Securities and Exchange Commission
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $ 26,036
NASD filing fee.................................................... 10,366
Nasdaq National Market listing fee................................. 17,500
Blue Sky fees and expenses......................................... 15,000
Printing and engraving expenses.................................... 150,000
Legal fees and expenses............................................ 250,000
Accounting fees and expenses....................................... 80,000
Transfer Agent and Registrar fees.................................. 10,000
Miscellaneous expenses............................................. 41,098
--------
Total............................................................ $600,000
========
</TABLE>
Item 15. Indemnification of Directors and Officers
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act authorize a court to award, or a corporation's board of
directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). Article 9 of the registrant's restated bylaws provides for
indemnification of the registrant's directors, officers, employees and agents
to the maximum extent permitted by Washington law. The directors and officers
of the registrant also may be indemnified against liability they may incur for
serving in that capacity pursuant to a liability insurance policy maintained
by the registrant for such purpose.
The Washington Business Corporation Act authorizes a corporation to limit a
director's liability to the corporation or its shareholders for monetary
damages for acts or omissions as a director, except in certain circumstances
involving intentional misconduct, knowing violations of law or illegal
corporate loans or distributions, or any transaction from which the director
personally receives a benefit in money, property or services to which the
director is not legally entitled. Article 10 of the registrant's restated
articles of incorporation contains provisions implementing, to the fullest
extent permitted by Washington law, such limitations on a director's liability
to the registrant and its shareholders.
The underwriting agreement (Exhibit 1.1 hereto) provides for indemnification
by the underwriters of the registrant and the selling shareholders, and by the
registrant and the selling shareholders of the underwriters, for certain
liabilities, including liabilities arising under the Securities Act, in
connection with matters specifically provided in writing by the underwriters
for inclusion in this registration statement.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1+ Restated Articles of Incorporation.
3.2++ Restated Bylaws.
5.1 Opinion of Perkins Coie LLP as to the legality of the shares.
21.1** Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
Consent of Perkins Coie LLP (contained in the opinion filed as Exhibit
23.2 5.1 hereto).
24.1** Power of Attorney.
</TABLE>
- ---------------------
+ Incorporated by reference to Exhibit 3.3 filed with the registrant's report
on Form 10-K for the fiscal year ended March 28, 1998.
++ Incorporated by reference to Exhibit 3.2 filed with the registrant's report
on Form 10-K for the fiscal year ended March 28, 1998.
** Previously filed.
(b) Financial Statement Schedules
All schedules are omitted because they are inapplicable or the requested
information is shown in the financial statements of the registrant or related
notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 15, or otherwise, the
registrant has been advised that, in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets
all the requirements for filing on Form S-3 and has duly caused this Amendment
No. 2 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Vancouver, State of
Washington, on the 10th day of March, 1999.
EGGHEAD.COM, INC.
/s/ Brian W. Bender
By: _________________________________
Brian W. Bender
Chief Financial Officer, Vice
President of Finance and Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to the Registration Statement has been signed by the following
persons in the capacities indicated below on the 10th day of March, 1999.
Signature Title
--------- -----
George P. Orban* Chairman of the Board and
____________________________________ Chief Executive Officer
George P. Orban (Principal Executive
Officer)
/s/ Brian W. Bender Chief Financial Officer,
____________________________________ Vice President of Finance
Brian W. Bender and Secretary (Principal
Financial and Accounting
Officer)
Gregory J. Boudreau* Director
____________________________________
Gregory J. Boudreau
Jonathan W. Brodeur* Director
____________________________________
Jonathan W. Brodeur
C. Scott Gibson* Director
____________________________________
C. Scott Gibson
Eric P. Robison* Director
____________________________________
Eric P. Robison
Robert T. Wall* Director
____________________________________
Robert T. Wall
II-3
<PAGE>
Karen White* Director
____________________________________
Karen White
Melvin A. Wilmore* Director
____________________________________
Melvin A. Wilmore
/s/ Brian W. Bender
* By: ___________________________
Brian W. Bender
Attorney-in-Fact
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
------- --------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1+ Restated Articles of Incorporation.
3.2++ Restated Bylaws.
5.1 Opinion of Perkins Coie LLP as to the legality of the shares.
21.1** Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
Consent of Perkins Coie LLP (contained in the opinion filed as Exhibit
23.2 5.1 hereto).
24.1** Power of Attorney.
</TABLE>
- ---------------------
+ Incorporated by reference to Exhibit 3.3 filed with the registrant's report
on Form 10-K for the fiscal year ended March 28, 1998.
++ Incorporated by reference to Exhibit 3.2 filed with the registrant's report
on Form 10-K for the fiscal year ended March 28, 1998.
** Previously filed.
<PAGE>
EXHIBIT 1.1
EGGHEAD.COM, INC.
5,030,000 Shares/1/
Common Stock
UNDERWRITING AGREEMENT
_______________, 1999
HAMBRECHT & QUIST LLC
BANCBOSTON ROBERTSON STEPHENS INC.
PRUDENTIAL SECURITIES INCORPORATED
U.S. BANCORP PIPER JAFFRAY INC.
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
Egghead.com, Inc., a Washington corporation (herein called the "Company"),
proposes to issue and sell 5,000,000 shares of its authorized but unissued
Common Stock, $0.01 par value (herein called the "Common Stock"), and the
shareholders of the Company named in Schedule II hereto (herein collectively
called the "Selling Securityholders") propose to sell an aggregate of 30,000
shares of Common Stock of the Company (said 5,030,000 shares of Common Stock
being herein called the "Underwritten Stock"). The Company proposes to grant to
the Underwriters (as hereinafter defined) an option to purchase up to 750,000
additional shares of Common Stock (herein called the "Option Stock" and with the
Underwritten Stock herein collectively called the "Stock").
The Company and the Selling Securityholders severally hereby confirm the
agreements made with respect to the purchase of the Stock by the several
underwriters, for whom you are acting, named in Schedule I hereto (herein
collectively called the "Underwriters," which term shall also include any
underwriter purchasing Stock pursuant to Section 3(b) hereof). You represent
and warrant that you have been authorized by each of the other Underwriters to
enter into this Agreement on its behalf and to act for it in the manner herein
provided.
1. Registration Statement. The Company has filed with the Securities and
Exchange Commission (herein called the "Commission") a registration statement on
Form S-3 (No. 333-71907), including the related preliminary prospectus, for the
registration under the Securities Act of 1933, as amended (herein called the
"Securities Act") of the Stock. Copies of such registration statement and of
each amendment thereto, if any, including the related preliminary prospectus
(meeting the requirements of Rule 430A of the rules and regulations of the
Commission) heretofore filed by the Company with the Commission have been
delivered to you.
The term Registration Statement as used in this agreement shall mean such
registration statement, including all documents incorporated by reference
therein, all exhibits and financial statements, all information omitted
therefrom in reliance upon Rule 430A and contained in the Prospectus referred to
below, in the form in which it became effective, and any registration statement
filed pursuant to Rule 462(b) of the rules and regulations of the Commission
with respect to the Stock (herein called a "Rule 462(b) registration
statement"), and, in the event of any amendment thereto after the effective date
of such registration statement (herein called the "Effective Date"), shall also
mean (from and after the effectiveness of such amendment) such registration
statement as so amended (including any Rule 462(b) registration statement). The
term
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/1/ Plus an option to purchase from the Company up to 750,000 additional
shares to cover over-allotments.
<PAGE>
"Prospectus" as used in this Agreement shall mean the prospectus, including the
documents incorporated by reference therein, relating to the Stock first filed
with the Commission pursuant to Rule 424(b) and Rule 430A (or if no such filing
is required, as included in the Registration Statement) and, in the event of any
supplement or amendment to such prospectus after the Effective Date, shall also
mean (from and after the filing with the Commission of such supplement or the
effectiveness of such amendment) such prospectus as so supplemented or amended.
The term Preliminary Prospectus as used in this Agreement shall mean each
preliminary prospectus, including the documents incorporated by reference
therein, included in such registration statement prior to the time it becomes
effective.
The Registration Statement has been declared effective under the Securities
Act, and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. The Company has caused to be delivered
to you copies of each Preliminary Prospectus and has consented to the use of
such copies for the purposes permitted by the Securities Act.
2. Representations and Warranties of the Company and the Selling
Securityholders.
(a) The Company hereby represents and warrants as follows:
(i) Each of the Company and its subsidiaries has been duly
incorporated and is a validly existing corporation under the laws of the
jurisdiction of its incorporation, has full corporate power and authority to own
or lease its properties and conduct its business as described in the
Registration Statement and the Prospectus and as being conducted, and is duly
qualified as a foreign corporation and in good standing in all jurisdictions in
which the character of the property owned or leased or the nature of the
business transacted by it makes qualification necessary (except where the
failure to be so qualified would not have a material adverse effect on the
business, properties, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole).
(ii) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, there has not been any
materially adverse change in the business, properties, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole,
whether or not arising from transactions in the ordinary course of business,
other than as set forth in the Registration Statement and the Prospectus, and
since such dates, except in the ordinary course of business, neither the Company
nor any of its subsidiaries has entered into any material transaction not
referred to in the Registration Statement and the Prospectus.
(iii) The Registration Statement and the Prospectus comply, and
on the Closing Date (as hereinafter defined) and any later date on which Option
Stock is to be purchased, the Prospectus will comply, in all material respects,
with the provisions of the Securities Act and the Securities Exchange Act of
1934, as amended (herein called the "Exchange Act") and the rules and
regulations of the Commission thereunder; on the Effective Date, the
Registration Statement did not contain any untrue statement of a material fact
and did not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading; and, on the
Effective Date, the Prospectus did not and, on the Closing Date and any later
date on which Option Stock is to be purchased, will not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that none of the
representations and warranties in this subparagraph (iii) shall apply to
statements in, or omissions from, the Registration Statement or the Prospectus
made in reliance upon and in conformity with information herein or otherwise
furnished in writing to the Company by or on behalf of the Underwriters for use
in the Registration Statement or the Prospectus.
(iv) The Stock, when issued and sold to the Underwriters as
provided herein, will be duly and validly issued, fully paid and nonassessable
and conforms to the description thereof contained or incorporated by reference
in the Prospectus. No further approval or authority of the shareholders or the
Board of Directors of the Company will be required for the transfer and sale of
the Stock to be sold by the Selling Securityholders or the issuance and sale of
the Stock as contemplated herein.
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<PAGE>
(v) Except as disclosed in the Prospectus, the Company and each
of its subsidiaries owns or possesses valid licenses or other rights to use all
patents, copyrights, trademarks, service marks, trade names, technology and
know-how necessary (in any material respect) to conduct its business in the
manner described in the Prospectus and, except as disclosed in the Prospectus,
neither the Company nor any of its subsidiaries has received any notice of
infringement or conflict with (and neither the Company nor any of its
subsidiaries knows of any infringement or conflict with) asserted rights of
others with respect to any patents, copyrights, trademarks, service marks, trade
names, technology or know-how which could reasonably be expected to result in
any material adverse effect upon the Company and its subsidiaries, taken as a
whole; and, except as disclosed in the Prospectus, the discoveries, inventions,
products or processes of the Company and its subsidiaries referred to in the
Prospectus do not, to the knowledge of the Company or any of its subsidiaries,
infringe or conflict with any right or patent of any third party, or any
discovery, invention, product or process which is the subject of a patent
application filed by any third party, known to the Company or any of its
subsidiaries, which could have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(vi) No consent, approval, authorization or order of any court
or governmental agency or body is required for the consummation of the
transactions contemplated herein, except such as have been obtained under the
Securities Act and such as may be required under state securities or blue sky
laws in connection with the purchase and distribution of the Stock by the
Underwriters.
(vii) The Stock to be sold by the Selling Securityholders is
listed and duly admitted to trading on the Nasdaq National Market, and prior to
the Closing Date the Stock to be issued and sold by the Company will be
authorized for listing by the Nasdaq National Market upon official notice of
issuance.
(viii) The Company has not, directly or indirectly, (i) taken
any action designed to cause or to result in, or that has constituted or which
might reasonably be expected to constitute, the stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Stock or (ii) since the filing of the Registration Statement (A) sold, bid
for, purchased, or paid anyone any compensation for soliciting purchases of,
Stock or (B) paid or agreed to pay to any person any compensation for soliciting
another to purchase any other securities of the Company (except for the sale of
Stock by the Selling Securityholders under this agreement).
(b) Each of the Selling Securityholders hereby represents and
warrants as follows:
(i) Such Selling Securityholder has, or with respect to shares
of stock issuable upon exercise of stock options will have on the Closing Date,
good and marketable title to all the shares of Stock to be sold by such Selling
Securityholder hereunder, free and clear of all liens, encumbrances, equities,
security interests and claims whatsoever, with full right and authority to
deliver the same hereunder, subject, in the case of each Selling Securityholder,
to the rights of Chase Mellon Shareholder Services L.L.C. as Custodian (herein
called the "Custodian"), and that upon the delivery of and payment for such
shares of the Stock hereunder, and assuming that the Underwriters are acquiring
the stock with no knowledge of any adverse claim, the several Underwriters will
receive good and marketable title thereto, free and clear of all liens,
encumbrances, equities, security interests and claims whatsoever.
(ii) Either (A) Certificates in negotiable form for the shares
of the Stock to be sold by such Selling Securityholder have been placed in
custody under a Custody Agreement for delivery under this Agreement with the
Custodian; or (B) one or more Conditional Notices of Exercise of Option (the
"Option Documents"), relating to the stock option(s) (the "Options") of such
Selling Securityholder exercisable for the shares of Stock to be sold by such
Selling Securityholder, have been placed in custody with the Custodian under a
Custody Agreement, such Options have been automatically exercised, the Custodian
has been authorized, under the Custody Agreement, to issue to such Selling
Securityholder the shares of Stock to be sold by such Selling Securityholder and
such shares of Stock will be represented on the Closing Date by certificates in
negotiable form and in the custody of the Custodian; such Selling Securityholder
specifically agrees that the shares of the Stock represented by the certificates
or the Option Documents so held in custody for such Selling Securityholder are
subject to the interests of the several Underwriters, that the arrangements made
by such Selling Securityholder for such custody, including the Power of Attorney
provided for in such Custody Agreement, are to that extent irrevocable, and that
the obligations of such Selling Securityholder shall not be terminated by any
act of such
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<PAGE>
Selling Securityholder or by operation of law, whether by the death or
incapacity of such Selling Securityholder (or, in the case of a Selling
Securityholder that is not an individual, the dissolution or liquidation of such
Selling Securityholder) or the occurrence of any other event; if any such death,
incapacity, dissolution, liquidation or other such event should occur before the
delivery of such shares of the Stock hereunder, certificates for such shares of
the Stock shall be delivered by the Custodian in accordance with the terms and
conditions of this Agreement as if such death, incapacity, dissolution,
liquidation or other event had not occurred, regardless of whether the Custodian
shall have received notice of such death, incapacity, dissolution, liquidation
or other event.
(iii) Solely to the extent that any statements or omissions made in
the Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto are made in reliance upon and in conformity with
written information furnished to the Company by such Selling Securityholder
expressly for use therein, nothing has come to the attention of such Selling
Securityholder that would lead such Selling Securityholder to believe that, (A)
on the Effective Date, the Registration Statement contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, or (B) that
the Preliminary Prospectus or the Prospectus included any untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
3. Purchase of the Stock by the Underwriters.
(a) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company agrees to issue and sell
5,000,000 shares of the Underwritten Stock to the several Underwriters, each
Selling Securityholder agrees to sell to the several Underwriters the number of
shares of the Underwritten Stock set forth in Schedule II opposite the name of
such Selling Securityholder, and each of the Underwriters agrees to purchase
from the Company and the Selling Securityholders the respective aggregate number
of shares of Underwritten Stock set forth opposite its name in Schedule I. The
price at which such shares of Underwritten Stock shall be sold by the Company
and the Selling Securityholders and purchased by the several Underwriters shall
be $___ per share. The obligation of each Underwriter to the Company and each of
the Selling Securityholders shall be to purchase from the Company and the
Selling Securityholders that number of shares of the Underwritten Stock which
represents the same proportion of the total number of shares of the Underwritten
Stock to be sold by each of the Company and the Selling Securityholders pursuant
to this Agreement as the number of shares of the Underwritten Stock set forth
opposite the name of such Underwriter in Schedule I hereto represents of the
total number of shares of the Underwritten Stock to be purchased by all
Underwriters pursuant to this Agreement, as adjusted by you in such manner as
you deem advisable to avoid fractional shares. In making this Agreement, each
Underwriter is contracting severally and not jointly; except as provided in
paragraphs (b) and (c) of this Section 3, the agreement of each Underwriter is
to purchase only the respective number of shares of the Underwritten Stock
specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Sections 8 or 9 hereof) to purchase and
pay for the number of shares of the Stock agreed to be purchased by such
Underwriter or Underwriters, the Company or the Selling Securityholders shall
immediately give notice thereof to you, and the non-defaulting Underwriters
shall have the right within 24 hours after the receipt by you of such notice to
purchase, or procure one or more other Underwriters to purchase, in such
proportions as may be agreed upon between you and such purchasing Underwriter or
Underwriters and upon the terms herein set forth, all or any part of the shares
of the Stock which such defaulting Underwriter or Underwriters agreed to
purchase. If the non-defaulting Underwriters fail so to make such arrangements
with respect to all such shares and portion, the number of shares of the Stock
which each non-defaulting Underwriter is otherwise obligated to purchase under
this Agreement shall be automatically increased on a pro rata basis to absorb
the remaining shares and portion which the defaulting Underwriter or
Underwriters agreed to purchase; provided, however, that the non-defaulting
Underwriters shall not be obligated to purchase the shares and portion which the
defaulting Underwriter or Underwriters agreed to purchase if the aggregate
number of such shares of the Stock exceeds 10% of the total number of shares of
the Stock which all Underwriters agreed to purchase hereunder. If the total
number of shares of the Stock which the defaulting Underwriter or Underwriters
agreed to purchase shall not be purchased or absorbed in accordance with the two
preceding sentences, the
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<PAGE>
Company and the Selling Securityholders shall have the right, within 24 hours
next succeeding the 24-hour period above referred to, to make arrangements with
other underwriters or purchasers satisfactory to you for purchase of such shares
and portion on the terms herein set forth. In any such case, either you or the
Company shall have the right to postpone the Closing Date determined as provided
in Section 5 hereof for not more than seven business days after the date
originally fixed as the Closing Date pursuant to said Section 5 in order that
any necessary changes in the Registration Statement, the Prospectus or any other
documents or arrangements may be made. If neither the non-defaulting
Underwriters nor the Company and the Selling Securityholders shall make
arrangements within the 24-hour periods stated above for the purchase of all the
shares of the Stock which the defaulting Underwriter or Underwriters agreed to
purchase hereunder, this Agreement shall be terminated without further act or
deed and without any liability on the part of the Company or the Selling
Securityholders to any non-defaulting Underwriter and without any liability on
the part of any non-defaulting Underwriter to the Company or the Selling
Securityholders. Nothing in this paragraph (b), and no action taken hereunder,
shall relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Company grants an option to the several Underwriters to purchase, severally and
not jointly, up to 750,000 shares in the aggregate of the Option Stock from the
Company at the same price per share as the Underwriters shall pay for the
Underwritten Stock. Said option may be exercised only to cover over-allotments
in the sale of the Underwritten Stock by the Underwriters and may be exercised
in whole or in part at any time (but not more than once) on or before the
thirtieth day after the date of this Agreement upon written or telegraphic
notice by you to the Company setting forth the aggregate number of shares of the
Option Stock as to which the several Underwriters are exercising the option.
Delivery of certificates for the shares of Option Stock, and payment therefor,
shall be made as provided in Section 5 hereof. The number of shares of the
Option Stock to be purchased by each Underwriter shall be the same percentage of
the total number of shares of the Option Stock to be purchased by the several
Underwriters as such Underwriter is purchasing of the Underwritten Stock, as
adjusted by you in such manner as you deem advisable to avoid fractional shares.
4. Offering by Underwriters.
(a) The terms of the public offering by the Underwriters of the Stock
to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the public offering and increase or decrease the concessions and
discounts to dealers as they may determine.
(b) The information set forth in the last two paragraphs on the front
cover page, the last paragraph on the outside back cover page and under
"Underwriting" in the Registration Statement, any Preliminary Prospectus and the
Prospectus relating to the Stock filed by the Company (insofar as such
information relates to the Underwriters) constitutes the only information
furnished by the Underwriters to the Company for inclusion in the Registration
Statement, any Preliminary Prospectus, and the Prospectus, and you on behalf of
the respective Underwriters represent and warrant to the Company that the
statements made therein are correct.
5. Delivery of and Payment for the Stock.
(a) Delivery of certificates for the shares of the Underwritten Stock
and the Option Stock (if the option granted by Section 3(c) hereof shall have
been exercised not later than 7:00 A.M., San Francisco time, on the date two
business days preceding the Closing Date), and payment therefor, shall be made
at the office of Perkins Coie LLP, 1201 Third Avenue, 40th Floor, Seattle,
Washington 98101-3099, at 7:00 a.m., San Francisco time, on the fourth business
day after the date of this Agreement, or at such time on such other day, not
later than seven full business days after such fourth business day, as shall be
agreed upon in writing by the Company, the Selling Securityholders and you. The
date and hour of such delivery and payment (which may be postponed as provided
in Section 3(b) hereof) are herein called the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be exercised
after 7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Option Stock, and
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<PAGE>
payment therefor, shall be made at the office of Perkins Coie LLP, 1201 Third
Avenue, 40th Floor, Seattle, Washington 98101-3099, at 7:00 a.m., San Francisco
time, on the third business day after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be made to
the Company or its order, and payment for the Stock purchased from the Selling
Securityholders shall be made to the Custodian, for the account of the Selling
Securityholders (and in the case of Stock sold upon the exercise of options, the
amount of the exercise price for such options and any applicable withholding tax
shall be paid to the Custodian for the account of the Company), in each case by
wire transfer or by one or more certified or official bank check or checks in
immediately available funds. Such payment shall be made upon delivery of
certificates for the Stock to you for the respective accounts of the several
Underwriters against receipt therefor signed by you. Certificates for the Stock
to be delivered to you shall be registered in such name or names and shall be in
such denominations as you may request at least one business day before the
Closing Date, in the case of Underwritten Stock, and at least one business day
prior to the purchase thereof, in the case of the Option Stock. Such
certificates will be made available to the Underwriters for inspection, checking
and packaging at the offices of Lewco Securities Corporation, 2 Broadway, New
York, New York 10004 not later than one business day prior to the Closing Date
or, in the case of the Option Stock, by 3:00 p.m., New York time, not later than
one business day preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
and the Selling Securityholders for shares to be purchased by any Underwriter
whose check shall not have been received by you on the Closing Date or any later
date on which Option Stock is purchased for the account of such Underwriter. Any
such payment by you shall not relieve such Underwriter from any of its
obligations hereunder.
6. Further Agreements of the Company and the Selling Securityholders.
Each of the Company and the Selling Securityholders respectively covenants and
agrees as follows:
(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) a Prospectus containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A and
such other changes, if any, as permitted under Rule 424(b) and (ii) not file any
amendment to the Registration Statement or supplement to the Prospectus of which
you shall not previously have been advised and furnished with a copy or to which
you shall have reasonably objected in writing or which is not in compliance with
the Securities Act or the rules and regulations of the Commission.
(b) The Company will promptly notify each Underwriter in the event of
(i) the request by the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement, (iii) the institution or notice of intended institution
of any action or proceeding for that purpose, (iv) the receipt by the Company of
any notification with respect to the suspension of the qualification of the
Stock for sale in any jurisdiction, or (v) the receipt by it of notice of the
initiation or threatening of any proceeding for such purpose. The Company will
make every reasonable effort to prevent the issuance of such a stop order and,
if such an order shall at any time be issued, to obtain the withdrawal thereof
at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to
you a signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each post-
effective amendment, if any, to the Registration Statement (together with, in
each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus as
you may reasonably request, and (iii) thereafter from time to time during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many additional
copies
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<PAGE>
of the Prospectus and as many copies of any supplement to the Prospectus and of
any amended prospectus, filed by the Company with the Commission, as you may
reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer any event relating
to or affecting the Company, or of which the Company shall be advised in writing
by you, shall occur as a result of which it is necessary, in the opinion of
counsel for the Company or of counsel for the Underwriters, to supplement or
amend the Prospectus in order to make the Prospectus not misleading in the light
of the circumstances existing at the time it is delivered to a purchaser of the
Stock, the Company will forthwith prepare and file with the Commission a
supplement to the Prospectus or an amended prospectus so that the Prospectus as
so supplemented or amended will not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances existing at the time such
Prospectus is delivered to such purchaser, not misleading. If, after the public
offering of the Stock by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the Company
in writing of the proposed variation, and, if in the opinion either of counsel
for the Company or of counsel for the Underwriters such proposed variation
requires that the Prospectus be supplemented or amended, the Company will
forthwith prepare and file with the Commission a supplement to the Prospectus or
an amended prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to whom any of the Stock may be sold by the several
Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Stock in accordance with the
applicable provisions of the Securities Act and the applicable rules and
regulations thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications in good standing under said securities or blue sky
laws; provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified or would become subject to
taxation. The Company will, from time to time, prepare and file such statements,
reports, and other documents as are or may be required to continue such
qualifications in effect for so long a period as you may reasonably request for
distribution of the Stock.
(g) During a period of five years commencing with the date hereof,
the Company will furnish to you upon written request, and to each Underwriter
who may so request in writing, copies of all periodic and special reports
furnished to shareholders of the Company and of all information, documents and
reports filed with the Commission.
(h) Not later than the 45th day following the end of the full fiscal
quarter first occurring after the first anniversary of the Effective Date, the
Company will make generally available to its security holders an earnings
statement in accordance with Section 11(a) of the Securities Act and Rule 158
thereunder.
(i) The Company agrees to pay all costs and expenses incident to the
performance of their obligations under this Agreement, including all costs and
expenses incident to (i) the preparation, printing and filing with the
Commission and the National Association of Securities Dealers, Inc. ("NASD") of
the Registration Statement, any Preliminary Prospectus and the Prospectus, (ii)
the furnishing to the Underwriters of copies of any Preliminary Prospectus and
of the several documents required by paragraph (c) of this Section 6 to be so
furnished, (iii) the preparation, printing and filing of all supplements and
amendments to the Prospectus referred to in paragraph (d) of this Section 6,
(iv) the furnishing to you and the Underwriters of the reports and information
referred to in paragraph (g) of this Section 6 and (v) the printing and issuance
of stock certificates, including the transfer agent's fees. The Selling
Securityholder will pay any transfer taxes incident to the transfer to the
Underwriters of the shares of the Stock being sold by such Selling
Securityholder.
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(j) The Company agrees to reimburse you, for the account of the
several Underwriters, for (i) blue sky fees and related disbursements (including
counsel fees and disbursements and cost of printing memoranda for the
Underwriters) paid by or for the account of the Underwriters or their counsel in
qualifying the Stock under state securities or blue sky laws and (ii) the filing
fee and reasonable fees (in an amount not to exceed $12,000) and disbursements
of counsel to the Underwriters incurred in the review of the offering by the
NASD.
(k) The provisions of paragraphs (i) and (j) of this Section are
intended to relieve the Underwriters from the payment of the expenses and costs
which the Company hereby agrees to pay and shall not affect any agreement which
the Company and the Selling Securityholders may make, or may have made, for the
sharing of any such expenses and costs.
(l) The Company hereby agrees that, without the prior written consent
of Hambrecht & Quist LLC on behalf of the Underwriters, the Company will not,
for a period of 90 days following the commencement of the public offering of the
Stock by the Underwriters, directly or indirectly, (i) sell, offer, contract to
sell, make any short sale, pledge, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any shares of Common Stock or any
securities convertible into or exchangeable or exercisable for or any rights to
purchase or acquire Common Stock or (ii) enter into any swap or other agreement
that transfers, in whole or in part, any of the economic consequences or
ownership of Common Stock, whether any such transaction described in clause (i)
or (ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to (A)
the Stock to be sold to the Underwriters pursuant to this Agreement, (B) shares
of Common Stock issued by the Company pursuant to the Egghead.com, Inc. Amended
and Restated 1989 Employee Stock Purchase Plan, the Egghead.com, Inc. 1997
Nonofficer Employee Stock Option Plan, the Surplus Software, Inc. 1996 Stock
Option Plan, Egghead.com, Inc.'s Amended and Restated 1993 Stock Incentive
Compensation Plan, the Company's 1986 Combined Incentive and Non-Qualified Stock
Option Plan, the Egghead.com, Inc. Restated Nonemployee Director Stock Option
Plan and the Egghead.com, Inc. 1989 Executive Retention Incentive Stock Option
Plan (all such plans collectively referred to herein as the "Plans"), (C) shares
of Common Stock issued by the Company pursuant to currently outstanding
contractual obligations, options, warrants or similar rights, (D) shares of
Common Stock and securities convertible into or exchangeable for Common Stock
issues in connection with corporate partnerships or alliances and other
collaborative arrangements entered into by the Company; provided that such
corporate partner, entity subject to such alliance or collaborator will be bound
by and subject to the restrictions set forth in this Section 6(l) for the
remainder of such 90 day period and (E) options to purchase Common Stock granted
under the Plans.
(m) The Selling Securityholder agrees to comply with the terms of the
lockup agreement executed by such Selling Securityholder in connection with the
offering of the Stock.
(n) The Company agrees to use its best efforts to cause all
directors, officers, and beneficial holders of more than 5% of the outstanding
Common Stock to agree that, without the prior written consent of Hambrecht &
Quist LLC on behalf of the Underwriters, such person or entity will not, for a
period of 90 days from the date hereof, directly or indirectly, sell, offer,
contract to sell, transfer the economic risks of ownership in, make any short
sale, pledge, or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable or exercisable for or any rights to
purchase or acquire Common Stock, subject to specified limited exceptions.
(o) The Company is familiar with the Investment Company Act of 1940,
as amended, and has in the past conducted its affairs, and will in the future
conduct its affairs, in such a manner to ensure that the Company was not and
will not be an "investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as amended,
and the rules and regulations thereunder.
7. Indemnification and Contribution.
(a) The Company and the Selling Securityholders severally and not
jointly agree to indemnify and hold harmless each Underwriter and each person
(including each partner or officer thereof) who controls any Underwriter
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<PAGE>
within the meaning of Section 15 of the Securities Act from and against any and
all losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Securities Act,
the Exchange Act, or the common law or otherwise, and the Company agrees to
reimburse each such Underwriter and controlling person for any legal or other
reasonable expenses (including, except as otherwise hereinafter provided,
reasonable fees and disbursements of counsel) incurred by the respective
indemnified parties in connection with defending against any such losses,
claims, damages or liabilities or in connection with any investigation or
inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement), or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or supplement
thereto) or the omission or alleged omission to state therein a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that (1) the indemnity agreements of the Company and the Selling Securityholders
contained in this paragraph (a) shall not apply to any such losses, claims,
damages, liabilities or expenses if such statement or omission was made in
reliance upon and in conformity with information furnished as herein stated or
otherwise furnished in writing to the Company by or on behalf of any Underwriter
for use in any Preliminary Prospectus or the Registration Statement or the
Prospectus or any such amendment thereof or supplement thereto, (2) the
indemnity agreement contained in this paragraph (a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any such losses, claims, damages, liabilities or
expenses purchased the Stock which is the subject thereof (or to the benefit of
any person controlling such Underwriter) if at or prior to the written
confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
(excluding the documents incorporated therein by reference) and the untrue
statement or omission of a material fact contained in such Preliminary
Prospectus was corrected in the Prospectus (or the Prospectus as amended or
supplemented) unless the failure is the result of noncompliance by the Company
with paragraph (c) of Section 6 hereof, and (3) each Selling Securityholder
shall only be liable under this paragraph with respect to (A) information
pertaining to such Selling Securityholder furnished by or on behalf of such
Selling Securityholder for use in any Preliminary Prospectus or the Registration
Statement or the Prospectus or any such amendment thereof or supplement thereto
or (B) facts that would constitute a breach of any representation or warranty of
such Selling Securityholder set forth in Section 2(b) hereof. The indemnity
agreements of the Company and the Selling Securityholders contained in this
paragraph (a) and the representations and warranties of the Company and the
Selling Securityholders contained in Section 2 hereof shall remain operative and
in full force and effect regardless of any investigation made by or on behalf of
any indemnified party and shall survive the delivery of and payment for the
Stock.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its officers who signs the Registration Statement on his
own behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act, and the Selling Securityholders from and against any
and all losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Securities Act,
the Exchange Act, or the common law or otherwise and to reimburse each of them
for any legal or other reasonable expenses (including, except as otherwise
hereinafter provided, reasonable fees and disbursements of counsel) incurred by
the respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement) or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading or (ii) any untrue
statement or alleged untrue statement of a material fact contained in the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment thereof or supplement thereto) or the omission or
alleged omission to state therein a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, if such
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<PAGE>
statement or omission was made in reliance upon and in conformity with
information furnished as herein stated or otherwise furnished in writing to the
Company by or on behalf of such indemnifying Underwriter for use in the
Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto. The indemnity agreement of each Underwriter contained in
this paragraph (b) shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any indemnified party
and shall survive the delivery of and payment for the Stock.
(c) Each party indemnified under the provision of paragraphs (a) and
(b) of this Section 7 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (herein called the "Notice") of
such service or notification to the party or parties from whom indemnification
may be sought hereunder. No indemnification provided for in such paragraphs
shall be available to any party who shall fail so to give the Notice if the
party to whom such Notice was not given was unaware of the action, suit,
investigation, inquiry or proceeding to which the Notice would have related and
was prejudiced by the failure to give the Notice, but the omission so to notify
such indemnifying party or parties of any such service or notification shall not
relieve such indemnifying party or parties from any liability which it or they
may have to the indemnified party for contribution or otherwise than on account
of such indemnity agreement. Any indemnifying party shall be entitled at its own
expense to participate in the defense of any action, suit or proceeding against,
or investigation or inquiry of, an indemnified party. Any indemnifying party
shall be entitled, if it so elects within a reasonable time after receipt of the
Notice by giving written notice (herein called the "Notice of Defense") to the
indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or parties
shall be entitled to conduct the defense to the extent reasonably determined by
such counsel to be necessary to protect the interests of the indemnified party
or parties and (ii) in any event, the indemnified party or parties shall be
entitled to have counsel chosen by such indemnified party or parties participate
in, but not conduct, the defense. If, within a reasonable time after receipt of
the Notice, an indemnifying party gives a Notice of Defense and the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under paragraphs (a) through (c) of this Section 7 for any legal or other
expenses subsequently incurred by the indemnified party or parties in connection
with the defense of the action, suit, investigation, inquiry or proceeding,
except that (A) the indemnifying party or parties shall bear the legal and other
expenses incurred in connection with the conduct of the defense as referred to
in clause (i) of the proviso to the preceding sentence and (B) the indemnifying
party or parties shall bear such other expenses as it or they have authorized to
be incurred by the indemnified party or parties. If, within a reasonable time
after receipt of the Notice, no Notice of Defense has been given, the
indemnifying party or parties shall be responsible for any legal or other
expenses incurred by the indemnified party or parties in connection with the
defense of the action, suit, investigation, inquiry or proceeding.
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 7 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Stock or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Selling Securityholders on the one hand and the Underwriters on
the other shall be deemed to be in the same respective proportions as the total
net proceeds from the offering of the Stock received by the Company and the
Selling Securityholders and the total underwriting discount
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received by the Underwriters, as set forth in the table on the cover page of the
Prospectus, bear to the aggregate public offering price of the Stock. Relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by each
indemnifying party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this paragraph
(d). The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities, or actions in respect thereof, referred to in the first
sentence of this paragraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigation, preparing to defend or defending against any action or claim
which is the subject of this paragraph (d). Notwithstanding the provisions of
this paragraph (d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the Stock purchased by such
Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this paragraph (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (c) of this Section 7).
(e) Neither the Company nor the Selling Securityholders will, without
the prior written consent of each Underwriter, settle or compromise or consent
to the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not such Underwriter or any person who controls such Underwriter within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act is
a party to such claim, action, suit or proceeding) unless such settlement,
compromise or consent includes an unconditional release of such Underwriter and
each such controlling person from all liability arising out of such claim,
action, suit or proceeding.
(f) The liability of each Selling Securityholder under such Selling
Securityholder's representations and warranties in Section 2 hereof and under
the indemnity and reimbursement agreements contained in the provisions of this
Section 7 shall be limited to an amount equal to the net proceeds received by
such Selling Securityholder for the Stock sold by such Selling Securityholder to
the Underwriters. The Company and the Selling Securityholders may agree, as
among themselves and without limiting the rights of the Underwriters under this
Agreement, as to the respective amounts of such liability for which they each
shall be responsible.
8. Termination. This Agreement may be terminated by you at any time
prior to the Closing Date by giving written notice to the Company and the
Selling Securityholders if after the date of this Agreement trading in the
Common Stock shall have been suspended, or if there shall have occurred (i) the
engagement in hostilities or an escalation of major hostilities by the United
States or the declaration of war or a national emergency by the United States on
or after the date hereof, (ii) any outbreak of hostilities or other national or
international calamity or crisis or change in economic or political conditions
if the effect of such outbreak, calamity, crisis or change in economic or
political conditions in the financial markets of the United States would, in the
Underwriters' reasonable judgment, make the offering or delivery of the Stock
impracticable, (iii) suspension of trading in securities generally or a material
adverse decline in value of securities generally on the New York Stock Exchange,
the American Stock Exchange or The Nasdaq Stock Market, or limitations on prices
(other than limitations on hours or numbers of days of trading) for securities
on either such exchange or system, (iv) suspension of trading in securities of
the Company on the New York Stock Exchange, the American Stock Exchange or the
Nasdaq Stock Market, (v) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation,
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<PAGE>
rule or order of, or commencement of any proceeding or investigation by, any
court, legislative body, agency or other governmental authority which in the
Underwriters' reasonable opinion materially and adversely affects or will
materially or adversely affect the business or operations of the Company, (vi)
declaration of a general banking moratorium by either federal or New York State
authorities or (vii) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in the
Underwriters' reasonable opinion has a material adverse effect on the securities
markets in the United States. If this Agreement shall be terminated pursuant to
this Section 8, there shall be no liability of the Company or the Selling
Securityholders to the Underwriters and no liability of the Underwriters to the
Company or the Selling Securityholders; provided, however, that in the event of
any such termination the Company agrees to indemnify and hold harmless the
Underwriters from all costs or expenses incident to the performance of the
obligations of the Company and the Selling Securityholders under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof.
9. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company and by the Selling Securityholders of all their
respective obligations to be performed hereunder at or prior to the Closing Date
or any later date on which Option Stock is to be purchased, as the case may be,
and to the following further conditions:
(a) The Registration Statement shall have become effective; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock hereunder
and the validity and form of the certificates representing the Stock, all
corporate proceedings and other legal matters incident to the foregoing, and the
form of the Registration Statement and of the Prospectus (except as to the
financial statements contained therein), shall have been approved at or prior to
the Closing Date by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
counsel for the Underwriters.
(c) You shall have received from Perkins Coie LLP, counsel for the
Company and special counsel for the Selling Securityholders solely for purposes
of the opinion referenced in the succeeding clause, an opinion, addressed to the
Underwriters and dated the Closing Date, covering the matters set forth in Annex
A hereto, and if Option Stock is purchased at any date after the Closing Date,
additional opinions from each such counsel, addressed to the Underwriters and
dated such later date, confirming that the statements expressed as of the
Closing Date in such opinions remain valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, not misleading, (ii) since the
Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set forth in such a
supplement or amendment, (iii) since the respective dates as of which
information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole, whether or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary course of business,
neither the Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein, (iv)
neither the Company nor any of its subsidiaries has any material contingent
obligations which are not disclosed in the Registration Statement and the
Prospectus, (v) there are not any pending or known threatened legal proceedings
to which the Company or any of its subsidiaries is a party or of which property
of the Company or any of its subsidiaries is the subject which are material and
which are not disclosed in the Registration Statement and the Prospectus, (vi)
there are not any franchises, contracts, leases or other documents which are
required to be filed as exhibits to the Registration Statement which have not
been filed as required, (vii) the representations and warranties of the Company
herein are true and correct in all material respects as of the Closing Date or
any later date on which Option Stock is to be purchased, as the case may be, and
(viii) there has not been any material change in the market for securities in
general or
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<PAGE>
in political, financial or economic conditions from those reasonably foreseeable
as to render it impracticable in your reasonable judgment to make a public
offering of the Stock, or a material adverse change in market levels for
securities in general (or those of companies in particular) or financial or
economic conditions which render it inadvisable to proceed.
(e) You shall have received on the Closing Date and on any later date
on which Option Stock is purchased a certificate, dated the Closing Date or such
later date, as the case may be, and signed by the President or Chief Executive
Officer and the Chief Financial Officer of the Company, stating that the
respective signers of said certificate have carefully examined the Registration
Statement in the form in which it originally became effective and the Prospectus
contained therein and any supplements or amendments thereto, and that the
statements included in clauses (i) through (vii) of paragraph (d) of this
Section 9 are true and correct.
(f) You shall have received from Arthur Andersen L.L.P., a letter or
letters, addressed to the Underwriters and dated the Closing Date and any later
date on which Option Stock is purchased, confirming that they are independent
public accountants with respect to the Company within the meaning of the
Securities Act and the applicable published rules and regulations thereunder and
based upon the procedures described in their letter delivered to you
concurrently with the execution of this Agreement (herein called the "Original
Letter"), but carried out to a date not more than three business days prior to
the Closing Date or such later date on which Option Stock is purchased (i)
confirming, to the extent true, that the statements and conclusions set forth in
the Original Letter are accurate as of the Closing Date or such later date, as
the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of the Original Letter or to reflect the availability of more recent
financial statements, data or information. The letters shall not disclose any
change, or any development involving a prospective change, in or affecting the
business or properties of the Company or any of its subsidiaries which, in your
sole judgment, makes it impractical or inadvisable to proceed with the public
offering of the Stock or the purchase of the Option Stock as contemplated by the
Prospectus.
(g) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several jurisdictions,
or other evidence satisfactory to you, of the qualification referred to in
paragraph (f) of Section 6 hereof.
(h) Prior to the Closing Date, the Stock to be issued and sold by the
Company shall have been duly authorized for listing by the Nasdaq National
Market upon official notice of issuance.
(i) On or prior to the Closing Date, you shall have received from all
directors, officers, and beneficial holders of more than 5% of the outstanding
Common Stock shareholders agreements, in form reasonably satisfactory to
Hambrecht & Quist LLC, stating that without the prior written consent of
Hambrecht & Quist LLC on behalf of the Underwriters, such person or entity will
not, for a period of 90 days from the date hereof, directly or indirectly,
sell, offer, contract to sell, transfer the economic risk of ownership in, make
any short sale, pledge or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable or exercisable for or any rights to
purchase or acquire Common Stock, subject to specified limited exceptions.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Wilson Sonsini Goodrich & Rosati, Professional
Corporation, counsel for the Underwriters, shall be reasonably satisfied that
they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company and to the Selling Securityholders. Any such termination shall be
without liability of the Company or the Selling Securityholders to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholders; provided, however, that (i) in the event of such
termination, the Company agrees to indemnify and hold harmless the Underwriters
from all costs or expenses incident to the performance of the obligations of the
Company and the Selling Securityholders under this Agreement, including all
costs and expenses referred to in paragraphs (i) and (j) of Section 6 hereof,
and (ii) if this Agreement is terminated by you because of any refusal,
inability or failure on the part of the Company or the Selling Securityholders
to perform any agreement herein, to fulfill any
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of the conditions herein, or to comply with any provision hereof other than by
reason of a default by any of the Underwriters, the Company will reimburse the
Underwriters severally upon demand for all out-of-pocket expenses (including
reasonable fees and disbursements of counsel) that shall have been incurred by
them in connection with the transactions contemplated hereby.
10. Conditions of the Obligation of the Company and the Selling
Securityholders. The obligation of the Company and the Selling Securityholders
to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by the Company and the Selling
Securityholders by giving notice to you. Any such termination shall be without
liability of the Company and the Selling Securityholders to the Underwriters and
without liability of the Underwriters to the Company or the Selling
Securityholders; provided, however, that in the event of any such termination
the Company agrees to indemnify and hold harmless the Underwriters from all
costs or expenses incident to the performance of the obligations of the Company
and the Selling Securityholders under this Agreement, including all costs and
expenses referred to in paragraphs (i) and (j) of Section 6 hereof.
11. Reimbursement of Certain Expenses. In addition to their other
obligations under Section 7 of this Agreement, the Company agrees to reimburse
on a quarterly basis the Underwriters for all reasonable legal and other
expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
12. Persons Entitled to Benefit of Agreement. This Agreement shall inure
to the benefit of the Company, the Selling Securityholders and the several
Underwriters and, with respect to the provisions of Section 7 hereof, the
several parties (in addition to the Company, the Selling Securityholders and the
several Underwriters) indemnified under the provisions of said Section 7, and
their respective personal representatives, successors and assigns. Nothing in
this Agreement is intended or shall be construed to give to any other person,
firm or corporation any legal or equitable remedy or claim under or in respect
of this Agreement or any provision herein contained. The term "successors and
assigns" as herein used shall not include any purchaser, as such purchaser, of
any of the Stock from any of the several Underwriters.
13. Notices. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush Street,
San Francisco, California 94104; and if to the Company, shall be mailed,
telegraphed or delivered to it at its office, 521 S.E. Chkalov Drive, Vancouver,
Washington 98683, Attention: Brian W. Bender; and if to the Selling
Securityholders, shall be mailed, telegraphed or delivered to each Selling
Securityholder at the address for such Selling Securityholder set forth on
Schedule II to this Agreement. All notices given by telegraph shall be promptly
confirmed by letter.
14. Miscellaneous. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company, its officers and directors, or the Selling Securityholders, and (c)
delivery and payment for the Stock under this Agreement; provided, however, that
if this Agreement is terminated prior to the Closing Date, the provisions of
paragraphs (l) and (m) of Section 6 hereof shall be of no further force or
effect.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
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This Agreement shall be governed by, and construed in accordance with,
the laws of the State of California.
[Remainder of page intentionally left blank]
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Please sign and return to the Company and the Selling Securityholders
in care of the Company the enclosed duplicates of this letter, whereupon this
letter will become a binding agreement among the Company, the Selling
Securityholders and the several Underwriters in accordance with its terms.
Very truly yours,
EGGHEAD.COM, INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
SELLING SECURITYHOLDERS:
James F. Kalasky
Norman F. Hullinger
By:
------------------------------------
Attorney-in-fact
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
HAMBRECHT & QUIST LLC
BANCBOSTON ROBERTSON STEPHENS INC.
PRUDENTIAL SECURITIES INCORPORATED
U.S. BANCORP PIPER JAFFRAY INC.
By: Hambrecht & Quist LLC
By:
---------------------------------
Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
<PAGE>
SCHEDULE I
UNDERWRITERS
- ------------------------------------------------------- ------------------
Number of Shares
Underwriters to be Purchased
Hambrecht & Quist LLC..................................
BancBoston Robertson Stephens Inc......................
Prudential Securities Incorporated.....................
U.S. Bancorp Piper Jaffray Inc.........................
---------
Total......................................... 5,030,000
=========
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SCHEDULE II
SELLING SECURITYHOLDERS
- ----------------------------------------------- ----------------
Number of Shares
Name and Address of Selling Securityholders to be Sold
James F. Kalasky 20,000
c/o Egghead.com, Inc.
521 S.E. Chkalov Drive
Vancouver, Washington 95683
Norman F. Hullinger 10,000
c/o Egghead.com, Inc.
521 S.E. Chkalov Drive
Vancouver, Washington 95683
------
Total................................. 30,000
======
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Exhibit 5.1
[PERKINS COIE LLP LETTERHEAD]
March 10, 1999
Egghead.com, Inc.
521 S.E. Chkalov Drive
Vancouver, WA 98683
Ladies and Gentlemen:
We have acted as counsel to you in connection with the proceedings for the
authorization and issuance by Egghead.com, Inc. (the "Company") of up to
5,000,000 shares (the "Company Shares") of the Company's common stock, $.01
par value per share (the "Common Stock"), and the sale by certain of the
Company's shareholders (the "Selling Shareholders") of up to 30,000 shares
of Common Stock (the "Selling Shareholder Shares") together with up to an
additional 750,000 shares of Common Stock if and to the extent the underwriters
exercise an over-allotment option granted by the Company (the "Over-Allotment
Shares"), and the preparation and filing of a registration statement on Form S-3
(the "Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), which you are filing with the Securities and Exchange
Commission with respect to the Company Shares, the Selling Shareholder Shares
and the Over-Allotment Shares (collectively, the "Shares").
We have examined the Registration Statement and such documents and records
of the Company and other documents as we have deemed necessary for the purpose
of this opinion. Based upon the foregoing, we are of the opinion that upon the
happening of the following events:
a) the effectiveness of the Registration Statement and any amendments thereto,
b) due action by the Selling Shareholders authorizing the sale of the Selling
Shareholder Shares;
c) due execution by the Company and registration by its registrar of the
Shares,
d) the offering and sale of the Shares as contemplated by the Registration
Statement and in accordance with the resolutions of the Board of Directors
of the Company authorizing the sale and issuance of the Company Shares and
the aforesaid shareholder authorization, and
e) receipt by the Company and the Selling Shareholders of the consideration
required for the Shares as contemplated by the Registration Statement,
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the Shares will be duly authorized, validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and any amendment thereto, including any and all post-
effective amendments and any registration statement relating to the same
offering that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act, and to the reference to our firm in the Prospectus of the
Registration Statement under the heading "Legal Matters." In giving such
consent, we do not thereby admit that we are in the category of persons whose
consent is required under Section 7 of the Securities Act.
Very truly yours,
/s/ PERKINS COIE LLP
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
Amendment No. 2 to the registration statement.
/s/ Arthur Andersen LLP
Seattle, Washington,
March 10, 1999
