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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended April 3, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-16930
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EGGHEAD.COM, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1296187
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
521 S.E. Chkalov Drive
Vancouver, Washington 98683
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (360) 883-3447
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [_]
To the best of Egghead.com, Inc.'s knowledge, the aggregate market value of
the voting stock held by non-affiliates of the registrant at May 28, 1999 was
$313,000,000.
The number of shares of the registrants' Common Stock outstanding at May 28,
1999 was 30,733,602.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to
Egghead.com, Inc.'s 1999 Annual Meeting of Shareholders are incorporated by
reference into Part III of this Form 10-K.
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EGGHEAD.COM, INC.
TABLE OF CONTENTS
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PART I
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ITEM 1. BUSINESS...................................................... 3
ITEM 2. PROPERTIES.................................................... 22
ITEM 3. LEGAL PROCEEDINGS............................................. 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS.......................................... 23
ITEM 6. SELECTED FINANCIAL DATA....................................... 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................... 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..................................... 52
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 52
ITEM 11. EXECUTIVE COMPENSATION........................................ 52
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND........... 52
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 52
PART IV
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-
ITEM 14. K............................................................. 52
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PART I
Item 1. BUSINESS OF EGGHEAD
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements based on current expectations,
estimates and projections about Egghead.com's industry, management's beliefs
and certain assumptions made by management. When used in this report and
elsewhere by management, from time to time, the words "believes," "plans,"
"estimates," "intends," "anticipates," "seeks," and "expects" and similar
expressions are intended to identify forward-looking statements. These
forward-looking statements are not guarantees of future performance and are
subject to certain risks and uncertainties that are difficult to predict.
Accordingly, actual results may differ materially from those anticipated or
expressed in such statements. Potential risks and uncertainties include, among
others, those set forth herein under "Additional Factors That May Affect
Future Results." Particular attention should be paid to the cautionary
statements involving Egghead.com's limited online operating history,
anticipated losses, unpredictability of future revenues, potential
fluctuations in operating results, systems failures, business interruptions,
capacity constraints, systems development, management of growth, the intensely
competitive nature of the electronic commerce industry and reliance on third
parties, manufacturers, distributors and suppliers. Readers are cautioned not
to place undue reliance on the forward-looking statements, which speak only as
of the date made. Except as required by law, Egghead.com undertakes no
obligation to update any forward-looking statement, whether as a result of new
information, future events or otherwise. Readers, however, should carefully
review the factors set forth in other reports or documents that Egghead.com
files from time to time with the Securities and Exchange Commission ("SEC").
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. Egghead.com is a
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 $26.6 million in the
quarter ended March 28, 1998 to approximately $42.2 million in the quarter
ended April 3, 1999. 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
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among these three distinct shopping formats to satisfy a variety of their
product and budget needs. From March 28, 1998 to April 3, 1999, the number of
our customer accounts grew from approximately 460,000 to over 920,000. Repeat
customers generated over 59% of the orders at our online store in the quarter
ended April 3, 1999. 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.
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 began
operations primarily as a software reseller. We reincorporated in Delaware in
1985 and then reincorporated in Washington in 1988. We changed our name to
Egghead.com, Inc. in 1998. Unless the context otherwise requires, references
in this Annual Report on Form 10-K to "Egghead.com," "Egghead," "we," "our,"
and "us" refer to Egghead.com, Inc. and our wholly owned subsidiaries, Surplus
Software, Inc., 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 Annual
Report on Form 10-K.
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.
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 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.
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Egghead.com
Egghead.com is a leading online retailer of personal computer hardware,
software, peripherals and accessories. In the quarter ended April 3, 1999, we
had net sales of approximately $42.2 million, and repeat customers generated
over 59% 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. 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. 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.
Three Shopping Formats--Shop Three Times Smarter(SM). 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.
. 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
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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.
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 by leveraging brand recognition, promoting customer loyalty by providing
an outstanding shopping experience, strengthening core product offerings and
expanding into other merchandise categories, expanding into new markets,
maintaining and strengthening relationships with suppliers and distributors,
increasing our focus on technology and attracting and retaining exceptional
employees.
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 for 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. 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.
. 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.
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. 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 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
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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
During fiscal 1999, we spent an average of over $1.5 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, to promote the Egghead.com Web site through
their current search engines, community, information and/or e-mail sites. We
have also entered into an agreement with Be Free, Inc. to build and maintain
our affiliate sales channel. In addition, we place advertisements on various
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 April 3, 1999, over 2.8
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
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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.
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 11.2% of our aggregate merchandise purchases for fiscal
1999. We do not have any long-term contracts or arrangements with these
distributors that guarantee availability of merchandise.
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. We have
increased the functionality of our online order status to allow customers the
ability to see order status by order number, track the shipment of their order
and the generation of proactive e-mail informing customers of changes in order
status. In addition, we have increased the functionality of our search engine
so that customers can search for products by SKU, Uniform Product Code,
category and price. In addition, customers can set the number of items they
would like returned in their search and perform advanced search functions such
as all word matching, exact word matching and any word matching.
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
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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. 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 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., Dell Computer Corporation and NECX
Office and Personal Technology Center (in which Gateway 2000, Inc. has a
minority stake), and electronic software distributors such as Digital
River, Inc.;
. Companies offering Internet auctions, such as ONSALE, Inc., uBid, Inc.,
Amazon.com, 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. Recently some competitors
have begun selling certain products at or near the purchase price paid by them
to acquire the products. To improve our competitive position, we are focused
on increasing our level of customer service and maintaining competitive
pricing.
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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, or among competitors and suppliers, may emerge
and rapidly acquire market share. For example, Dell Computer Corporation and
Amazon.com, Inc. have agreed to provide links from their Web sites to new Web
pages that advertise their respective products. Also, manufacturers might
elect to sell or liquidate their products directly over the Internet. Many of
our current and potential competitors have significantly greater financial,
marketing, customer support, technical and other resources than we do. As a
result, they may be able to secure merchandise from suppliers on more
favorable terms than we can, and they may be able to respond more quickly to
changes in customer preference or to devote greater resources to the
development, promotion and sale of their merchandise than we can.
Sales Tax
We currently collect sales tax on sales of products delivered to residents
in the states of Washington and North Carolina. Various states have tried to
impose, on direct marketers, the burden of collecting sales taxes on the sale
of products shipped to state residents. The United States Supreme Court
affirmed its position that it is unlawful for a state to impose sales tax
collection obligations on an out-of-state mail order company whose only
contacts with the state are the distribution of catalogs and other advertising
materials through the mail and subsequent delivery of purchased goods from out
of state locations by parcel post and interstate common carriers. It is
possible that legislation may be passed to supersede the United State Supreme
Court's decision or the Court may change its position. Additionally, it is
currently uncertain as to whether electronic commerce, which will likely
include our Web sites' sales activities, will be subject to state sales tax.
The imposition of new sales tax collection obligations on us in states to
which we ship products would result in additional administrative expenses to
us and could result in price increases to our customers and in a competitive
disadvantage.
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 own a number of common law trademarks
and service marks, including certain "EGG" combination words.
Employees
As of April 3, 1999, we had approximately 295 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.
Additional Factors That May Affect Future Results
In addition to other information contained in this report, the following
factors could affect our actual results and could cause such results to differ
materially from those achieved in the past or expressed in our forward-looking
statements.
We have a limited online operating history which provides little information
with which to evaluate our electronic commerce business
In February 1998, we shifted our business emphasis to the Internet and
closed our remaining retail stores. We therefore have had only a limited
operating history as an electronic commerce company. As a result, there is
little information on which to evaluate our business and prospects as an
electronic commerce company. An
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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 April 3, 1999, we had a retained deficit of $109.2 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 competitive
pricing, marketing and advertising programs, offer additional categories of
merchandise for sale at our online store and improve and enhance our
technology, infrastructure and systems. These initiatives will likely result
in operating expenses that are higher than current operating expenses. We will
need to generate significant revenues to achieve profitability and to maintain
profitability if it is achieved. Although our revenues from electronic
commerce have grown in recent quarters, such growth rates may not be
sustainable and we may not become profitable in the future.
Our future revenues are unpredictable and our operating results may
fluctuate significantly
Because we have a limited operating history in electronic commerce and
because electronic commerce is a new, emerging market, we cannot accurately
forecast our revenues. Although our revenues from electronic commerce have
grown in recent quarters, you should not use these past results to predict our
future results. We base our current and future expenditures on our plans and
estimates of future revenues. Our expenses are, to a large degree, fixed. We
may be unable to adjust spending in a timely manner if we experience an
unexpected shortfall in our revenues.
We expect that our future quarterly operating results will fluctuate
significantly because of many factors, several of which we do not control.
Such factors include:
. our ability to satisfy customers, retain existing customers and attract
new customers at a steady rate;
. pricing competition, including, but not limited to, pricing which results
in no gross margin on certain products;
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. 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;
. 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, the
competitive pricing of our products and the availability of merchandise from
our suppliers. We cannot forecast the number of future customers, the future
pricing strategies of our competitors or the future availability of
merchandise with any degree of certainty. It is clear, however, that if the
number of customers does not increase, if our gross margins decrease or if the
amount of merchandise available to us decreases substantially, our business
will suffer.
Because of these and other factors, we believe that period-to-period
comparisons of our historical results of operations are not good indicators of
our future performance.
Our operating results may fluctuate depending on the season
We expect to experience fluctuations in our operating results because of
seasonal fluctuations in traditional retail patterns. Retail sales in the
traditional retail industry tend to be significantly higher in the fourth
calendar quarter of each year than in the preceding three quarters. As a
result of such factors, our operating results in one or more future quarters
may fluctuate and, therefore, period-to-period comparisons of our historical
results of operations may no be good indicators of our future performance.
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. We have experienced temporary power failures and
telecommunications failures from time to time at this facility. Our systems
are vulnerable to damage from fire, floods, power loss, telecommunications
failures, break-ins, earthquakes and other events. Although we have
implemented network security measures, our servers are vulnerable to computer
viruses, physical or electronic break-ins, attempts by third parties
deliberately to exceed the capacity of our systems and similar disruptions.
Any of these events could lead to interruptions or delays in service, loss of
data or the inability to accept and confirm customer orders. Generally, we do
not have redundant
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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.
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.
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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., Dell Computer Corporation and NECX
Office and Personal Technology Center (in which Gateway 2000, Inc. has a
minority stake), and electronic software distributors such as Digital
River, Inc.;
. Companies offering Internet auctions, such as ONSALE, Inc., uBid, Inc.,
Amazon.com, 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 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. Recently some competitors
have begun selling certain products at or near the purchase price paid by them
to acquire the products. To improve our competitive position, we are focused
on increasing our level of customer service and maintaining competitive
pricing.
Current and potential competitors have established or may establish
cooperative relationships among themselves or directly with suppliers to
obtain exclusive or semi-exclusive sources of merchandise. New competitors or
alliances among competitors, or among competitors and suppliers, may emerge
and rapidly acquire market share. For example, Dell Computer Corporation and
Amazon.com, Inc. have agreed to provide links from their Web sites to new Web
pages that advertise their respective products. Also, manufacturers might
elect to sell or liquidate their products directly over the Internet. Many of
our current and potential competitors have significantly greater financial,
marketing, customer support, technical and other resources than we do. As a
result, they may be able to secure merchandise from suppliers on more
favorable terms than we can, and they
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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 approximately 11.2% of our aggregate
merchandise purchases for fiscal 1999. We have no long-term contracts or
arrangements with manufacturers, distributors or suppliers that guarantee
availability of merchandise for our online store. We cannot assure you that
current manufacturers, distributors and suppliers will continue to sell
merchandise to us or otherwise provide merchandise for sale by us or that we
will be able to establish new manufacturer, distributor or supplier
relationships that ensure merchandise will be available for sale by us. We
also rely on many of our distributors and suppliers to ship merchandise to
customers. We have limited control over the shipping procedures of these
distributors and suppliers, and such shipments have often been subject to
delays. Most merchandise sold by us carries a warranty from the manufacturer
or the supplier, and we are not obligated to accept merchandise returns.
Nevertheless, we in fact have accepted returns from customers for which we did
not receive reimbursements from our 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.
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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 identified and initiated
communications with third parties whose networks, systems or services are
critical to our business to determine the status of their Year 2000
compliance. We cannot assure you that all such parties will provide accurate
and complete information, or that all their networks, systems or services will
achieve full Year 2000 compliance in a timely fashion. The most reasonably
likely worst-case scenario for us resulting from Year 2000 issues is that
third-party noncompliance would disrupt, reduce or eliminate for a period of
time the ability of our customers to connect with and purchase products at our
Web site. If such occurrences are frequent or long in duration, they could
materially adversely affect our business. The compliance of third-party
global, national and local communications networks and the compliance of
individual Internet service providers is not within our control. Accordingly,
a contingency plan for this worst-case scenario does not exist, and we do not
believe we will be able to develop one.
We rely on the quality of the products that manufacturers, distributors and
suppliers provide to us for sale to our customers. To the extent that the
products we sell are not Year 2000 compliant, we may be subject to claims by
customers that could materially adversely affect our business or damage our
reputation.
We 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
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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. 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. In addition, we are
moving our remaining general and administrative functions, primarily the
finance department, from Spokane, Washington to Vancouver. 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,
administrative and distribution functions 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.
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.
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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.
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
19
<PAGE>
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 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 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 fifteen months. Thereafter, we may need to
raise additional funds. However, we may need to raise additional funds sooner
in order to fund more rapid expansion, to develop new or enhanced services or
products, to respond to competitive pressures or to acquire complementary
businesses, products, services or technologies. We cannot assure you that
additional financing will be available, or available on terms favorable to us.
If such financing is not available, we may not be able to fund our expansion,
take advantage of
20
<PAGE>
unanticipated acquisition opportunities, develop or enhance services, products
or technologies, or respond to competitive pressures.
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 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 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 states of Washington and North Carolina. 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 restated articles of incorporation and restated bylaws provide director
and officer indemnification and limit their liability
We may have to spend significant resources indemnifying our officers and
directors or paying for damages caused by their conduct. The Washington
Business Corporation Act provides for broad indemnification by corporations of
their officers and directors, and our restated bylaws implement this
indemnification to the fullest extent permitted under the Act as it currently
exists or as it may be amended in the future. Similarly, our restated articles
of incorporation include a provision that limits the liability of our
directors to the fullest 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
21
<PAGE>
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, preferred stock could include
terms calculated to delay or prevent a change in control of Egghead.com or
make the removal of management more difficult. Also, our restated bylaws
contain advance notice procedures with respect to shareholder proposals and
the nomination of candidates for election as directors which could make it
more difficult for our shareholders to propose a change of control or to
change our board of directors. In addition, our restated articles of
incorporation and our restated bylaws provide for the division of our board of
directors into three classes, with the directors in each class serving for
three-year terms, and one class being elected each year by our shareholders.
Because this system of electing and removing directors generally makes it more
difficult for shareholders to replace a majority of the board of directors, it
may tend to discourage a third party from making a tender offer or otherwise
attempting to gain control of Egghead.com and may preserve the tenure of the
current board of directors. Furthermore, Washington law imposes restrictions
on certain transactions between a corporation and certain significant
shareholders. The Washington Business Corporation Act prohibits a target
corporation, with certain exceptions, from engaging in certain "significant
business transactions" with an "acquiring person" (generally a person or group
of persons that beneficially owns 10% or more of the outstanding voting
securities of the target corporation) for five years from the date the person
or group of persons became an "acquiring person," unless a majority of the
target corporation's board of directors approved the significant business
transaction before the person or group of persons became an acquiring person.
Generally, a "significant business transaction" includes a merger, asset or
stock sale, and certain other transactions resulting in a financial benefit to
the acquiring person. After the five-year period, a significant business
transaction may occur, as long as it complies with certain "fair price"
provisions of the statute. This provision may delay or prevent a change of
control of Egghead.com, even if such change of control would benefit our
shareholders.
Item 2. Properties
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 June 1999. Our primary warehousing and
distribution operations are located in a facility in Vancouver under a lease
that expires in July 1999. In May 1999, we signed a lease for a larger
distribution facility in Vancouver. This lease expires in November 2000. We
also own a commercial building in Kalispell, Montana, which is currently being
marketed for sale.
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.
Item 3. 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.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders in the fourth
quarter of fiscal year 1999.
22
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
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. For current price information, the Egghead shareholders are
urged to consult publicly available sources.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
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.............................................. $26.63 $12.00
</TABLE>
On April 3, 1999, the last reported sale price of our common stock on the
Nasdaq National Market was $17.8125 per share. As of April 3, 1999, there were
approximately 1,310 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.
23
<PAGE>
Item 6. Selected Financial Data
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 herein. 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
---------------------------------------------------
April 1, March 30, March 29, March 28, April 3,
1995 1996 1997 1998 1999
-------- --------- --------- --------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net sales:
Online...................... $ -- $ 149 $ 1,408 $ 59,737 $148,721
Retail...................... 434,021 403,692 359,307 233,342 --
-------- -------- -------- -------- --------
Total net sales........... 434,021 403,841 360,715 293,079 148,721
-------- -------- -------- -------- --------
Cost of sales:
Online...................... -- 95 1,159 52,016 134,341
Retail...................... 361,567 334,484 303,092 205,159 --
-------- -------- -------- -------- --------
Total cost of sales....... 361,567 334,579 304,251 257,175 134,341
-------- -------- -------- -------- --------
Gross profit................. 72,454 69,262 56,464 35,904 14,380
Selling and marketing
expenses:
Online...................... -- 29 382 10,118 34,722
Retail...................... 54,256 59,210 56,970 38,453 --
-------- -------- -------- -------- --------
Total selling and
marketing expenses....... 54,256 59,239 57,352 49,219 34,722
General and administrative
expenses.................... 19,594 23,257 24,065 18,847 16,084
Depreciation and amortization
expenses.................... 7,363 7,569 7,352 5,809 4,560
Restructuring and impairment
charges..................... -- -- 15,597 19,500 --
-------- -------- -------- -------- --------
Operating loss............... (8,759) (20,803) (47,902) (57,471) (40,986)
Other income, net(1)......... 3,362 2,652 3,729 2,940 6,563
-------- -------- -------- -------- --------
Loss from continuing
operations before income
taxes....................... (5,397) (18,151) (44,173) (54,531) (34,423)
Income tax benefit
(provision)................. 2,106 7,030 (4,788) -- --
-------- -------- -------- -------- --------
Loss from continuing
operations.................. (3,291) (11,121) (48,961) (54,531) (34,423)
-------- -------- -------- -------- --------
Income (loss) from
discontinued operations, net
of tax...................... 5,959 376 (12,254) 4,300 --
Gain on disposal of
discontinued operations, net
of tax...................... -- -- 22,286 -- --
-------- -------- -------- -------- --------
Income from discontinued
operations.................. 5,959 376 10,032 4,300 --
-------- -------- -------- -------- --------
Net income (loss) before
cumulative effect of change
in accounting principles.... 2,668 (10,745) (38,929) (50,231) (34,423)
Cumulative effect of change
in accounting principles,
net of tax.................. -- -- (711) -- --
-------- -------- -------- -------- --------
Net income (loss)............ $ 2,668 $(10,745) $(39,640) $(50,231) (34,423)
======== ======== ======== ======== ========
Basic earnings (loss) per
share:
Continuing operations....... $ (0.19) $ (0.64) $ (2.78) $ (2.60) (1.40)
Discontinued operations,
net........................ 0.34 0.02 0.57 0.20 --
Cumulative effect of change
in accounting principle,
net........................ -- -- (0.04) -- --
-------- -------- -------- -------- --------
Basic net income (loss) per
share....................... $ 0.15 $ (0.62) $ (2.25) $ (2.40) (1.40)
======== ======== ======== ======== ========
Shares used in per share
calculations................ 17,281 17,437 17,581 20,967 24,569
<CAPTION>
April 1, March 30, March 29, March 28, April 3,
1995 1996 1997 1998 1999
-------- --------- --------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents.... $ 42,592 $ 49,590 $ 83,473 $ 67,381 $119,467
Working capital.............. 118,728 105,113 87,250 50,135 99,950
Total assets................. 270,141 284,232 175,520 131,152 176,185
Total shareholders' equity... 146,416 139,269 100,047 86,087 140,994
</TABLE>
See Notes to Consolidated Financial Statements.
24
<PAGE>
Selected financial data for each quarter of fiscal years 1999 and 1998
follows (in millions, except per share data). Each quarter consists of 13
weeks except the fourth quarter of fiscal 1999, which had 14 weeks.
<TABLE>
<CAPTION>
Second Fourth
First Quarter Quarter Third Quarter Quarter
-------------- -------------- -------------- --------------
1998 1999 1998 1999 1998 1999 1998 1999
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $ 56.2 $ 29.5 $ 63.3 $ 35.1 $ 99.1 $ 41.9 $ 74.5 $ 42.2
------ ------ ------ ------ ------ ------ ------ ------
Gross margin............ 9.2 3.1 11.3 3.7 15.6 3.3 (0.2) 4.3
Selling and marketing
expense................ 9.0 5.8 10.8 6.9 16.4 11.0 13.0 11.0
General and
administrative
expense................ 3.7 3.1 4.9 3.7 4.8 4.1 5.5 5.2
Operating loss.......... (4.7) (6.6) (5.7) (7.8) (7.3) (12.9) (39.8) (13.7)
Loss from continuing
operations before
income taxes........... (3.7) (5.5) (4.9) (7.2) (6.6) (8.9) (39.3) (12.8)
Loss from continuing
operations............. (3.7) (5.5) (4.9) (7.2) (6.6) (8.9) (39.3) (12.8)
Loss per share from
continuing operations.. $(0.21) $(0.24) $(0.24) $(0.30) $(0.29) $(0.36) $(1.70) $(0.50)
</TABLE>
See Notes to Consolidated Financial Statements.
25
<PAGE>
Item 7. 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 report. 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 "Item 1. Business--
Additional Factors That May Affect Future Results" and elsewhere in this
report.
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 report as discontinued operations. See
Note 10 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. In March 1999 we announced the move of our remaining general
and administrative functions from Liberty Lake, Washington to Vancouver.
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 fiscal 1998, 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 using 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.
26
<PAGE>
Set forth below for fiscal 1998 are certain online pro forma operations
data:
<TABLE>
<CAPTION>
As a Percentage
of Online
Pro Forma
Online Pro Forma Results Amount Net Sales
------------------------ -------------- ---------------
(in thousands)
<S> <C> <C>
Online net sales.............................. $81,337 100.0%
Online cost of sales.......................... 69,726 85.7
------- -----
Online gross profit........................... 11,611 14.3
Online selling and marketing expenses......... $16,152 19.9%
</TABLE>
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 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 April 3, 1999, we had a retained deficit of $109.2 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 should not be
relied upon as an indication of future performance.
27
<PAGE>
Results of Operations
Results of Operations--Fiscal Years 1999, 1998 and 1997
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
---------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Net sales:
Online.................... 0.4 % 20.4 % 100.0 %
Retail.................... 99.6 79.6 --
----- ----- -----
Total net sales......... 100.0 100.0 100.0
----- ----- -----
Cost of sales(1):
Online.................... 82.3 87.1 90.3
Retail.................... 84.4 87.9 --
----- ----- -----
Total cost of sales..... 84.3 87.7 90.3
----- ----- -----
Gross margin................ 15.7 12.3 9.7
Selling and marketing
expenses(2):
Online.................... 27.1 16.9 23.4
Retail.................... 15.9 16.5 --
----- ----- -----
Total selling and
marketing expenses..... 15.9 16.6 23.4
General and administrative
expenses................... 6.7 6.6 10.8
Depreciation and
amortization expenses...... 2.0 2.0 3.1
Restructuring and impairment
charges.................... 4.3 6.7 --
----- ----- -----
Operating loss.............. (13.2) (19.6) (27.6)
Other income, net........... 1.0 1.0 4.4
----- ----- -----
Loss before income taxes.... (12.2)% (18.6)% (23.2)%
===== ===== =====
</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.
Net Sales. Total online net sales for fiscal 1999 increased 83% to $148.7
million as compared to the online pro forma net sales of $81.3 million for
fiscal 1998. Net sales through the online store during fiscal 1999 increased
211% to $119.1 million from $38.4 million (online pro forma) for 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 auctions and an increase in categories and amount
of merchandise offered. In addition, our online net sales benefited from an
increase in our customer accounts to over 920,000 as of April 3, 1999 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 fiscal 1999 decreased 31% to $29.6 million from $43.0 million
(online pro forma) during fiscal 1998. Management intends to continue 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 fiscal 1999 decreased to $148.7 million from $293.1
million for fiscal 1998. This decrease was primarily due to the closure of the
retail store chain, which accounted for net sales of $233.3 million for fiscal
1998, and was partially offset by the increase in online net sales.
28
<PAGE>
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. 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. We closed 70
stores during the fourth quarter of fiscal 1997.
Gross Profit. Gross profit consist 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 fiscal 1999
increased to $14.4 million compared to gross profit of $11.6 million (online
pro forma) for fiscal 1998. The gross margin from online net sales for fiscal
1999 was 9.7% as compared to 14.3% (online pro forma) for 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 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. Recently some competitors have begun selling current
version goods commonly available from major distributors at or near the
purchase price paid by them to acquire the products. Although we have not
adopted this pricing strategy we have responded to these competitive pressures
by reducing the selling prices on certain products. This reduction in selling
prices has had and is expected to have a material adverse impact on our first
quarter fiscal 2000 gross margins when compared to our historical online gross
margins. Management has initiated, and will continue to initiate actions in an
attempt to offset this reduction in gross margins; however, there can be no
assurance that gross margins will improve after the first fiscal quarter of
2000.
Total gross profit for fiscal 1999 decreased to $14.4 million compared to
$35.9 million for fiscal 1998. This decrease was primarily due to the closure
of the retail store chain, which contributed gross profit of $28.2 million in
fiscal 1998, and was partially offset by the increase in online net sales.
The total 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 our 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%.
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 online selling and marketing expenses for fiscal
1999 increased 114% to $34.7 million as compared to selling and marketing
expenses of $16.2 million (online pro forma) for fiscal 1998. Online selling
and marketing expense as a percentage of online net sales increased to 23.4%
for fiscal 1999 as compared to 19.9% (online pro forma) for fiscal 1998. The
increase in selling and marketing expenses was primarily due to increased
promotions 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 continue 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 fiscal 1999 decreased to $34.7
million as compared to $49.2 million for 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 the acquired operations of Surplus Direct.
29
<PAGE>
The total selling and marketing expenses for fiscal 1998 were $49.2 million,
a reduction from $57.4 million for fiscal 1997. 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. 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.
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 fiscal 1999 decreased
15% to $16.1 million as compared to $18.9 million for fiscal 1998. The
decrease was primarily due to the recapitalization of our wholly owned
subsidiary Elekom Corporation in November 1997 and expenses incurred in fiscal
1998 related to the acquisition of Surplus Direct. See Notes 7 and 11 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 fiscal 1998. After the recapitalization, the results of Elekom were
recorded using the equity method of accounting. Our remaining interest in
Elekom was sold in November 1998. General and administrative expenses as
percentage of net sales increased to 10.8% for fiscal 1999 as compared to 6.4%
for fiscal 1998. This increase was primarily due 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 support
systems.
The general and administrative expenses for fiscal 1998 were $18.9 million,
a reduction from $24.1 million in fiscal 1997. 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.
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 fiscal 1999
decreased to $2.9 million as compared to $4.8 million for fiscal 1998,
primarily due to the closure of our remaining retail stores in February 1998.
Amortization expense for fiscal 1999 increased to $1.7 million as compared to
$1.0 million for fiscal 1998. This increase in amortization expense reflects a
full year of amortization of the goodwill recorded for the Surplus Direct
acquisition in August 1997. See Note 7 of Notes to Consolidated Financial
Statements.
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. Amortization expense of $1.0 million in fiscal 1998 reflects
the amortization of goodwill from the Surplus Direct acquisition.
Restructuring and Impairment Charges. In the fourth quarter of fiscal 1999,
we announced plans to move the remaining headquarters functions at Liberty
Lake, Washington to Vancouver, Washington. We recorded a restructuring charge
of approximately $890,000 related to the move. This restructuring charge was
offset by a reduction of approximately the same amount in fiscal 1998
restructuring reserves. We anticipate that the obligations will be
substantially settled by the end of the third quarter of fiscal 2000.
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
30
<PAGE>
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.
Other Income, Net. Other income, net for fiscal 1999 increased to $6.6
million as compared to $2.9 million for fiscal 1998 and $3.7 million. 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 11 of Notes to
Consolidated Financial Statements. Interest income for fiscal 1999 was $3.5
million as compared to $3.2 million for fiscal 1998 and $2.3 million for
fiscal 1997.
Income Taxes. Due to our net operating losses, we did not record a provision
for income taxes for fiscal 1999 or fiscal 1998. Given our recent losses, we
do not believe that our deferred tax assets meet the realization criteria of
SFAS 109. Under SFAS 109, the realization of the deferred tax assets depends
on generating future taxable income. We believe 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 a tax benefit for future operating results.
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. 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.
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 10 of Notes to Consolidated Financial Statements.
31
<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, the proceeds relating
to the sale of the Corporate, Government and Educational Sales Division and
the proceeds from a public offering of common stock.
Cash and cash equivalents increased to $119.5 million as of April 3, 1999
from $67.4 million at March 28, 1998. The increase in the cash balance was
primarily due to net proceeds of $72.9 million from the common stock offering,
net proceeds of $17.0 million from 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. These increases were partially offset by the
net operating loss of $34.4 million, the decrease in restructuring liabilities
of $10.7 million and the purchase of property and equipment of $9.2 million.
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 $38.5 million for fiscal 1999 was
primarily due to the net loss of $34.4 million and a decrease in restructuring
liabilities of $10.7 million, partially offset by a decrease in accounts
receivable of $3.4 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 $1.3 million for 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 $9.2 million primarily related to the upgrading of the Web
site software platforms and related hardware. See Note 11 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 $89.3 million for fiscal 1999
consisted of net proceeds of $72.9 million from the common stock offering and
net proceeds of $17.0 million of 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 April 3, 1999, our principal source of liquidity was $119.5 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. As of April 3, 1999, there
were approximately $116,000 of borrowings outstanding under this line of
credit. As of April 3, 1999, our principal commitments consisted of
obligations in connection with operating leases and commitments for
advertising and promotional arrangements. Although we have no material
commitments for capital expenditures, we anticipate future purchases related
to enhancements of our Web site to improve functionality and navigation,
incorporating features that are intended to improve the customer shopping
experience, and scalability and performance of our Web site. We estimate
capital expenditures through the end of fiscal 2000 to be at least $10.2
million. See Note 6 of Notes to Consolidated Financial Statements.
32
<PAGE>
We believe that 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 fifteen months. Our future liquidity and
capital requirements will depend upon numerous factors discussed under "Item
1. Business--Additional Factors That May Affect Future Results." In addition,
we may, from time to time, consider the acquisition of or investment in
complementary businesses, products, services and technologies, which might
increase our liquidity requirements or cause us to issue additional equity or
debt securities. Although we believe that our current cash and cash equivalent
balances will be sufficient for at least the next fifteen 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 have completed the
assessment and planning phase for addressing our remaining significant
internal systems for Year 2000 compliance. 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 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 identified and initiated communications with those
third parties whose networks, systems or services are critical to our business
to determine the status of these entities' Year 2000 compliance. We cannot
assure you that all such parties will provide accurate and complete
information, or that all their networks, systems or services will achieve full
Year 2000 compliance in a timely fashion. In an attempt to mitigate the risk
of noncompliance by certain critical service providers, we have begun to
diversify our use of certain services among several providers. However, we
cannot assure you that this diversification will mitigate the risk of
noncompliance.
33
<PAGE>
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 2002.
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.
34
<PAGE>
Item 8. Financial Statements and Supplementary Data
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 April 3, 1999 and March
28, 1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three fiscal years in the period ended
April 3, 1999. These financial statements are the responsibility of
Egghead.com'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 April 3, 1999 and March 28, 1998, and the results of their
operations and their cash flows for each of the three fiscal years in the
period ended April 3, 1999, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
Seattle, Washington
May 3, 1999
35
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
March 28, April 3,
1998 1999
-------- ---------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents............................... $ 67,381 $ 119,467
Accounts receivable, net of allowance for doubtful
accounts of $2,611 and $786, respectively.............. 5,670 2,316
Merchandise inventories, net............................ 12,923 12,599
Prepaid expenses and other current assets............... 999 759
Property held for sale.................................. 6,823 --
-------- ---------
Total current assets.................................. 93,796 135,141
-------- ---------
Property and equipment, net............................... 3,795 9,196
Goodwill, net............................................. 33,225 31,631
Other assets.............................................. 336 217
-------- ---------
$131,152 $ 176,185
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable........................................ $ 15,834 $ 16,276
Accrued liabilities..................................... 12,002 12,398
Reserves and liabilities related to restructuring....... 17,226 6,517
-------- ---------
Total current liabilities............................. 45,062 35,191
-------- ---------
Long-term liabilities..................................... 3 --
-------- ---------
Total liabilities..................................... 45,065 35,191
-------- ---------
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; 23,492,502 and 30,675,059 shares issued and
outstanding, respectively.............................. 235 307
Additional paid-in capital.............................. 160,669 249,927
Retained deficit........................................ (74,817) (109,240)
-------- ---------
Total shareholders' equity............................ 86,087 140,994
-------- ---------
$131,152 $ 176,185
======== =========
</TABLE>
See Notes to Consolidated Financial Statements.
36
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net sales:
Online.......................................... $ 1,408 $ 59,737 $148,721
Retail.......................................... 359,307 233,342 --
-------- -------- --------
360,715 293,079 148,721
-------- -------- --------
Cost of sales:
Online.......................................... 1,159 52,016 134,341
Retail.......................................... 303,092 205,159 --
-------- -------- --------
304,251 257,175 134,341
-------- -------- --------
Gross margin:
Online.......................................... 249 7,721 14,380
Retail.......................................... 56,215 28,183 --
-------- -------- --------
56,464 35,904 14,380
-------- -------- --------
Selling and marketing expense..................... 57,352 49,219 34,722
General and administrative expense................ 24,065 18,847 16,084
Restructure and impairment costs.................. 15,597 19,500 --
Amortization of goodwill.......................... -- 1,009 1,708
Depreciation...................................... 7,352 4,800 2,852
-------- -------- --------
Operating loss.................................... (47,902) (57,471) (40,986)
Other income, net................................. 3,729 2,940 6,563
-------- -------- --------
Loss from continuing operations before income
taxes............................................ (44,173) (54,531) (34,423)
Income tax expense................................ (4,788) -- --
-------- -------- --------
Net loss from continuing operations before
discontinued operations and change in accounting
principle........................................ (48,961) (54,531) (34,423)
Discontinued operations:
Gain on disposal of discontinued operations, net
of tax expense of $14,249...................... 22,286 -- --
(Loss) income from discontinued operations, net
of tax (benefit) expense of $(7,833), $0 and
$0, respectively............................... (12,254) 4,300 --
-------- -------- --------
Net loss before cumulative effect of change in
accounting principle............................. (38,929) (50,231) (34,423)
Cumulative effect of change in accounting
principle, net of tax of $451.................... (711) -- --
-------- -------- --------
Net loss.......................................... $(39,640) $(50,231) $(34,423)
======== ======== ========
Basic earnings (loss) per share:
Continuing operations........................... $ (2.78) $ (2.60) $ (1.40)
Discontinued operations:
Gain on disposal of discontinued operations... 1.27 -- --
(Loss) income from discontinued operations.... (0.70) 0.20 --
Change in accounting principle.................. (0.04) -- --
-------- -------- --------
Basic loss per share.............................. $ (2.25) $ (2.40) $ (1.40)
======== ======== ========
Weighted average common shares outstanding........ 17,581 20,967 24,569
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
37
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss from operations....................... $(39,640) $(50,231) $(34,423)
-------- -------- --------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 7,099 5,809 4,560
Deferred rent................................ (465) (435) (3)
Deferred income taxes........................ 10,750 -- --
Loss (gain) on disposition of assets......... 2,490 216 (272)
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..................... 6,162 12,247 3,354
Merchandise inventories...................... 30,495 29,947 324
Prepaid expenses & other current assets...... 3,669 2,306 240
Other assets................................. (658) (218) 119
Discontinued operations, net................. 67,101 (7,648) --
Accounts payable............................. (76,373) (25,848) 442
Restructuring reserves....................... -- (11,157) (10,709)
Accrued liabilities.......................... (7,268) 1,556 1,221
-------- -------- --------
Total adjustments.......................... 31,810 39,366 (4,073)
-------- -------- --------
Net cash used in operating activities........ (7,830) (10,865) (38,496)
-------- -------- --------
Cash flows from investing activities:
Additions to property and equipment............ (5,091) (2,824) (9,207)
Proceeds from sale of property and equipment... 1,757 87 7,110
Proceeds from sale of equity investment........ -- -- 3,348
Proceeds from sale of CGE division............. 45,000 -- --
-------- -------- --------
Net cash provided by (used in) investing
activities.................................. 41,666 (2,737) 1,251
-------- -------- --------
Cash flows from financing activities:
Payments on notes payable of acquired
subsidiary.................................... -- (6,000) --
Proceeds from stock issuances.................. 353 3,635 89,331
Payments made on capital lease obligations..... (306) (125) --
-------- -------- --------
Net cash provided by (used in) financing
activities.................................. 47 (2,490) 89,331
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 33,883 (16,092) 52,086
-------- -------- --------
Cash and cash equivalents at beginning of
period.......................................... 49,590 83,473 67,381
-------- -------- --------
Cash and cash equivalents at end of period....... $ 83,473 $ 67,381 $119,467
======== ======== ========
Supplemental disclosures of cash paid (received)
during the year:
Interest....................................... $ 30 $ 32 $ 10
Income taxes................................... $ -- $ (732) $ (250)
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.
See Notes to Consolidated Financial Statements.
38
<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, 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 retired in final
settlement of acquisition of
subsidiary.................... (100) (1) (541) -- (542)
Stock granted as compensation.. 4 -- 85 -- 85
Stock issued through public
offering...................... 5,750 58 72,846 -- 72,904
Stock issued for cash, pursuant
to stock option plan.......... 1,514 15 16,821 -- 16,836
Net loss....................... -- -- -- (34,423) (34,423)
------ ---- -------- --------- --------
Balance, April 3, 1999......... 30,675 $307 $249,927 $(109,240) $140,994
====== ==== ======== ========= ========
</TABLE>
See Notes to Consolidated Financial Statements.
39
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All references herein to fiscal 1997, 1998 and 1999 relate to the fiscal
years ended March 29, 1997, March 28, 1998 and April 3, 1999, 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
26 percent interest until November 9, 1998 when the remaining ownership was
sold (Note 11).
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
1997 and 1998 each had 52 weeks. Fiscal 1999 consisted of 53 weeks.
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 April 3, 1999 include restricted cash of $1.6 million and $2.5 million,
respectively.
Accounts Receivable
The Company offers payments 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 market development fund arrangements.
40
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $3.1 million and $1.7 million at March 28, 1998 and April 3,
1999, respectively. 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
The purchase price of net assets of businesses acquired in purchase
transactions is allocated based on the fair value of the assets at the date of
acquisition. Goodwill is amortized over 20 years. Goodwill at March 28, 1998
and April 3, 1999 was $33.2 million and $31.6 million, net of accumulated
amortization of $1.0 million and $2.7 million, respectively. The Company
periodically reviews goodwill for possible impairment.
Accounts Payable
Outstanding checks included in accounts payable were $2.7 million and $3.7
million at March 28, 1998 and April 3, 1999, 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.
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.
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.
41
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 1997, 1998 and 1999.
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 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 28, 1998 and April 3, 1999,
approximately $127,000, and $79,000, respectively, of advertising were
reported as assets. For the fiscal years 1997, 1998 and 1999, the Company
incurred gross advertising expense of $35.8 million, $17.5 million and $17.3
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 the fiscal
1998 and fiscal 1999 presentations. 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 2002.
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.
42
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of property and equipment at March 28, 1998 and April 3, 1999
were as follows (in thousands):
<TABLE>
<CAPTION>
March 28, April 3,
1998 1999
--------- --------
<S> <C> <C>
Land and buildings........................................ $1,551 $ 563
Equipment................................................. 4,952 13,156
Leasehold improvements.................................... 813 1,034
Furniture and fixtures.................................... 165 418
------ ------
7,481 15,171
------ ------
Less accumulated depreciation and amortization............ (3,686) (5,975)
------ ------
Property and equipment, net............................... $3,795 $9,196
====== ======
</TABLE>
Property held for sale at March 28, 1998 includes Egghead.com's headquarters
building in Liberty Lake, Washington. See Note 9.
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.
Note 3 Income Taxes
The provision (benefit) for income taxes from continuing operations is
comprised of the following (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
------------------
1997 1998 1999
------ ----- -----
<S> <C> <C> <C>
Current:
Federal................................................. $ -- $ -- $ --
State................................................... -- -- --
------ ----- -----
-- -- --
------ ----- -----
Deferred:
Federal................................................. 4,170 -- --
State................................................... 618 -- --
------ ----- -----
4,788 -- --
Total................................................. $4,788 $ -- $ --
====== ===== =====
</TABLE>
During fiscal 1997, Egghead.com 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.
43
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 28, April 3,
1998 1999
--------- --------
<S> <C> <C>
Accounts receivable..................................... $ 898 $ 463
Merchandise inventories................................. 2,060 1,623
Property and equipment.................................. 2,007 1,939
Net operating loss carryforwards........................ 22,993 33,199
Reserves and liabilities related to restructuring....... 5,937 2,065
Accrued liabilities and other........................... 2,232 3,797
-------- --------
Total deferred tax assets............................... 36,127 43,086
Less valuation allowance................................ (36,127) (43,086)
-------- --------
Net deferred tax assets................................. $ -- $ --
======== ========
</TABLE>
Egghead.com has 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 as of April 3, 1999 begin to expire at the
end of the following fiscal years:
<TABLE>
<S> <C>
2011............................................................ $ 1,680
2012............................................................ 13,381
2013............................................................ 51,585
2014............................................................ 34,423
--------
$101,069
========
</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
---------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Statutory Federal tax
rate................... (34.0)% (34.0)% (34.0)%
State taxes, net of
Federal benefit........ (4.0) -- --
Tax exempt interest
income................. (1.4) -- --
Other, net.............. 2.0 0.1 0.1
Change in valuation
allowance.............. 48.2 33.9 33.9
----- ----- -----
10.8 % -- % -- %
===== ===== =====
</TABLE>
44
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4 Stockholders' Equity and Stock Option and Purchase Plans
Common Stock
In March 1999, The Company issued an additional 5.75 million shares of
Common Stock through a public offering, resulting in net proceeds of $72.9
million.
Employee Stock Purchase Plan
The Egghead.com, Inc. 1989 Employee Stock Purchase Plan (the 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 April 3, 1999, 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 (the 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 April 3, 1999, 493,290 shares were
available for grant and 483,102 shares were subject to outstanding options,
which have been granted at prices ranging from $5.38 to $25.19 per share. As
of April 3, 1999, 52,276 options for shares were vested.
The Surplus Software, Inc. 1996 Stock Option Plan
In August 1997 as part of the acquisition of Surplus, 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 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 April 3, 1999,
63,703 shares were subject to outstanding options, which have exercise prices
ranging from $0.97 to $2.26 per share. As of April 3, 1999, 18,742 options
were vested.
The Amended and Restated 1993 Stock Option Plan
In September 1993, Egghead.com's shareholders approved the 1993 Stock Option
Plan (the 1993 Plan and together with the 1986 Combined 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 will 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
45
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
amended and restated by the Board of Directors to allow the granting of stock
awards and to change the name of the plan to Amended and Restated 1993 Stock
Incentive Compensation Plan. In fiscal year 1999, 3,750 shares were granted as
stock awards, which were fully vested upon grant with no restrictions.
Options granted, exercised, and canceled under the Plans are summarized as
follows:
<TABLE>
<CAPTION>
Fiscal year
-----------------------------------------------------------
1997 1998 1999
------------------- ------------------- -------------------
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year................ 1,372,887 $9.33 2,183,528 $7.75 1,748,319 $5.27
Options granted(1)...... 1,444,200 6.80 769,682 4.64 340,000 9.63
Options exercised....... (27,891) 7.01 (323,248) 7.49 (337,012) 4.58
Options canceled........ (605,668) 9.50 (881,643) 10.06 (160,254) 5.61
--------- ----- --------- ----- --------- -----
Outstanding, end of
year................... 2,183,528 7.75 1,748,319 5.27 1,591,053 6.31
========= ===== ========= ===== ========= =====
Exercisable, end of
year................... 837,156 $8.19 973,499 $5.37 1,283,225 $5.86
========= ===== ========= ===== ========= =====
Available for grant in
future years........... 1,022,341 1,134,302 950,806
========= ========= =========
</TABLE>
- --------
(1) One million options granted to an officer during fiscal 1997 vest over a
period of 18 months, with 294,400, 823,600, and 1,000,000 vested as of
March 29, 1997, March 28, 1998 and April 3, 1999, respectively.
Summary
The following table summarizes information regarding all stock options
outstanding in all the Company's plans at April 3, 1999:
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
------------------------------ ------------------
Remaining
Contractual Exercise Exercise
Range of Exercise Prices Number Life Price Number Price
------------------------ --------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.967 - $4.8125......... 254,756 7.77 years $ 3.81 130,718 $4.21
$5.375 - $7.8125......... 1,345,700 8.12 years 5.63 1,071,999 5.43
$8.06 - $10.75........... 717,902 8.83 years 9.22 232,026 9.29
$16.1875 - $20.00........ 19,500 9.78 years 18.83 -- N/A
$20.1875 - $25.1875...... 20,000 9.61 years 23.14 -- N/A
--------- ---------
$0.967 - $25.1875........ 2,357,858 8.32 years $ 6.78 1,434,743 $5.94
========= =========
</TABLE>
46
<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 loss and loss per share would have been reduced to the
following pro forma amounts:
<TABLE>
<CAPTION>
Fiscal Year
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net Loss
As Reported.................................. $(39,640) $(50,231) $(34,423)
Pro Forma.................................... (40,800) (54,697) (37,245)
Loss per share
As Reported.................................. $ (2.25) $ (2.40) $ (1.40)
Pro Forma.................................... (2.32) (2.61) (1.52)
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 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 1997, 1998 and 1999, respectively:
<TABLE>
<CAPTION>
Fiscal Year
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Dividend yield................................. 0% 0% 0%
Volatility..................................... 67% 70% 96%
Risk-free interest rate........................ 5.61% 6.27% 5.38%
Expected stock option life 4.4 yrs. 3.5 yrs. 4.3 yrs.
</TABLE>
Using these assumptions, the weighted average fair value of options granted
was $3.67, $3.06 and $6.73 in fiscal 1997, 1998 and 1999, respectively.
Option Repricing
In April of 1997, the Compensation Committee of the Egghead.com Board of
Directors approved a plan pursuant to which certain executive officers and
employees 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 Restated Non-employee Director Stock Option Plan
In September 1993, Egghead.com's shareholders approved the Non-employee
Director Stock Option Plan, and in August 1995, Egghead.com's shareholders
approved amendments thereto (as amended, the 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 annually over three
years and terminate after 10 years. As of April 3, 1999, 125,000 shares were
available for grant and 220,000 shares were subject to outstanding options,
which have been granted at prices ranging from $5.88 to $10.75 per share. As
of April 3, 1999, options for 80,500 shares were vested.
47
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. On February 22, 1999, all outstanding
options expired therefore the Executive Plan is no longer active and no
further options will be granted under the Executive Plan.
Note 5 401(k) Plan
Effective January 1, 1999, the DJ&J plan was amended and restated to merge
the Surplus Direct 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). Egghead.com contributions are
fully vested upon the completion of five years of service. Egghead.com
contributions were approximately $466,000, $17,000 and $51,000 in fiscal 1997,
1998 and 1999, respectively
Prior to January 1, 1999, 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. Effective
July 1, 1998, employee contributions were 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). From March 29, 1997 to June 30, 1998,
Egghead.com discontinued the guaranteed matching of employee contributions.
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.
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.
Note 6 Commitments and Contingencies
Significant Suppliers
In fiscal 1997, 1998 and 1999, one primary distributor accounted for
approximately 13%, 11% and 11%, respectively, of Egghead.com's purchases. The
loss of this distributor could have a material adverse effect on the
Egghead.com's operating results and financial condition.
Credit Line for Inventory Financing
At April 3, 1999, the Company has a credit line of $5 million for the
financing of inventory. The terms to such financing vary depending on the
vendor terms. The credit line is fully secured by the inventory purchased
through the agreement with the lender. The lender has reserved the right to
discontinue the inventory financing at any time at its discretion. At April 3,
1999, there were approximately $116,000 outstanding under this line of credit.
48
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Leases
Egghead.com leases corporate offices and a distribution facility 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 1997, 1998 and 1999 was approximately $15.4
million, $7.8 million and $1.8 million, respectively. As of April 3, 1999,
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>
2000........................................................... $ 957
2001........................................................... 730
2002........................................................... 463
2003........................................................... 467
Thereafter...................................................... 583
------
Total minimum payments........................................ $3,200
======
</TABLE>
The Company has recorded a liability for retail stores and distribution
facility lease terminations in connection with its retail restructurings. See
Note 8.
In May 1999, the Company signed a lease for a distribution facility in
Vancouver, Washington. The lease term is through November 2000 at a monthly
rate of approximately $46,000, which is not included in the table above.
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. This goodwill is
being amortized over 20 years. In January 1999, the Company received and
subsequently retired 99,994 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, 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
49
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$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 April 3, 1999,
related to the restructuring, consisting primarily of $0.3 million in lease
obligations will be substantially settled by the end of the third quarter of
fiscal 2000.
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 included 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. At April 3,
1999, the remaining payables related to the restructuring consisted primarily
of $5.8 million in retail lease obligations, $0.3 million in severance and
employee benefits and $0.1 million miscellaneous costs. Egghead.com
anticipates that the settlement of all leases and claims related to the
restructuring will be substantially completed by the end of the third quarter
of fiscal 2000.
In the fourth quarter of fiscal 1999, Egghead.com announced plans to move
the remaining headquarters functions from Liberty Lake, Washington to
Vancouver, Washington. The Company recorded a restructuring charge of
approximately $890,000 related to the move. The 1999 restructuring charge was
offset by a reduction of approximately the same amount in fiscal 1998
restructuring reserves. Egghead.com anticipates that the obligations will be
substantially settled by the end of the third quarter of fiscal 2000.
Note 9 Sale of Property
On May 1, 1998, the Company sold its former headquarters building located in
Liberty Lake, Washington, for approximately $7.5 million, less related closing
costs. 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 with a lease term expiring on June 30, 1999.
Note 10 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.
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 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.
50
<PAGE>
EGGHEAD.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The income from discontinued operations for fiscal 1997 and 1998 is
comprised of the following (in millions):
<TABLE>
<CAPTION>
Fiscal Year
-------------
1997 1998
------ -----
<S> <C> <C>
Net sales................................................... $ 39.3 $ --
Costs and expenses.......................................... 59.4 (4.3)
------ -----
Income (loss) before provision for income taxes............. (20.1) 4.3
------ -----
Income tax benefit.......................................... (7.8) --
------ -----
Income (loss) from discontinued operations.................. $(12.3) $ 4.3
====== =====
</TABLE>
There was no income or loss from discontinued operations during fiscal 1999.
Note 11 Recapitalization 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 resolution of the contingencies.
51
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Gregory J. Boudreau resigned from the Board of Directors of Egghead
effective May 5, 1999. Other information required by Part III, Item 10, is
incorporated by reference from Egghead.com, Inc.'s definitive Proxy Statement
relating to Egghead.com, Inc.'s 1999 Annual Meeting of Shareholders, which
will be filed pursuant to Regulation 14A within 120 days of April 3, 1999.
Item 11. Executive Compensation
The information required by Part III, Item 11, is incorporated by reference
from Egghead.com, Inc.'s definitive Proxy Statement relating to Egghead.com,
Inc.'s 1999 Annual Meeting of Shareholders, which will be filed pursuant to
Regulation 14A within 120 days of April 3, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Part III, Item 12, is incorporated by reference
from Egghead.com, Inc.'s definitive Proxy Statement relating to Egghead.com,
Inc.'s 1999 Annual Meeting of Shareholders, which will be filed pursuant to
Regulation 14A within 120 days of April 3, 1999.
Item 13. Certain Relationships and Related Transactions
The information required by Part III, Item 13, is incorporated by reference
from Egghead.com, Inc.'s definitive Proxy Statement relating to Egghead.com,
Inc.'s 1999 Annual Meeting of Shareholders, which will be filed pursuant to
Regulation 14A within 120 days of April 3, 1999.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as a part of this report:
<TABLE>
<C> <C> <S>
1. Financial Statements The Consolidated Financial Statements,
Notes thereto, Financial Statement Schedules (none), and
Accountants' Report thereon are included in Part II, Item 8
of this report.
2(a) Exhibits
(xii) 3.1 Restated Articles of Incorporation of Egghead.com, Inc.
(xiii) 3.2 Amended and Restated Bylaws of Egghead.com, Inc.
10.1 Intentionally left blank
10.2 Intentionally left blank
10.3 Intentionally left blank
(xi) 10.4** Executive Deferred Compensation Plan and related documents
effective July 1, 1996
10.5** Executive Employment Agreement between Egghead, Inc. and DJ&J
Software Corporation and George P. Orban dated as of January
31, 1997. (Incorporated by reference to Exhibit 10.1 to
registrant's Form 10-Q for the fiscal quarter ended June 28,
1997.)
10.5a** Pledge Agreement between Egghead.com, Inc. and George P.
Orban dated as of February 25, 1998 (Incorporated by
reference to .Exhibit 10.5a to registrant's Form 10-K for the
fiscal year ended March 28, 1998)
</TABLE>
52
<PAGE>
<TABLE>
<C> <C> <S>
10.6 Intentionally left blank
10.7** Egghead.com, Inc. 1997 Nonofficer Employee Stock Option Plan
(Incorporated herein by reference to Exhibit 99.1 to
registrants' registration statement on Form S-8 dated June 5,
1998)
10.8** Employee Stock Issuance Program (Incorporated herein by
reference to Exhibit 99.2 to registrants' registration
statement on Form S-8 dated June 5, 1998)
10.9 Agreement and Plan of Merger, dated April 30, 1997, among
Egghead, Inc. ("Egghead"),
North Face Merger Sub, Inc. ("North Face") and Surplus
Software, Inc. ("Surplus Direct") and certain shareholders of
Surplus Direct, and amendment thereto dated May 23, 1997
(Incorporated herein by reference to Exhibit 2.1 to
registrant's Registration Statement on Form S-4 (Registration
No. 333-31251) filed with the SEC on July 14, 1997.)
10.10 Intentionally left blank
10.11 Intentionally left blank
10.12** Employment Agreement between Surplus Software, Inc. and
Jonathan Brodeur, dated May 15, 1996 (Incorporate herein by
reference to Exhibit 10.5 to registrant's Form 10-Q for the
quarter ended September 27, 1997.)
10.13** Employment Agreement Amendment, effective April 30, 1997,
between Surplus Software, Inc. and Jonathan Brodeur
(Incorporated by reference to, and previously filed with as
part of registrant's Registration Statement on Form S-4
(Registration No. 333-31251)
as Annex III to the Proxy Statement/Prospectus contained in
the Registration Statement filed with the SEC on July 14,
1997).
10.14 Intentionally left blank.
10.15 Lease, as amended, dated June 9, 1988, between Sammamish Park
Place I Limited Partnership as Landlord and DJ&J Software
Corporation as Tenant regarding registrant's administrative
headquarters. (Incorporated herein by reference to Exhibit
10.46 to registrant's Form 10-K for the fiscal year ended
April 1, 1989).
10.16 First Amendment to June 9, 1988 Lease between Sammamish Park
Place I Limited Partnership and DJ&J Software Corporation
dated October 4, 1989. (Incorporated herein by reference to
Exhibit 10.46a to registrant's Form 10-K for the fiscal year
ended March 31, 1990).
10.17 Lease dated March 23, 1992 between Sammamish Park Place II
Limited Partnership as Landlord and DJ&J Software Corporation
as Tenant regarding registrant's administrative headquarters.
(Incorporated herein by reference to Exhibit 10.47 to
registrant's Form 10-K for the fiscal year ended March 28,
1992).
10.18 Lease Termination and Rent Payment Agreement between
Sammamish Park Place II Limited Partnership as Landlord and
DJ&J Software Corporation as Tenant regarding registrant's
administrative headquarters. (Incorporated herein by
reference to Exhibit 10.47a to registrant's Form 10-Q for the
quarter ended July 2, 1994).
(vi) 10.18a First Amendment to Lease Termination and Rent Payment
Agreement between Sammamish Park Place II Limited Partnership
as Landlord and DJ&J Software Corporation as Tenant.
(vi) 10.18b Second Amendment to Lease Termination and Rent Payment
Agreement between Sammamish Park Place II Limited Partnership
as Landlord and DJ&J Software Corporation as Tenant.
10.19 Intentionally left blank
10.20 Intentionally left blank
</TABLE>
53
<PAGE>
<TABLE>
<C> <C> <S>
10.21 Intentionally left blank
10.22 Intentionally left blank
10.23 Intentionally left blank
10.24 Intentionally left blank
(viii) 10.25 Asset Purchase Agreement by and among Software Spectrum,
Inc., Egghead, Inc. and DJ&J Software Corporation dated
as of March 23, 1996 with Exhibits 4.11 and 4.12 thereto.
10.26 Intentionally left blank.
10.27 Intentionally left blank
10.28 Intentionally left blank
10.29 Intentionally left blank
10.30 Intentionally left blank
10.31 Intentionally left blank.
10.32 Intentionally left blank.
10.33 Intentionally left blank
(ii) 10.34** Egghead, Inc. 1989 Executive Retention Incentive Stock
Option Plan.
10.35 Intentionally left blank.
10.36 Intentionally left blank.
10.37 Intentionally left blank.
10.38 Intentionally left blank.
10.39 Intentionally left blank.
10.40 Intentionally left blank.
10.41 Intentionally left blank.
10.42 Intentionally left blank.
10.43 Intentionally left blank.
10.44 Intentionally left blank.
10.45 Intentionally left blank.
10.46 Intentionally left blank.
10.47 Intentionally left blank.
10.48** Egghead, Inc. 1989 Employee Stock Purchase Plan.
(Incorporated herein by reference to Exhibit 10 to
registrant's Form S-8 dated June 23, 1990).
10.49** Egghead, Inc. 1993 Stock Option Plan. (Incorporated
herein by reference to Exhibit 10.31 to registrant's Form
10-Q dated for the quarter ended October 16, 1993).
10.49(a) ** Amended Egghead, Inc. 1993 Stock Option Plan
(Incorportated herein by reference to Exhibit 10.1 to
registrant's Form 10-Q for fiscal quarter ended September
27, 1997.
10.49(b) ** Second Amended Egghead, Inc. 1993 Stock Option Plan
(Incorporated herein by reference to Exhibit 10.49(b) to
registrants' Form 10-K for fiscal year ended March 28,
1998).
10.49(c)** Egghead.com, Inc. Amended and Restated 1993 Stock
Incentive Compensation Plan (Incorporated herein by
reference to Exhibit 10.1 to registrant's Form 10-Q for
the fiscal quarter ended December 26, 1998).
</TABLE>
54
<PAGE>
<TABLE>
<C> <C> <S>
10.50** Egghead.com, Inc. Restated Nonemployee Director Stock Option
Plan (Incorporated herein by reference to Exhibit 10.2 to
registrant's Form 10-Q for the fiscal quarter ended
December 26, 1998).
10.51** Executive Employment Agreements with each of Tommy Collins,
Brian W. Bender, Norma Hullinger and James Kalasky
(Incorporated herein by reference to Exhibits 10.1, 10.2,
10.3, and 10.4 to registrant's Form 10-Q for the fiscal
quarter ended December 27, 1997).
10.52** Amendment No. 1 to Executive Employment Agreements with each
of Tommy Collins, Norman Hullinger and James Kalasky dated
January 28, 1999 (Incorporated herein by reference to Exhibit
10.4 to registrant's Form 10-Q for the fiscal quarter ended
December 26, 1998).
10.53 Settlement Agreement and Release dated December 21, 1998 by
and among Egghead.com, Inc. and those parties listed as
shareholders on the signature pages thereto (Incorporated
herein by reference to Exhibit 10.3 to registrant's Form 10-Q
for the fiscal quarter ended December 26, 1998).
21.1X List of subsidiaries of Egghead.com, Inc.
23.1X Consent of Arthur Andersen LLP.
24.1X Power of Attorney (contained on signature page).
27.1X Financial Data Schedule
</TABLE>
- --------
X Filed herewith.
(i) Incorporated herein by reference to same exhibit number to registrant's
Registration Statement on Form S-1, Registration No. 33-21472.
(ii) Incorporated herein by reference to Exhibits 10.1 to 10.13 to
registrant's Form 8-K dated February 23, 1989.
(iii) Incorporated herein by reference to same exhibit number to registrant's
Form 10-K for the fiscal year ended March 29, 1992.
(iv) Intentionally left blank.
(v) Intentionally left blank.
(vi) Incorporated herein by reference to registrant's Form 10-Q for the
quarter ended October 1, 1994.
(vii) Intentionally left blank.
(viii) Incorporated herein by reference to Exhibit 2.1 to registrant's Form 8-
K dated March 23, 1996.
(ix)Intentionally left blank.
(x)Intentionally left blank.
(xi) Incorporated herein by reference to same exhibit number to registrant's
Form 10-K for the fiscal year ended March 29, 1997
(xii) Incorporated herein by reference to Exhibit 3.2 to registrants' report
on Form 8-K dated June 8, 1999
(xiii) Incorporated herein by reference to Exhibits 3.1 and 3.3 to
registrants' report on Form 10-K for the fiscal year ended March 28,
1998.
** Designates management contract or compensatory plan or arrangement.
2b. Reports on Form 8-K
Egghead.com, Inc. did not file any reports on Form 8-K during the fourth
quarter of its fiscal year ended April 3, 1999.
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Vancouver, State of Washington, on June 30, 1999.
EGGHEAD.COM, INC.
/s/ GEORGE P. ORBAN
By: _________________________________
George P. Orban
Chairman of the Board and Chief
Executive Officer( Principal
Executive Officer)
EGGHEAD.COM, INC.
/s/ BRIAN W. BENDER
By: _________________________________
Brian W. Bender
Chief Financial Officer, Vice-
President of Finance and
Secretary (Principal Financial
and Accounting Officer)
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes
George P. Orban and Brian W. Bender, or either of them, as attorneys-in-fact
with full power of substitution, to execute in the name and on behalf of each
person, individually and in each capacity stated below, and to file, any and
all amendments to this report, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorneys-in-fact,
of their substitute or substitutes, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons have signed this report on June 30, 1999, on behalf of the
Registrant and in capacities indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ GEORGE P. ORBAN Chairman of the Board and Chief Executive
___________________________________________ Officer (Principal Executive Officer)
George P. Orban
/s/ BRIAN W. BENDER Chief Financial Office, Vice-President of
___________________________________________ Finance and Secretary (Principal Financial
Brian W. Bender and Accounting Officer)
Director
___________________________________________
C. Scott Gibson
/s/ KAREN WHITE Director
___________________________________________
Karen White
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
Director
___________________________________________
Eric P. Robison
/s/ Jonathan W. Brodeur Director
___________________________________________
Jonathan W. Brodeur
/s/ Robert T. Wall Director
___________________________________________
Robert T. Wall
/s/ Melvin A. Wilmore Director
___________________________________________
Melvin A. Wilmore
</TABLE>
57
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<S> <C>
Exhibit 21.1 Schedule of Egghead Subsidiaries
Exhibit 23.1 Consent of Independent Public Accountants
Exhibit 27 Article 5 of Regulation S-X
</TABLE>
<PAGE>
Exhibit 21.1
SCHEDULE OF EGGHEAD SUBSIDIARIES
Form 10K for Fiscal Year Ended 4/3/99
Parent Company: EGGHEAD.COM, INC.
- --------------
Subsidiaries, wholly owned by Egghead.com, Inc.:
- ------------------------------------------------
D J & J Software Corporation (WA)
EH Direct, Inc. (WA) Inactive corporation
MPI Corporation (WA) (wholly owned subsidiary of EH Direct, Inc.) Inactive
corporation
Surplus Software, Inc.. (OR)
<PAGE>
Exhibit 23.1
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation
of our reports included in this form 10-K, into the Company's previously filed
Registrations Statements No. 33-29453 (Egghead.com, Inc. 1989 Employee Stock
Purchase Plan); No. 33-59779 (Egghead.com, Inc. 1993 Stock Option Plan);
No. 33-64033 (Egghead.com, Inc. Restated Nonemployee Director Stock Option
Plan), No. 333-56211 (1997 Nonofficer Egghead.com, Inc. Employee Stock Option
Plan and Employee Stock Issuance Plan) and No. 333-33611 (Surplus Software, Inc.
1996 Stock Option Plan).
/s/ Arthur Andersen LLP
Seattle, Washington
June 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-03-1999
<PERIOD-END> APR-03-1999
<CASH> 119,467
<SECURITIES> 0
<RECEIVABLES> 3,102
<ALLOWANCES> 786
<INVENTORY> 12,599
<CURRENT-ASSETS> 135,141
<PP&E> 15,171
<DEPRECIATION> 5,975
<TOTAL-ASSETS> 176,185
<CURRENT-LIABILITIES> 35,191
<BONDS> 0
0
0
<COMMON> 307
<OTHER-SE> 140,687
<TOTAL-LIABILITY-AND-EQUITY> 176,185
<SALES> 148,721
<TOTAL-REVENUES> 148,721
<CGS> 134,341
<TOTAL-COSTS> 134,341
<OTHER-EXPENSES> (2,003)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (34,423)
<INCOME-TAX> 0
<INCOME-CONTINUING> (34,423)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,423)
<EPS-BASIC> (1.40)
<EPS-DILUTED> (1.40)
</TABLE>
