-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PI7SVucH4acb+SsZo2WX6IIu4SLeLMnLf7UjeE/SmJFTvJhtULdcLCS5rSxw2Bq9 qusksEqE2anrIU9t/aB6bQ== 0000912057-96-015702.txt : 19960730 0000912057-96-015702.hdr.sgml : 19960730 ACCESSION NUMBER: 0000912057-96-015702 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960330 FILED AS OF DATE: 19960729 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EGGHEAD INC /WA/ CENTRAL INDEX KEY: 0000832320 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 911296187 STATE OF INCORPORATION: WA FISCAL YEAR END: 0330 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-16930 FILM NUMBER: 96600503 BUSINESS ADDRESS: STREET 1: 22705 EAST MISSION CITY: LIBERTY LAKE STATE: WA ZIP: 99019 BUSINESS PHONE: 5098914883 MAIL ADDRESS: STREET 1: 22705 EAST MISSION CITY: LIBERTY LAKE STATE: WA ZIP: 99019 10-K/A 1 10-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (Amendment No. 1) ------------- (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 For the fiscal year ended March 30, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 For the transition period from to -------- -------- Commission file number 0-16930 ------- EGGHEAD, INC. ------------- (Exact name of registrant as specified in its charter) WASHINGTON 91-1296187 - ---------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) EAST 22705 MISSION LIBERTY LAKE, WASHINGTON 99019 - ------------------------ ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (509) 922-7031 --------------- 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) 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, Inc.'s knowledge, the aggregate market value of the voting stock held by non-affiliates of the registrant at July 22, 1996 was $161,578,331. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. OUTSTANDING AT CLASS July 22, 1996 ----- -------------- Common Stock, $.01 par value 17,580,278 shares DOCUMENTS INCORPORATED BY REFERENCE [None] PART I Item 1. BUSINESS GENERAL Egghead, Inc. (Egghead or the Company), a reseller of personal computer (PC) software, hardware, and related products, serves small businesses and individuals through retail outlets and mail order. As of March 30, 1996, the Company operated 164 retail stores, a direct response group, and Elekom Corporation (ELEKOM), all of which are included in continuing operations. The Company has also historically served corporate, governmental, and educational customers through its corporate, government, and education (CGE) division. On March 25, 1996, the Company announced the sale of the CGE Division to Software Spectrum, Inc. (SSI), a Texas corporation, for $45.0 million in cash which did not include the CGE division's receivables and inventory that Egghead is liquidating in an orderly manner, all of which are expected to result in total gross cash proceeds of approximately $90.0 million. The sale, which was effective, May 13, 1996 included a Fulfillment Agreement relating to the provision by Egghead to SSI of certain support services for a period not to exceed 120 days and a Call Center Lease detailing the lease for a period of three years of a portion of Egghead's Spokane facility to SSI. (Exhibits on Form 8-K filed May 23). Information contained in this filing excludes, unless otherwise stated, any data relative to the discontinued operations of the CGE division. Egghead, a Washington corporation, was incorporated in 1988 and is the successor to a corporation which was incorporated in Washington in 1984. Egghead is the parent company of DJ&J Software Corporation, Eggspert Software, Ltd. (Eggspert), EH Direct, Inc., Egghead International, Inc. (Egghead International) and ELEKOM. Eggspert and Egghead International became inactive subsidiaries on May 13, 1996 following the sale of the CGE division to SSI. Unless the context indicates otherwise, references to "the Company" and "Egghead" include Egghead and its subsidiaries. Operating results of Eggspert and Egghead International are included in discontinued operations. See Note 8 of Notes to the Consolidated Financial Statements. Egghead's retail stores offer a broad in-store selection of products at competitive prices, as well as special order capabilities for additional products. The Company employs a knowledgeable sales force to assist customers in selecting software, hardware, and related products. At fiscal year end, the Company was operating 19 of its retail stores under a new merchandising format which is approximately twice the size of original stores and is arranged in a more user-friendly format. The performance of these new stores has been mixed and management continues to evaluate results while refining the format. While assessing the overall contribution of the new merchandising format, management intends to open six new stores. Pending such evaluation and refinement of the new format, the Company does not intend to open more than the six new stores. 3 In August 1995, Egghead formed ELEKOM, a new subsidiary. ELEKOM was formed to develop electronic commerce applications and services which link customers and their suppliers. EleTrade, a product being developed by ELEKOM, uses Lotus Notes and other notes networks to provide large organizations an easy-to-use, cost-effective, secure and reliable product ordering and order management system for non-production goods and services. EleTrade allows companies to create customized electronic catalogs with multi-media product information and customer-specific pricing. ELEKOM is also developing additional enhancements which will automate the internal requisition and approval process and which may create better asset/inventory management and allow electronic software distribution. ELEKOM, a development stage company, incurred selling, general and administrative costs of approximately $1.1 million in fiscal 1996 and is not expected to make significant sales or distribution of products in fiscal year 1997. MARKET OVERVIEW The software industry is undergoing a noticeable degree of consolidation as large software publishers acquire either other software publishers or complete software product lines. Smaller software publishers are attempting to concentrate on specialized products in limited markets. Software resellers are also merging with or acquiring other software resellers. Both businesses and individual consumers have shown an increasing preference for integrated software packages which combine word processing, spreadsheet, presentation, and database software. These integrated packages are appealing to the consumer for several reasons. The purchase cost of an integrated software package is lower than the individual components purchased separately. In addition, integration reduces some of the complexity and learning time involved in using software. Integrated software packages also help standardize the computing environment for local area networks, which are becoming more common in the business world. This shift toward integration and standardization is viewed by many companies as a way to significantly reduce the cost of supporting PC applications in their organizations. Prices of microprocessor chips continue to fall due to increased competition among computer chip manufacturers, and the introduction of newer, faster microprocessor chips. The decrease in microprocessor chip prices has forced PC prices down, resulting in increased sales of PCs to businesses and individual consumers. Sales of home computers, especially those equipped for multimedia, have increased dramatically as consumers begin to use PCs for a variety of uses such as telecommuting, home productivity, entertainment, communications, and education. Price performance improvements in microcomputer hardware and the availability of CD-ROM technology have a dramatic impact on the retail segment of the market. Sales of PC hardware accessories, such as hard drives and modems, have increased as consumers enhance their PCs. Multimedia capability has enabled home users to more effectively use microcomputers for educational and entertainment purposes. Access to electronic communication networks, such as the Internet and commercially available on-line services, has become increasingly important to both businesses and individual consumers. These electronic communication networks have grown at a tremendous pace over the last year. The networks are expected to provide substantial opportunities both now and in the future for communications, commerce, and the exchange of data. Software publishers have recognized the significance of this trend, and have begun to integrate interfaces for these electronic communications networks into their operating systems and workgroup software. PRODUCTS AND SERVICES Egghead resells PC software, hardware and related products, computer- related magazines and books, tutorials, and selected peripheral devices and accessories. Egghead has approximately 2,000 software products (including both IBM-Registered Trademark--compatible and Apple-Registered Trademark- Macintosh-Registered Trademark- software) and other products in its retail stores, and thousands more available through 1-800-EGGHEAD's special order service. The Company offers a broad array of customer support services to assist customers in the selection and administration of their software purchases, including the following: CUSTOM UPDATES AND EGGSTRAS (CUE-SM-) PROGRAM - a preferred customer membership program providing discounts and other benefits in the retail stores and direct response. CUE-SM- also provides the Company with a valuable database of customers, their PC equipment profiles, and a history of their software purchases. COMPUTER SELECT - a CD-ROM-based system updated monthly with information on most software and hardware products. Articles can be obtained from all major personal computer publications and sent to customers as requested. INTERNET SITE - Egghead now maintains a site on the internet for information, customer support, and product sales. Egghead's page can be found at http://www.egghead.com. The site allows Egghead to reach customers through a new medium as an expanding consumer base purchases hardware and/or software that allows Internet access. The site uses the new merchandising format to display SKUs in a manner similar to the new format Egghead retail stores. Egghead plans to begin offering electronic delivery of software in the second quarter of 1997. 1-800-EGGHEAD - Egghead maintains a direct response unit which processes all telephone and mail orders. These orders are solicited through catalog distribution. Catalogs have been redesigned to use the merchandising format found in Egghead's new retail stores. 1-800- EGGHEAD also provides customer service for the 164 stores, as well as store referral to callers who would like to try a product. 1-800- EGGHEAD also allows customers access to products not available through retail outlets by offering a special order service. MARKETING, ADVERTISING, AND PROMOTION Egghead's marketing philosophy is to position itself as the reseller of choice by providing the customer with the best value in terms of competitive prices, selection, service, and convenience. In addition, Egghead strives to create primary demand for the products it sells. The Company's strategy to meet these objectives is to use aggressive advertising and marketing efforts. The Company's advertising campaign emphasizes a broad selection of available merchandise and competitive prices. Advertising is also used to promote major new product launches. 5 Egghead's primary advertising medium is direct mail, which is used to target the highly identifiable segment of the population which owns and/or uses computers. In addition to a database of more than 3 million of its CUE customers, Egghead sends regular direct mail product promotions to purchased lists of computer owners. The Company also uses both local and national newspapers. Catalogs are designed to reflect the same layout as customers will find in Egghead's new format retail stores. These catalogs are updated and distributed throughout the year. Egghead has entered into cooperative advertising and other promotional and market development fund agreements with numerous manufacturers and distributors. The funds obtained through these agreements assist the Company in achieving high visibility in the marketplace. CUSTOMERS Egghead has a diverse customer base comprised primarily of individuals and small businesses and uses specific marketing strategies to target different customer segments. RETAIL OPERATIONS Egghead's retail stores are designed to provide a pleasant shopping environment for walk-in customers, primarily individuals, who purchase PC software and hardware products for their personal use and/or for use in a small business. A knowledgeable sales force offers solutions-oriented assistance to customers selecting software, hardware, and related products. Egghead's retail stores offer customers competitive prices, a wide selection of products, excellent service, and convenient store locations. In addition to stocking approximately 2,000 SKUs in the retail stores, Egghead customers have access to thousands more through 1-800-EGGHEAD's special order service. The Company also stocks selected PC hardware products, computer-related magazines and books, tutorials, and selected peripheral devices and accessories. Egghead also provides installation services in most of its stores. During fiscal 1996, the Company introduced 19 stores based on a new merchandising format which is approximately twice the size of older format stores and is arranged in a more user-friendly environment. The performance of these new stores has been mixed and management continues to evaluate results while refining the format. While assessing the overall contribution of the new merchandising format, management intends to open six new stores. Pending such evaluation and refinement of the new format, the Company does not intend to open more than the six new stores. The balance of the Egghead stores contain approximately 2,500 square feet of retail selling space. Most stores are located in strip shopping centers. Store locations are researched and chosen to be in areas with high distribution of personal computers, high population density, and high mean income levels. Egghead provides in-store demonstration of software, with most stores having personal computers available for use by customers in evaluating software in the stores. MERCHANDISING Egghead purchases most of its products through a central merchandise buying department. Inventory levels and product mix are based upon rates of sale, seasonality, and store demographics and size. The Company also special orders non-inventoried software products to satisfy customers' special needs. 6 Egghead's decision to buy merchandise directly from manufacturers or through distributors is determined on a transaction-by-transaction basis depending on cost, availability, and potential product obsolescence. For certain products, Egghead has sufficient sales volume to purchase directly from manufacturers at volume discounts. The Company purchases software and other products directly from more than 250 manufacturers. Egghead minimizes the administrative overhead associated with buying products from hundreds of smaller manufacturers by using a limited number of distributors. Egghead conducts business with major vendors including Microsoft and Western Digital. In fiscal years 1996 and 1995, sales derived from software programs supplied by Microsoft, Egghead's largest vendor, represented approximately 18% and 15% of total net sales, respectively. Egghead has certain exchange and return privileges with many of its vendors, which typically include time, volume, and other limitations. These exchange and return privileges allow the Company to reduce the risk of loss resulting from obsolete and defective merchandise. SUPPLY AND DEMAND FOR COMPUTER SOFTWARE, HARDWARE AND RELATED SUPPLIES Sales by Egghead and other similar resellers are dependent upon the continued purchase and expanded use of home and home office personal computers, as well as the continued development of personal computer software. A long-term decline in the purchase or use of home or home office personal computers, or an interruption in the continued development of personal computer software, would have a material adverse effect on the Company's results of operations and financial position. DISTRIBUTION Most inventory that Egghead purchases is received in one of the Company's distribution facilities before it is sent to a customer or to a retail store. Some products are sent directly from vendors or distributors to stores or customers. The Company's distribution facilities also process most returned merchandise. The Company leases a 138,000 square foot facility in Sacramento, California and a 125,000 square foot facility in Lancaster, Pennsylvania. The manner in which microcomputer software products are sold and distributed is changing rapidly. Other methods of distribution, such as electronic software distribution could have an impact on how the Company distributes products in the future. COMPETITION The business of selling microcomputer software and hardware is intensely competitive. The Company currently competes with other "direct sales" organizations, other software retailers, computer and office superstores, consumer electronic superstores, mass merchandisers, direct response companies, computer manufacturers, and software publishers that sell directly to end-users through traditional and electronic methods of distribution. Other software retail competitors include mall-based stores such as Electronics Boutique, Babbages, and Software Etc. 7 Computer and office superstores, such as CompUSA, Computer City, Micro Center, and Office Depot provide significant competition for Egghead's retail stores in the markets in which they are located. These stores are very price competitive. Computer superstores typically offer a wide product selection, while office superstores have a more limited selection. Large computer superstores, like Computer City, offer on-site installation of software and hardware upgrades. Some superstores also offer training and technical services. Consumer electronic superstores, such as Best Buy, Future Shop, and Circuit City, are a growing source of competition for the Company's retail stores in the markets in which they operate. Mass merchandisers, such as Wal-Mart, Incredible Universe, and Sears, and warehouse clubs such as SAM's and Price/Costco, generally concentrate on basic software products and carry relatively few titles. Direct response businesses, such as MicroWarehouse, Programmers Paradise, and PC Connection, are another important channel for software sales. MicroWarehouse sells their products internationally, and has experienced significant growth in international markets. Many superstores and computer manufacturers sell PCs to consumers with custom-installed hardware and pre-loaded software. This bundling of products is very convenient for the consumer, and eliminates many of the technical difficulties involved with the installation of software or hardware. Software publishers continue to directly market and sell to end-users. It is also becoming more common for software publishers to distribute software over electronic communications networks. Such networks provide the convenience of allowing the customer to purchase software products directly from their home or office. However, distribution directly by a publisher does not provide the customer with a broad selection, personal assistance from the sales force, or a full demonstration of the product prior to purchase. There has also been a continuing trend of software publishers offering new software products at deeply discounted introductory prices. Because the microcomputer software market is very competitive, software resellers typically have low gross margins and operating income as a percentage of sales. Therefore, the Company's profitability is highly dependent upon effective internal operating and cost control and the ability to adapt quickly and efficiently to changes in industry trends. EMPLOYEES At March 30, 1996, Egghead had approximately 2,300 employees, (including temporary employees) consisting of approximately 1,800 retail personnel (including direct response), 200 distribution center employees, and 300 headquarters personnel. Employees are not represented by a collective bargaining unit. 8 TRADEMARKS AND TRADENAMES "EGGHEAD-Registered Trademark-", "EGGHEAD DISCOUNT SOFTWARE-Registered Trademark-", "EGG CARTON-Registered Trademark-", "EGGSPERT-Registered Trademark-", the "PROFESSOR EGGHEAD-Registered Trademark-" design, and "EGGCESSORIES-Registered Trademark-", are registered in the United States Patent and Trademark Office as service marks or trademarks of the Company. The Company also does business under the trade names "Egghead Software", "Egghead Discount Software", and "Mac's Place at Egghead." In addition, the Company is the owner of a number of common law trademarks and service marks, including "SOFTWARE ASSET MANAGEMENT-SM-", "SAM-SM-", "CUE-SM-", "EGGHEAD-Registered Trademark- EXPRESS-TM-", "ELEKOM-TM-", "EleTrade-TM-", and certain "EGG" combination words, "MAC'S PLACE-SM-," and "MAC'S PLACE AT EGGHEAD-SM-." The Company believes the strength of its trademarks and service marks benefits its business and intends to continue to protect and promote its registered and common law trademarks and service marks. ENVIRONMENTAL LAWS Compliance with federal, state, and local laws enacted for protection of the environment has had no material effect upon Egghead's capital expenditures, earnings, or competitive position. The Company does not anticipate any material adverse effects in the future based on the nature of its operations and the current focus of such laws. 9 PART II. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Egghead, Inc. (Egghead or the Company), a reseller of personal computer (PC) software, hardware, and related products, serves small businesses and individuals through retail outlets and mail order. Egghead's retail stores offer a broad in-store selection of products at competitive prices, as well as special order capabilities for additional products. On March 30, 1996, the Company operated 164 stores located throughout the United States. The Company employs a knowledgeable sales force to assist customers in selecting software, hardware, and related products. At the end of fiscal 1996 the Company was operating 19 of its retail stores under a new merchandising format which is approximately twice the size of predecessor stores and is arranged in a more user-friendly format. The performance of these new stores has been mixed and management continues to evaluate results while refining the format. While assessing the overall contribution of the new merchandising format, management intends to open six new stores. Pending such evaluation and refinement of the new format, the Company does not intend to open more than six new stores. Egghead continues to implement changes to restructure the Company. The Company has historically served corporate, governmental and educational customers through its corporate, government and education sales (CGE) division. On March 25, 1996, the Company announced the sale of the CGE division to Software Spectrum, Inc. (SSI), a Texas corporation, for $45.0 million in cash which did not include CGE division's receivables and inventory that Egghead is liquidating in an orderly manner, all of which are expected to result in total gross cash proceeds of approximately $90.0 million. The sale, which was effective May 13, 1996, included a Fulfillment Agreement relating to the provision by Egghead to SSI of certain support services for a period not to exceed 120 days and a Call Center Lease detailing the lease for a period of three years of a portion of Egghead's Spokane facility to SSI. Information contained in this filing excludes, unless otherwise stated, any data relative to the discontinued operations of the CGE division. The sales and gross margin performance of the Company's CGE division had declined and selling, general and administrative expenses as a percentage of sales had increased in the months prior to the sale. The sale of the CGE division will allow management to focus on the Company's retail business. See "--Results of Operations--DISCONTINUED OPERATIONS." In August 1995, Egghead formed Elekom Corporation (ELEKOM), a new subsidiary. ELEKOM was formed to develop electronic commerce applications and services which link customers and their suppliers. EleTrade, a product being developed by ELEKOM, uses Lotus Notes and other notes networks to give large organizations an easy-to-use, cost-effective, secure and reliable product ordering and order management system for non-production goods and services. EleTrade allows companies to create customized electronic catalogs with multi-media product information and customer- specific pricing. ELEKOM is also developing additional enhancements which will automate the internal requisition and approval process and which may create better asset/inventory management and allow electronic software distribution. ELEKOM, a development stage company, incurred selling, general and administrative costs of approximately $1.1 million in fiscal 1996 and is not expected to have significant sales or distribute products in fiscal year 1997. Over the past twelve months, Egghead consolidated into a new corporate headquarters location in Spokane, Washington its direct response operations, formerly in Kalispell, Montana, and its administrative operations, previously located in Issaquah, Washington. The relocation, severance and related costs of approximately $4.6 million are included in the fiscal 1996 operating results. The Company implemented these changes to improve customer service and reduce future operating costs. The Company uses a 52/53 week fiscal year, ending on the Saturday nearest March 31 of each year. Fiscal years 1996, 1995, and 1994 each had 52 weeks. All references herein to fiscal 1996, 1995, and 1994 relate to the fiscal years ended March 30, 1996, April 1, 1995, and April 2, 1994 respectively. CERTAIN RISK FACTORS In addition to other information contained in this filing, the following factors could affect the Company's actual results and could cause such results to differ materially from those achieved in the past or expressed in the Company's forward-looking statements. When used in this filing, the words "expects," "believes," "anticipates," and similar expressions are intended to identify forward-looking statements. Competition - The personal computer software, hardware and other related products retailing industry is highly competitive. Egghead competes with other software specialty stores located in malls and in other locations, as well as with computer and office superstores, consumer electronic superstores, mass merchandisers, direct response businesses and software publishers. In addition, there can be no assurance that other methods of distribution will not emerge in the future which would result in increased competition for Egghead. Increased competition may lead to reduced profit margins on personal computer software, hardware and related products, which could have an adverse effect on Egghead's results of operations. Certain of Egghead's competitors have substantially greater financial and other resources than Egghead, which may give them certain competitive advantages. See "Business - Competition." Seasonality and Quarterly Fluctuations - As is the case with many retailers, a significant portion of Egghead's sales will be generated in the fiscal quarter which includes the Christmas selling season. As a result, the annual earnings of Egghead will be heavily dependent on the results of that quarter. Egghead's quarterly results of operations may also fluctuate as a result of the amount of sales contributed by new stores, the timing of costs associated with the construction and opening of these stores, the timing of the closing of any stores, the timing of product releases and a variety of other factors. Dependence on Suppliers - Egghead expects to purchase a significant number of its products from Microsoft and Western Digital. During fiscal 1996 and 1995, sales derived from products supplied by Microsoft and Western Digital accounted for 23.7% and 22.9%, respectively, of Egghead's total net sales. The Company believes the loss of Microsoft or Western Digital as a supplier could have a material adverse effect on Egghead's business and financial results. In addition, Egghead's financial performance is in a large part dependent on the terms it obtains from its suppliers. Such terms include unit prices, unsold product return policies, advertising and market development allowances, freight charges and payment terms. If Egghead is unable to maintain favorable terms with its suppliers, its results of operations could be materially adversely affected. See "Business - Merchandising." 17 New Merchandising Store Format - Egghead's ability to open and operate new stores profitably will depend upon the success of the recently opened new merchandising format stores, the availability of suitable store locations, the negotiation of acceptable lease terms, its financial resources and its ability to control the operational aspects of its growth. While assessing the overall contribution of the new merchandising format, management intends to open six new stores. Pending such evaluation and refinement of the new format, the Company does not intend to open more than the six new stores. See "Business - Retail Operations." Dependence on Purchase and Use of Personal Computers and Software - Sales by Egghead of personal computer software, hardware and related products will be dependent upon the continued purchase and expanded use of home and home office personal computers, as well as the continued development of personal computer software. A long-term decline in the purchase or use of home or home office personal computers, or an interruption in the continued development of personal computer software, would have a material adverse effect on the Company's results of operations and financial position. Dependence on Key Personnel - The success of Egghead will also be dependent upon its ability to attract, motivate and retain key management personnel involved in store operations, merchandising, marketing and administration. The loss of services of key personnel could have a material adverse effect on Egghead's business and financial results. Development Stage Subsidiary - In August 1995, the Company formed ELEKOM, a subsidiary, which is developing electronic commerce applications and services which link customers and their suppliers. Selling, general and administrative costs of approximately $1.1 million and $407,000 were incurred by ELEKOM in fiscal 1996 and 1995, respectively. ELEKOM is expected to continue to incur costs in development of these products and is not expected to make significant sales or distribution of products in fiscal 1997. There can be no assurance that ELEKOM will complete development of these products, or if completed, that the products will have a market or that another similar product will not be already be introduced by a competitor. See "Business - General Readers are cautioned not to place undue reliance on the Company's forward- looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to such forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. RESULTS OF OPERATIONS OVERVIEW Egghead reported a total net loss for continuing and discontinued operations of $10.7 million for fiscal 1996 compared to net income of $2.7 million and a net loss of $514,000 for fiscal years 1995 and 1994, respectively. The net loss during fiscal 1996 was due primarily to a decrease in sales due to a reduction in the average number of stores in full operation during the year, one-time costs of approximately $4.6 million associated with the relocation of the corporate headquarters, costs of rolling out the new format retail stores, and investments of approximately $1.1 million in ELEKOM. Fiscal year 1995 net income included a one-time theft insurance recovery of $1.65 million, pre-tax, related to inventory stolen from retail stores in prior years. Earnings (loss) per share for the fiscal years 1996, 1995, and 1994 was $(0.62), $0.15, and $(0.03), respectively. CONTINUING OPERATIONS Income (loss) from continuing operations includes the results of the Company's retail division, direct response divisions, and ELEKOM as well as selling, general, and administrative expenses related to these operations. The following table shows the relationship of certain items relating to continuing operations included in the Company's Consolidated Statements of Operations expressed as a percentage of net sales:
1996 1995 1994 -------- -------- -------- Net sales 100.0% 100.0% 100.0% Cost of sales, including certain buying, occupancy and distribution costs 88.5 87.7 86.3 -------- -------- -------- Gross margin 11.5 12.3 13.7 Selling, general, and administrative expense 14.8 12.4 15.0 Depreciation and amortization expense, net of amounts included in cost of sales 1.8 1.7 2.0 Provision for shareholder litigation - - 0.3 -------- -------- -------- Operating income (loss) (5.1) (1.8) (3.6) Theft insurance recovery - 0.4 - Other income/(expense), net 0.6 0.1 - -------- -------- -------- Loss before income taxes (4.5) (1.3) (3.6) Income tax benefit 1.7 0.5 1.4 -------- -------- -------- Loss from continuing operations (2.8)% (0.8)% (2.2)% -------- -------- -------- -------- -------- --------
19 NET SALES in fiscal 1996 were $403.8 million, a decrease of $30.2 million or 7% from fiscal 1995 net sales of $434.0 million. Fiscal 1995 sales increased $60.5 million or 16% from fiscal 1994 sales of $373.5 million. Fiscal 1996 sales decreases were affected by a reduction in the average number of stores in full operation, which was 166 during fiscal 1996, compared to 178 stores during the previous year. Comparable retail store sales increased 0.1% in fiscal 1996 compared to fiscal 1995. Comparable store sales for the third and fourth quarters of fiscal 1996 decreased 6.6% and 12.5%, respectively, as compared to the fiscal 1995 third and fourth quarters. Comparable store sales performance in the fiscal 1997 months of April and May have continued this trend with decreases of 7.4% and 6.1% over the same periods in fiscal 1996. In fiscal 1995, comparable retail store sales increased 21% compared to fiscal 1994. Comparable store sales measure sales for stores which were open in both periods being evaluated. Because new format stores were opened during fiscal 1996, their sales will not impact comparable store sales statistics until they have been active during all periods evaluated. During fiscal 1996, the Company opened 10 stores, remodeled 10 stores, and closed 15 stores, operating a total of 164 stores at March 30, 1996. This compares to the 169 stores open at fiscal year end 1995 and 189 stores open at fiscal year end 1994. At the end of fiscal 1996, the Company was operating 19 of its retail stores under a new merchandising format which is approximately twice the size of older format stores and is arranged in a more user-friendly format. The performance of these new stores has been mixed and management continues to evaluate results while refining the format. While assessing the overall contribution of the new merchandising format, management intends to open six new stores. Pending such evaluation and refinement of the new format, the Company does not intend to open more than the six new stores. GROSS MARGIN (net sales minus cost of sales, including certain buying, occupancy, and distribution costs) as a percentage of net sales was 11.5% in fiscal 1996, compared to 12.3% and 13.7% in fiscal years 1995 and 1994, respectively. During 1996, gross margins were negatively affected by the Company's promotion of Microsoft Windows 95 and a clearance sale during the last quarter of the fiscal year. Gross margin as a percentage of sales continues to be affected by industry-wide pricing pressure related to both competitors' pricing and vendors' pricing. SELLING, GENERAL, AND ADMINISTRATIVE (SG&A) EXPENSE as a percentage of net sales was 14.8% in fiscal 1996, compared to 12.4%, and 15.0% in fiscal years 1995 and 1994, respectively. The increased expenses in fiscal 1996 include $4.6 million incurred in connection with the relocation of the corporate offices to Spokane and $1.1 million related to development of products by ELEKOM. SG&A expense as a percentage of net sales not including relocation expense or ELEKOM would be 13.3% in fiscal 1996 and 12.3% in fiscal 1995. The improvement in the fiscal 1995 SG&A expense as a percentage of sales compared to fiscal 1994 was due mainly to sales increasing at a faster rate than expenses. DEPRECIATION AND AMORTIZATION EXPENSE, NET OF AMOUNTS INCLUDED IN COST OF SALES, of $7.4 million in fiscal 1996, compared to $7.4 million and $7.6 million in fiscal years 1995 and 1994, respectively has remained constant. PROVISION FOR SHAREHOLDER LITIGATION of $1.2 million in fiscal 1994 represents a charge for the settlement and related attorneys' fees, net of an insurance recovery, of a shareholders' lawsuit. See note 10 of Notes to Consolidated Financial Statements. 20 THEFT INSURANCE RECOVERY of $1.65 million in fiscal 1995 represents settlement of an insurance claim, net of expenses, for inventory stolen by members of a multi-state shoplifting ring from numerous retail stores during fiscal years 1991, 1992, and 1993. DISCONTINUED OPERATIONS Due to the subsequent sale of the CGE division, all results for the operations of the CGE division are reported as a discontinued operation. Certain general, administrative and distribution areas have traditionally supported all of the Company's business lines. The expenses reflected in the discontinued operations results reflect only those activities directly related to the CGE business. NET SALES for the discontinued operations of CGE declined $65.2 million, or 15.2% from $428.5 million to $363.3 million in fiscal 1996. Fiscal 1995 net sales were $23.7 million, or 5.9% greater than net sales of $404.8 million in fiscal 1994. GROSS MARGIN for CGE (net sales minus cost of sales, including certain buying, occupancy, and distribution costs) as a percentage of net sales was 10.1% in fiscal 1996, compared to 11.3% and 12.8% in fiscal years 1995 and 1994, respectively SELLING, GENERAL, AND ADMINISTRATIVE (SG&A) EXPENSE as a percentage of net sales was 9.2% in fiscal 1996, compared to 8.6%, and 8.3% in fiscal years 1995 and 1994, respectively. DEPRECIATION AND AMORTIZATION EXPENSE, NET OF AMOUNTS INCLUDED IN COST OF SALES, was $2.3 million in fiscal 1996, compared to $2.0 million and $1.1 million in fiscal years 1995 and 1994, respectively. OPERATING INCOME, as a result of the foregoing factors, was $0.9 million in fiscal 1996, compared to $7.1 million and $12.8 million in fiscal years 1995 and 1994, respectively INCOME BEFORE INCOME TAXES, was $0.6 million in fiscal 1996 compared to $9.8 million and $12.9 million in fiscal years 1995 and 1994, respectively. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased $7.0 million from $42.6 million at the end of fiscal 1995, to $49.6 million at the end of fiscal 1996. The increase was due principally to a $13.8 million decrease in inventory, a $14.9 million increase in accounts payable, all of which were partially offset by $16.2 million of additions to property and equipment. In addition, the Company had cash losses of $1.2 million in fiscal 1996, compared to cash income of $14.3 million in fiscal 1995. Net accounts receivable increased $3.6 million from $20.5 million at April 1, 1995, to $24.1 million at March 30, 1996. The increase is due primarily to an increase of approximately $2.6 million in amounts due from vendors. Merchandise inventories decreased $13.8 million, or 11%, from $98.5 million at the end of fiscal 1995, to $84.7 million at the end of fiscal 1996. The decrease is consistent with current sales declines and management's efforts to reduce inventory levels. 21 Assets of discontinued operations include all of the current assets of CGE as of March 30, 1996 and April 1, 1995, respectively. These amounts are primarily trade accounts receivable. See Note 8 of Notes to the Consolidated Financial Statements. Current and non-current deferred income taxes totaling $9.1 million and $8.4 million at March 30, 1996, and April 1, 1995, respectively, resulted from taxes paid on temporary differences which caused taxable income to exceed financial reporting income. Net property and equipment increased $7.6 million, from $21.9 million at the end of fiscal 1995, to $29.5 million at March 30, 1996. The increase is principally due to the addition or remodel of 19 new format stores as well as improvements to the corporate headquarters building in Spokane. Accounts payable increased $14.9 million, from $104.4 million at April 1, 1995, to $119.3 million at March 30, 1996. The increase in accounts payable is primarily attributable to merchandise purchases near the fiscal year end and outstanding vendor payables to be offset by product returns. During fiscal 1996, the Company financed its working capital requirements and capital expenditures with cash provided by operations. Effective December 8, 1995, the Company entered into a revolving loan agreement with two banks providing for secured borrowings of up to $35 million through April 30, 1996. Each bank provided a $17.5 million line of credit and one bank served as agent for the agreement. The Company could elect interest rates on the notes based on the participating banks' rates on certificates of deposit, LIBOR, or prime rate. The agreement contained a number of covenants, including a restriction on the payment of dividends and compliance with certain financial ratios. The Company was not in compliance with the net worth covenant at March 30, 1996. The Company had no outstanding borrowings under the revolving loan agreement at March 30, 1996. The line was not renewed at expiration and the lien on Company assets securing borrowings was released. Capital expenditures in fiscal 1996 totaled approximately $16.2 million. Capital expenditures included leasehold improvements, fixtures, computer hardware, software and communications equipment, principally due to the remodel or addition of 19 new format stores and the relocation of the corporate headquarters. Capital expenditures in fiscal 1995 totaled approximately $14.7 million. Capital expenditures included land and a building in Spokane, Washington for the corporate headquarters. Other expenditures included computer software and communications equipment. Cash and cash equivalents at March 30, 1996 were $49.6 million. On May 13, 1996, the Company also received $45.0 million of gross cash proceeds from the sale of CGE to SSI, which did not include the CGE division's receivables and inventory that Egghead is liquidating in an orderly manner, all of which are expected to result in total gross cash proceeds of approximately $90.0 million. The Company expects these balances will be adequate to meet future cash requirements for operations. NEW ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This new standard requires long- lived assets and certain identifiable intangible assets be evaluated to determine whether the carrying amount is recoverable based on estimated future cash flows expected from the use of the assets and/or cash to be received upon disposal of the assets. The Company will adopt this standard in the first quarter of fiscal year 1997 and anticipates the effect of the adjustment, primarily from goodwill associated with direct response to be a charge of approximately $1.3 million before income taxes. In October 1995, the FASB issued Statement No. 123, Accounting for Stock- Based Compensation. This new standard requires entities to choose either a fair valued based method or an intrinsic value based method of accounting for all employee stock compensation plans. The Company currently uses and plans to continue to use the intrinsic value based method which requires no compensation cost to be recognized at the date of the stock compensation grant if the option is granted at the current market price. The Company will adopt this new standard during fiscal 1997 at which time additional footnote disclosure will be required. 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Egghead, Inc.: We have audited the accompanying consolidated balance sheets of Egghead, Inc. (a Washington corporation) and subsidiaries as of March 30, 1996 and April 1, 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three fiscal years in the period ended March 30, 1996. These financial statements are the responsibility of the Company'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, Inc. and subsidiaries as of March 30, 1996 and April 1, 1995, and the results of their operations and their cash flows for each of the three fiscal years in the period ended March 30, 1996, in conformity with generally accepted accounting principles. Arthur Andersen LLP Seattle, Washington, May 29, 1996 24 EGGHEAD, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Consolidated Balance Sheets (DOLLARS IN THOUSANDS)
ASSETS March 30, April 1, 1996 1995 ---------- ---------- Current assets: Cash and cash equivalents $ 49,590 $ 42,592 Non-trade accounts receivables, net of allowance for doubtful accounts of $2,098 and $2,169, respectively 24,079 20,494 Merchandise inventories, net 84,712 98,543 Prepaid expenses and other current assets 9,455 4,045 Current deferred income taxes (Note 4) 4,859 5,300 Discontinued operations - net current assets (Note 8) 71,796 70,059 ---------- ---------- Total current assets 244,491 241,033 ---------- ---------- Property and equipment, net (Note 2) 29,495 21,925 Non-current deferred income taxes (Note 4) 4,221 3,051 Other assets 1,621 2,172 Discontinued operations - net long-term assets (Note 8) 1,727 1,960 ---------- ---------- $ 281,555 $ 270,141 ---------- ---------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable to banks (Note 3) $ - $ - Accounts payable 119,341 104,425 Accrued liabilities 15,817 16,395 Income taxes payable (Note 4) - 325 Current portion of capital lease obligations 295 252 Discontinued operations - current liabilities (Note 8) 5,650 908 ---------- ---------- Total current liabilities 141,103 122,305 ---------- ---------- Capital lease obligations, less current portion (Note 7) 280 106 Deferred rent 903 1,314 ---------- ---------- Total liabilities 142,286 123,725 ---------- ---------- Commitments and contingencies (Note 7) - - Shareholders' equity (Note 5): Common stock, $.01 par value: 50,000,000 shares authorized; 17,546,548 and 17,166,031 shares issued and outstanding, respectively 176 172 Additional paid-in capital 124,104 120,572 Retained earnings 14,989 25,672 ---------- ---------- Total shareholders' equity 139,269 146,416 ---------- ---------- $281,555 $270,141 ---------- ---------- ---------- ----------
SEE NOTES TO CONSODOLIDATED FINANCIAL STATEMENTS. 25 EGGHEAD, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Consolidated Statements of Operations (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994 -------- -------- -------- Net sales $403,841 $434,021 $373,510 Cost of sales, including certain buying, occupancy and distribution costs 357,373 380,428 322,210 -------- -------- -------- Gross margin 46,468 53,593 51,300 Selling, general and administrative expense 59,639 53,895 56,096 Depreciation and amortization expense, net of amounts included in cost of sales 7,449 7,363 7,603 Provision for shareholder litigation (Note 10) - - 1,200 -------- -------- -------- Operating loss (20,620) (7,665) (13,599) Theft insurance recovery (Note 9) - 1,650 - Other (expense) income: Interest expense (77) (39) (82) Interest income 2,232 761 352 Other, net 314 (104) (371) -------- -------- -------- Loss from continuing operations before income taxes (18,151) (5,397) (13,700) Income tax benefit (Note 4) 7,030 2,106 5,343 -------- -------- -------- Net loss from continuing operations (11,121) (3,291) (8,357) Income from discontinued operations, net of tax (Note 8) 376 5,959 7,843 -------- -------- -------- Net income (loss) $(10,745) $ 2,668 $ (514) -------- -------- -------- -------- -------- -------- Earnings (loss) per share: Continuing operations $ (0.64) $ (0.19) $ (0.49) Discontinued operations 0.02 0.34 0.46 -------- -------- -------- Earnings (loss) per share $ (0.62) $ 0.15 $ (0.03) -------- -------- -------- -------- -------- -------- Weighted average common shares outstanding 17,437 17,281 17,088 -------- -------- -------- -------- -------- --------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 26 EGGHEAD, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Consolidated Statements of Shareholders' Equity (AMOUNTS IN THOUSANDS)
Additional Common Stock Paid-in Retained Shares Amount Capital Earnings Total --------- --------- --------- --------- --------- Balance, April 3, 1993 16,983 $ 170 $ 119,242 $ 23,578 $ 142,990 Stock issued for cash, pursuant to employee stock purchase plan 70 1 487 - 488 Tax benefit related to stock options - - 6 - 6 Stock granted as compensation 68 - 552 - 552 Translation adjustment - - - (106) (106) Net loss - - - (514) (514) --------- --------- --------- --------- --------- Balance, April 2, 1994 17,121 171 120,287 22,958 143,416 Stock issued for cash, pursuant to employee stock purchase plan 42 1 258 - 259 Stock issued for cash, pursuant to stock option plan 3 - 27 - 27 Translation adjustment - - - 46 46 Net income - - - 2,668 2,668 --------- --------- --------- --------- --------- Balance, April 1, 1995 17,166 172 120,572 25,672 146,416 Stock issued for cash, pursuant to employee stock purchase plan 46 1 286 - 287 Stock issued for cash, pursuant to stock option plan 335 3 3,246 - 3,249 Translation adjustment - - - 62 62 Net loss - - - (10,745) (10,745) --------- --------- --------- --------- --------- Balance, March 30, 1996 17,547 $ 176 $ 124,104 $ 14,989 $ 139,269 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 27 EGGHEAD, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Consolidated Statements of Cash Flows (DOLLARS IN THOUSANDS)
1996 1995 1994 -------- -------- -------- Cash flows from operating activities: Net loss from operations $(10,745) $ 2,668 $ (514) -------- -------- -------- Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 10,721 10,468 10,250 Deferred rent (411) (108) (85) Deferred income taxes (729) 1,084 (1,322) Stock issued as compensation - - 552 (Gain) loss on disposition of property and equipment (55) 187 327 Changes in assets and liabilities: Account receivable, net (3,585) 1,089 (7,935) Merchandise inventories 13,831 13,558 19,948 Prepaid expenses & other current assets (5,410) (574) 15 Other assets 128 (245) (2,288) Discontinued operations, net 3,005 (6,881) (4,233) Accounts payable 14,916 13,401 (7,040) Accrued liabilities (578) (2,359) 1,307 Income taxes payable (325) (169) (295) -------- -------- -------- Total adjustments 31,508 29,451 9,201 -------- -------- -------- Net cash provided by operating activities 20,763 32,119 8,687 -------- -------- -------- Cash flows from investing activities: Additions to property and equipment (16,174) (14,741) (9,483) Proceeds from sale of equipment 86 103 117 Discontinued operations, net (788) (520) - -------- -------- -------- Net cash used by investing activities (16,876) (15,158) (9,366) -------- -------- -------- Cash flows from financing activities: Proceeds from stock issuances 3,536 286 488 Payments made on capital lease obligations (487) (308) (493) -------- -------- -------- Net cash provided (used) by financing activities 3,049 (22) (5) -------- -------- -------- Effect of exchange rates on cash 62 (24) (25) -------- -------- -------- Net increase (decrease) in cash and cash equivalents 6,998 16,915 (709) Cash and cash equivalents at beginning of period 42,592 25,677 26,386 -------- -------- -------- Cash and cash equivalents at end of period $ 49,590 $ 42,592 $ 25,677 -------- -------- -------- -------- -------- --------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 28 EGGHEAD, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Consolidated Statements of Cash Flows (CONTINUED)
1996 1995 1994 -------- -------- -------- SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING THE YEAR (IN THOUSANDS): Interest $ 77 $ 39 $ 76 Income taxes $ 334 $ 668 $ 1,314
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Capital lease obligations totaling $0.7 million and $0.2 million were recorded in fiscal years 1996 and 1995 respectively, when the Company acquired new equipment. 29 EGGHEAD, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements All references herein to fiscal 1996, 1995 and 1994 relate to the fiscal years ended March 30, 1996, April 1, 1995, and April 2, 1994, respectively. NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS Egghead, Inc. sells personal computer software, hardware and related products through its wholly-owned subsidiaries, DJ&J Software Corporation (DJ&J, d/b/a Egghead Software) and Eggspert Software, Ltd. (Eggspert, a Canadian subsidiary), EH Direct, Inc. (EH Direct), Egghead International, Inc. (Egghead International), and Elekom Corporation (Elekom). References to "the Company" and "Egghead" include Egghead, Inc., its predecessors, and its subsidiaries. Eggspert and Egghead International became inactive subsidiaries May 13, 1996 following the sale of corporate, government, and education (CGE) division to Software Spectrum, Inc. (SSI) SEE NOTE 8. CONSOLIDATION The consolidated financial statements include the accounts of Egghead, Inc. and its wholly-owned subsidiaries, DJ&J, Eggspert, EH Direct, Egghead International, and ELEKOM, and include all such adjustments and reclassifications necessary to eliminate the effect of significant intercompany accounts and transactions. Operating results for Eggspert and Egghead International are included in discontinued operations. SEE NOTE 8. 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. CASH AND CASH EQUIVALENTS The Company 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. ACCOUNTS RECEIVABLE AND REVENUE RECOGNITION Company sales made on credit generally have terms of net 30 days. The sales and corresponding trade receivables for inventoried product are recorded upon merchandise shipment. The Company records provisions for doubtful accounts and sales returns and allowances based upon historical experience. Certain advertising and promotional expenditures are reimbursable from suppliers under cooperative advertising and other promotional and market development fund arrangements. Amounts qualifying for reimbursement are recorded as receivables from the suppliers and as a corresponding reduction of net advertising expense in the period the expenditure occurs. Also included in accounts receivable are credit card receivables and amounts due from vendors for returned inventory and other programs. The Company records a provision for uncollectible vendor receivables based upon historical experience. 30 EGGHEAD, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements (CONTINUED) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) MERCHANDISE INVENTORIES Merchandise inventories are accounted for using the moving weighted average cost method and are stated at the lower of cost or market. Egghead maintains reserves for the obsolescence of merchandise inventory. These reserves totaled approximately $6.7 million and $8.0 million at March 30, 1996 and April 1, 1995 respectively. Management has developed a plan to dispose of this obsolete inventory and believes the reserve is adequate to cover any losses on disposition. Inventories on the balance sheet are shown net of this reserve. 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 ranging from 20 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. GOODWILL Net assets of organizations acquired in purchase transactions are recorded at fair value at date of acquisitions. Unidentified intangibles are amortized straight line over the estimated life of the remaining long-term assets acquired. Unidentified intangibles at March 30, 1996 and April 1, 1995 were $998,000 and $1.4 million, respectively, net of accumulated amortization of $993,000 and $595,000, respectively. ACCOUNTS PAYABLE Outstanding checks included in accounts payable were $9.0 million and $10.4 million at March 30, 1996 and April 1, 1995, respectively. DEFERRED RENT Certain store lease agreements provide for scheduled rent increases or for rent payments to commence at a date later than the date of occupancy. In these cases, the Company recognizes the aggregate rent expense on a straight-line basis over the lease term beginning when the store opens. INCOME TAXES The Company determines its income tax accounts in accordance with Statement of Financial Accounting Standards No. 109. Deferred income taxes result primarily from temporary differences in the recognition of certain items for income tax and financial reporting purposes. EARNINGS (LOSS) PER SHARE Earnings per share amounts are computed using the weighted average number of common shares and dilutive common equivalent shares outstanding during each period using the treasury stock method. Common equivalent shares result from the assumed exercise of stock options and from the conversion of cash related to the employee stock purchase plan into common shares based upon the terms of the plan which would have a dilutive effect in years where there are earnings. Common equivalent shares had no material effect on the computation in fiscal years 1996, 1995, or 1994. 31 EGGHEAD, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements (CONTINUED) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FOREIGN CURRENCY TRANSLATION Balance sheet accounts of the Company's foreign operations are translated into U.S. dollars at the exchange rate on the balance sheet date. Results of operations are translated at the average exchange rate prevailing during the fiscal year. The results of unrealized exchange rate fluctuations on translating foreign currency assets and liabilities into U.S. dollars are recorded as a component of retained earnings. Realized gains and losses from foreign currency transactions are included in net income. OTHER ACCOUNTING PRINCIPLES In March 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This new standard requires long- lived assets and certain identifiable intangible assets be evaluated to determine whether the carrying amount is recoverable based on estimated future cash flows expected from the use of the assets and cash to be received upon disposal of the assets. The Company will adopt this standard in the first quarter of fiscal year 1997 and anticipates the effect of the adjustment, primarily from goodwill associated with direct response, to be a charge of approximately $1.3 million before income taxes. In October 1995, the FASB issued Statement No. 123, Accounting for Stock- Based Compensation. This new standard requires entities to choose either a fair valued based method or an intrinsic value based method of accounting for all employee stock compensation plans. The Company currently uses and plans to continue to use the intrinsic value based method which requires no compensation cost to be recognized at the date of the stock compensation grant if the option is granted at the current market price. The Company will adopt this new standard during fiscal 1997 at which time additional footnote disclosure will be required. FISCAL YEARS The Company uses a 52/53 week fiscal year, ending on the Saturday nearest March 31 of each year. Fiscal quarters are such that the first three quarters consist of 13 weeks and the fourth quarter consists of the remaining 13/14 weeks. Fiscal years 1996, 1995 and 1994 each had 52 weeks. 32 PART II. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA EGGHEAD, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements (CONTINUED) NOTE 2 PROPERTY AND EQUIPMENT The components of property and equipment at March 30, 1996 and April 1, 1995 were as follows (in thousands): March 30, April 1, 1996 1995 --------- --------- Land and buildings $ 8,547 $ 6,574 Equipment 38,814 33,559 Leasehold improvements 14,157 8,652 Furniture and fixtures 7,080 6,674 --------- --------- 68,598 55,459 Less accumulated depreciation and amortization (39,103) (33,534) --------- --------- Property and equipment, net $ 29,495 $ 21,925 --------- --------- --------- --------- NOTE 3 NOTES PAYABLE TO BANKS Effective December 8, 1995, the Company entered into a revolving loan agreement with two banks providing for secured borrowings of up to $35 million through April 30, 1996. Each bank provided a $17.5 million line of credit and one bank served as agent for the agreement. The Company could elect interest rates on the notes based on the participating banks' rates on certificates of deposit, LIBOR, or prime rate. The agreement contained a number of covenants, including a restriction on the payment of dividends and compliance with certain financial ratios. The Company was not in compliance with net worth ratios as of March 30, 1996. The Company had no outstanding borrowings under the revolving loan agreement at March 30, 1996. The line was not renewed at expiration and the lien on Company assets securing borrowings was released. A summary of borrowings under the lines of credit follows (in thousands): Fiscal year ----------- 1996 1995 1994 --------- --------- --------- Maximum amount outstanding $ 11,275 $ - $ 5,950 Average amount outstanding $ 285 $ - $ 350 Weighted average interest rate 8.0% -% 3.9% EGGHEAD, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements (CONTINUED) NOTE 4 INCOME TAXES The provision (benefit) for income taxes is comprised of the following (in thousands): Fiscal year ----------- 1996 1995 1994 --------- --------- --------- Current: Federal $ (4,383) $ (2,048) $ (3,545) State (1,917) (896) (990) --------- --------- --------- (6,300) (2,944) (4,535) --------- --------- --------- Deferred: Federal (404) 730 (704) State (326) 108 (104) --------- --------- --------- (730) 838 (808) --------- --------- --------- Total $ (7,030) $ (2,106) $ (5,343) --------- --------- --------- --------- --------- --------- 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: March 30, April 1, 1996 1995 --------- --------- Accounts receivable $ 857 $ 868 Merchandise inventories 2,651 2,919 Property and equipment 3,625 2,385 Other assets 256 155 Accrued liabilities 1,442 1,717 Deferred rent 249 307 --------- --------- Total deferred tax assets $ 9,080 $ 8,351 --------- --------- --------- --------- The Company's income tax benefit differs from the amount computed by applying the statutory federal tax rate to loss from continuing operations before taxes as follows: Fiscal year ----------- 1996 1995 1994 --------- --------- --------- Statutory Federal tax rate (34.0)% (34.0)% (34.0)% State taxes, net of Federal benefit (4.6) (4.0) (4.4) Tax exempt interest income (1.8) (3.3) (0.7) Other, net 1.7 2.3 0.1 --------- --------- --------- (38.7)% (39.0)% (39.0)% --------- --------- --------- --------- --------- --------- 34 EGGHEAD, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements (CONTINUED) NOTE 5 STOCK OPTION AND STOCK PURCHASE PLANS EMPLOYEE STOCK PURCHASE PLAN The Egghead, Inc. 1989 Employee Stock Purchase Plan currently provides options to acquire the Common Stock of the Company to substantially all full-time and certain other employees at the lesser of 85% of the fair market value of the Common Stock on August 1 of the first and second plan years and July 1 thereafter, or 85% of the fair market value on the following July 31 of the first plan year and June 30 of each plan year thereafter. Under the plan, a maximum of 650,000 shares were reserved for issuance. As of March 30, 1996, there were approximately 340,000 shares available for future issuance. THE 1993 STOCK OPTION PLAN In September 1993, the Company's shareholders approved the 1993 Stock Option Plan (the "1993 Plan"), under which 2,000,000 shares of the Company'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. Options granted, exercised, and canceled under the above Plans are summarized as follows: Fiscal year ----------- 1996 1995 1994 --------- --------- --------- Outstanding, beginning of year 1,513,089 702,322 1,184,338 Options granted 621,100 1,140,900 250,000 Options exercised (55,395) (2,625) - Options canceled (705,907) (327,508) (732,016) --------- --------- --------- Outstanding, end of year 1,372,887 1,513,089 702,322 --------- --------- --------- Exercisable, end of year 359,277 293,139 237,497 --------- --------- --------- --------- --------- --------- Available for grant in future years 1,860,873 1,776,066 2,589,458 --------- --------- --------- --------- --------- --------- Price of Options: Granted during year $9.50 - $10.75 $6.19 - $10.25 $7.50 - $8.13 Exercised during year $6.19 - $12.75 $9.88 - $10.75 - Canceled during year $6.19 - $17.00 $6.19 - $17.00 $8.37 - 17.00 35 EGGHEAD, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements (CONTINUED) NOTE 5 STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED) THE NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN In September 1993, the Company's shareholders approved the Non-employee Director Stock Option Plan, and in August 1995 the Company's shareholders approved amendments thereto (as amended, the "Director Plan") under which 450,000 shares of the Company's Common Stock were reserved for issuance. As of March 30, 1996, 315,000 shares were available for grant and 135,000 shares were subject to outstanding options which have been granted at prices ranging from $7.25 to $13.75. As of March 30, 1996, options for 90,000 shares were vested. THE EXECUTIVE PLAN In February 1989, the Board of Directors approved four-year employment agreements and stock option agreements for three executive officers who are no longer with the Company, Stuart Sloan, Ronald Weinstein, and Matthew Griffin, whereby the officers' compensation was based on equity incentives. Each drew an annual salary of $1 per year during their term of employment. Options to acquire up to 1,700,000 shares of common stock are authorized under the Plan. As of March 30, 1996, 325,000 shares were available for grant and 1,096,324 were subject to outstanding options which have been granted to the above named executive officers of the Company at prices ranging from $10.38 to $20.00. All outstanding options are vested and expire in February 1999. As of March 30, 1996, 278,676 of the options had been exercised at $10.38 per share. NOTE 6 401(K) PLAN The Company has a 401(k) retirement plan for the benefit of its employees. After six months of full-time employment (more than 1,000 hours), an employee is eligible to participate in the plan. Employee contributions are matched by the Company at 50% of each employee's contribution up to 4% of their compensation. The Company's contributions are fully vested upon the completion of two years of service. The Company's contributions were approximately $228,000, $446,000 and $571,000 in fiscal years 1996, 1995, and 1994, respectively. 36 EGGHEAD, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements (CONTINUED) NOTE 7 COMMITMENTS AND CONTINGENCIES Significant supplier In fiscal 1996 and 1995, one supplier accounted for sales aggregating approximately $71.6 million and $61.0 million, respectively. The loss of this supplier could have a material adverse effect on the Company's business and financial results and condition. Leases The Company leases retail stores and distribution facilities under operating leases with remaining lives on most leases ranging from one to five years. Some leases contain renewal options of one to five years which the Company may exercise at the end of the initial lease term. The leases generally require the Company to pay taxes, insurance, and certain common area maintenance costs. Aggregate rental expense, including common area maintenance charges, for all operating leases for the fiscal years ended 1996, 1995, and 1994 was approximately $15,990,829, $16,769,000 and $18,012,000, respectively. As of March 30, 1996, future minimum rental payments under non-cancelable operating and capital leases for retail stores and distribution facilities, and equipment consisted of the following (in thousands): Capital Operating Fiscal Year leases leases ---------------------------------------------- 1997 330 13,261 1998 306 9,251 1999 - 5,446 2000 - 2,404 2001 1,157 Thereafter - - ------ ------ Total minimum payments 636 $31,519 ------ ------ Less interest (61) ------ Present value of minimum lease payments 575 Less current portion (295) ------ Capital lease obligations, less current portion $280 ------ ------ 37 EGGHEAD, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements (CONTINUED) NOTE 8 DISCONTINUED OPERATIONS AND SUBSEQUENT EVENTS Effective May 13, 1996, the Company sold its CGE division to SSI, a Texas corporation, for $45 million in cash pursuant to the terms of an asset purchase agreement entered into on March 23, 1996. Egghead and SSI also entered into a Fulfillment Agreement and a Call Center Lease relating to the provision of certain support services by Egghead to SSI and to the lease for a period of three years of a portion of Egghead's facility previously used by the CGE division. The assets, liabilities, and results of discontinued operations of the CGE division are presented separately in the accompanying financial statements. The income from discontinued operations for 1996, 1995, and 1994 is comprised of the following (in thousands): Fiscal year ----------- 1996 1995 1994 -------- -------- -------- Net sales $ 363.3 $ 428.5 $ 404.8 Costs and expenses 362.7 418.7 391.9 -------- -------- -------- Income before provision for income taxes 0.6 9.8 12.9 Income tax expense 0.2 3.8 5.1 -------- -------- -------- Income from discontinued operations $ 0.4 $ 6.0 $ 7.8 -------- -------- -------- -------- -------- -------- The net assets of discontinued operations for 1996 and 1995 consist of the following (in thousands): 1996 1995 -------- -------- Accounts receivable - trade, net of allowance $ 61.7 $ 64.0 Merchandise inventory, net 9.3 4.4 Deferred taxes 0.8 1.7 -------- -------- Net current assets of discontinued operations $ 71.8 $ 70.1 -------- -------- -------- -------- NOTE 9 THEFT INSURANCE RECOVERY Theft insurance recovery of $1.65 million in fiscal 1995 represents settlement of an insurance claim, net of expenses, for inventory stolen from numerous retail stores during fiscal years 1991, 1992, and 1993, by members of a multi-state shoplifting ring. 38 EGGHEAD, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements (CONTINUED) NOTE 10 SHAREHOLDER LITIGATION On June 9, 1994, the Company announced that it had settled a shareholders' lawsuit originally filed against the Company and two former officers who were also directors. The action, originally entitled FINUCAN V. EGGHEAD, ET AL., was filed in federal court in Seattle in September 1993 and was alleged to be brought on behalf of all purchasers of the Company's common stock between February 11, 1992, and November 18, 1992, (other than the individual defendants and other individuals and entities otherwise affiliated with the Company). The settlement called for a cash payment by the Company of $2.625 million. Payment was made during fiscal 1995. This settlement was approved by the United States District Court for the Western District of Washington on January 12, 1995. Net of insurance recovery, the settlement and related attorneys fees resulted in a pretax charge of $1.2 million in fiscal year 1994 ($0.04 per share, net of income tax impact). 39 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - -------------------------------------------------- Directors The Company's Board of Directors (the "Board") is divided into three classes: Class I, Class II, and Class III. Each director serves for a term ending at the third annual meeting of shareholders following the annual meeting at which he or she was elected, except that any director appointed by the Board serves, subject to election by the shareholders at the next annual meeting, for a term ending at the annual meeting of shareholders for the class to which the director was appointed. Each director serves until his or her successor is elected and qualified or until his or her earlier death, resignation, or removal. CLASS II DIRECTORS (TERMS TO EXPIRE IN 1999) STEVEN E. LEBOW, age 42, has been a director of the Company since November 1985. Mr. Lebow is a Managing Director of the Investment Banking Division of Donaldson, Lufkin & Jenrette Securities Corporation, where he has been employed since 1979. LINDA FAYNE LEVINSON, age 54, has served as the President of Fayne Levinson Associates, a general management consulting firm to consumer and financial service organizations, since 1982. Ms. Levinson also serves as a member of the Boards of Genentech, Inc., Jacobs Engineering Group Inc. and Administaff Inc. Ms. Levinson was an executive at Creative Artists Agency, Inc. from 1993 through February 1994 and was a partner of Wings Partners, a Los Angeles-based merchant bank whose holdings include Northwest Airlines, from 1989 until 1993. Ms. Levinson was a Senior Vice President at American Express Travel Related Services Co., Inc. from 1984 until 1987, and was at McKinsey & Co., a worldwide general management consulting firm, from 1972 through 1981, where she was made the first woman partner in 1979. Ms. Levinson has been a director of the Company since September 1993. MELVIN A. WILMORE, age 50, was appointed a director of the Company in July 1996. Mr. Wilmore is a director and the President and Chief Operating Officer ("COO") of Ross Stores, Inc., a California based company which operates a nationwide chain of retail clothing stores. He began his association with that company in December 1991 as its Executive Vice President and COO, and was promoted to President and elected to the Board of Directors in March 1993. Prior to joining Ross Stores, Mr. Wilmore was President and Chief Executive Officer of Live Specialty Retail, a division of LIVE Entertainment, Inc. which operates a chain of prerecorded software home entertainment stores. He has been employed by Zale Jewelry and currently serves on the Board of Directors of Hechinger Company. CLASS III DIRECTORS (TERMS TO EXPIRE IN 1997) GEORGE P. ORBAN, age 50, has been a director of the Company since November 1985, and in May 1996 was appointed Chairman of the Board. Mr. Orban is Managing Partner of Orban Partners, a private investment company, and a director and co-founder of Ross Stores, Inc., which operates a chain of retail clothing stores. He is also the founder of Office Mart Holdings Corporation, Inc., which operates a chain of retail office products superstores, where he served as Chairman of the Board until 1992. ERIC P. ROBISON, age 36, was appointed a director of the Company in July 1996. Since 1994 Mr. Robison has been a Business Development Associate for Vulcan Ventures Inc. ("Vulcan"), a venture capital firm wholly-owned by Paul G. Allen, a former director of the Company. Mr. Robison's responsibilities at Vulcan include overseeing investment opportunities for Mr. Allen as well as providing strategic business consultation to the many companies controlled by Mr. Allen. Prior to joining Vulcan, Mr. Robison was co-founder and Vice President of The Stanton Robison Group, Inc., a business developement, marketing and advertising consulting firm, from 1992 - 1993. During 1991 he was a consultant with Stanton Bondo & Co. and for the two years before that, he was Vice President of SGS, Inc., which is involved in the restaurant business. He also serves on the Board of Directors for the following publicly held companies: ARI Network Services, Inc. and C/NET, Inc. CLASS I DIRECTORS (TERMS TO EXPIRE IN 1998) RICHARD P. COOLEY, age 72, has been a director of the Company since September 1992 and served as Chairman from February 1993 to June 1993. He was Chairman of Seafirst Bank from January 1983 to December 1990, Chairman of the Executive Committee of Seafirst Bank from January 1991 to March 1994, and was named Honorary Director of Seafirst Bank in April 1994. Mr. Cooley also serves as a director of Ackerley Comm., Inc. TERENCE M. STROM, age 52, has been a director and the President of the Company since June 1993, and the Chief Executive Officer of the Company since September 1993. From January 1990 until joining the Company, he served as Senior Vice President of Marketing, and from July 1989 until December 1989 as Vice President of Merchandising, of Best Buy Co., Inc., a consumer electronics retail chain. SAMUEL N. STROUM, age 75, has been a director of the Company since June 1984. He is the principal of Samuel Stroum Enterprises, a private investment company, and the Chairman of MACS Air, Inc., an air charter company. From 1975 to April 1991, Mr. Stroum served as a director of both Seafirst Bank and Seafirst Corporation. At Seafirst Corporation Mr. Stroum also served on the Executive Committee and was Chairman of the Organization Committee. He is also a Regent and Past President of the Board of Regents of the University of Washington. Executive Officers ------------- TOMMY E. COLLINS, age 39, joined the Company in July 1995 as Director of Management Information Systems ("MIS"). In May 1996 he was promoted to Vice President of MIS. Prior to joining the Company, Mr. Collins spent ten years at Key Tronic Corporation, serving for the last five years as Director of Corporate Information Services. Key Tronic Corporation is an independent computer peripheral manufacturing company. KURT S. CONKLIN, age 43, joined the Company in August 1994 as Vice President of Human Resources. In May 1996 he was promoted to Senior Vice President. From June 1992 until joining the Company, Mr. Conklin was employed as the Vice President of Human Resources and Purchasing at Key Tronic Corporation, a computer peripheral manufacturing company. From August 1987 to August 1991, he was the Vice President of Administration at Danzas Corporation, a freight forwarding company. DIANE E. COUSINEAU, age 46, was appointed Vice President of Stores in June 1995. Ms. Cousineau joined the Company in September 1990 as Director of Special Projects, and served as Director of Retail Operations from February 1991 to June 1995. Prior to joining the Company, Ms. Cousineau was employed by Waldenbooks for ten years, where she held various management positions, including Regional Director of the Northeast. PETER F. GROSSMAN, age 42, joined the Company in September 1994 as Vice President of Retail and in August 1995 he was named Vice President of Merchandising and Advertising. He was promoted to Executive Vice President in May 1996. Prior to joining the Company, Mr. Grossman was employed by The Sharper Image, a national retail and catalog sales company, where he served as Executive Vice President of Merchandising from July 1993 to September 1994, and as Senior Vice President of Merchandising from May 1990 to June 1993. He has also been employed as a Vice President by Rich's/Goldsmith's and The Emporium, both department store chains. JAMES F. KALASKY, age 46, joined the Company as Merchandising Manager in July 1995 and was promoted to Vice President of Merchandising in May 1996. Previously Mr. Kalasky was Director of Merchandising at Damark International, a membership driven consumer direct marketing company, from 1994 to 1995, and before that, Vice President of Merchandising at Best Buy Co., Inc., a consumer electronics retail chain, from 1992 to 1994. Prior to his association with Best Buy Co., Inc., Mr. Kalasky was the Merchandising Manager for ten years at Boscov's, a Pennsylvania based department store chain. KIRK W. LOCKHART, age 39, joined the Company in November 1994 as Vice President of International. Since August 1995 he has also served as President of the Company's wholly-owned subsidiary, ELEKOM Corporation. In May 1996 he resigned as the Company's Vice President of International. From August 1993 to October 1994, he was employed as Director of Strategic Planning by Best Buy Co., Inc., a consumer electronics retail chain. From June 1991 to August 1993, Mr. Lockhart was Senior Manager of Strategic Information Systems at Pioneer North America, a manufacturing company. Prior to that time Mr. Lockhart was employed by CCH Computax from August 1981 to June 1991 as Director of Marketing. RONALD J. SMITH, age 49, has been with the Company since 1987 and has been a Senior Vice President since May 1996. He served as Vice President of Distribution and Real Estate from September 1993 to May 1996. From May 1992 until August 1993, he was Vice President of Distribution. From July 1988 until April 1992, Mr. Smith was the Company's Director of Distribution, and from January 1988 until June 1988 he was General Manager of Distribution. EDWARD S. WOZNIAK, age 50, joined the Company in May 1996 as Vice President, Secretary and Chief Financial Officer. Before joining the Company he was associated for over five years with the Thom McAn Shoe Company, a division of Melville Corporation, where he most recently served as Senior Vice President and Chief Financial Officer. Mr. Wozniak also has been employed by Federated Department Stores, Inc. and the General Foods Corporation. COMPLIANCE WITH SEC REPORTING REQUIREMENTS ------------------------ Officers and directors of the Company and persons who own more than ten percent of the Company's stock are required to report to the Securities and Exchange Commission ("SEC") ownership and changes in ownership of the Company's stock. Regulations promulgated by the SEC require the Company to disclose to its shareholders those filings that were not made on a timely basis. Based solely on its review of copies of such reports received by it, or written representations received from reporting persons that no such forms were required for those persons, the Company believes that, during fiscal year 1996, its officers and directors complied with all applicable filing requirements, with the following exceptions: Messrs. Ron Foster and Glenn Johnson, both former Vice Presidents of the Company, filed late their respective initial beneficial ownership reports on Form 3 that were required to be filed in connection with the commencement of their employment as executive officers of the Company. ITEM 11. EXECUTIVE COMPENSATION - ------------------------ ANNUAL AND LONG-TERM COMPENSATION The following table sets forth annual and long-term compensation for services rendered during fiscal years 1996, 1995, and 1994, by Mr. Stroum, the Company's Chief Executive Officer, and the other Named Executive Officers. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS ------------------------------------------- ------------ OTHER ANNUAL SECURITIES ALL OTHER FISCAL SALARY BONUS COMPENSATION UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION YEAR (1) ($) (1) ($) ($) OPTIONS (#) ($) (2) - ---------------------------------------- -------- -------- -------- ------------ ------------ ------------ Terence M. Strom (3) ................... 1996 $299,994 $ 0 $70,395 0 $ 0 President and Chief 1995 300,000 300,000 0 50,000 0 Executive Officer 1994 230,769 852,500 31,075 268,000 N/A Brian W. Bender (4) .................... 1996 196,442 30,080 53,804 45,000 0 Vice President, Chief 1995 N/A N/A N/A N/A N/A Financial Officer and 1994 N/A N/A N/A N/A N/A Secretary Peter F. Grossman (5) .................. 1996 230,000 0 58,273 20,000 4,423 Executive Vice 1995 123,846 0 5,846 40,000 0 President 1994 N/A N/A N/A N/A N/A Ronald J. Smith (6) .................... 1996 150,000 77,943 56,459 20,000 3,398 Senior Vice President 1995 147,308 0 0 25,000 1,247 1994 120,731 0 0 0 2,233 Kurt S. Conklin (7) .................... 1996 140,000 62,940 65,702 20,000 3,951 Senior Vice President 1995 70,615 0 21,800 25,000 0 1994 N/A N/A N/A N/A N/A
- ------------------------ (1) Fiscal years 1996, 1995 and 1994 each had 52 weeks. (2) Amounts represent contributions by the Company to the Company's Nest Egg 401(k) savings plan on behalf of participating Named Executive Officers. (3) Mr. Strom joined the Company in June 1993. The salary shown for fiscal year 1994 is for a partial fiscal year's employment. Mr. Strom's bonus for fiscal year 1995 represents a guaranteed bonus based on his employment agreement, the term of which ended June 28, 1996. His fiscal year 1994 bonus represents a grant of 68,000 shares of Common Stock upon the commencement of his employment, valued at the market price of such shares on the date of grant, and a $300,000 guaranteed cash bonus. Other Annual Compensation in fiscal year 1994 include amounts paid for costs associated with the sale of Mr. Strom's prior residence upon commencement of his employment with the Company and in fiscal year 1996 includes amounts paid for relocation expenses incurred as a result of the relocation of corporate headquarters. (4) Mr. Bender joined the Company in May 1995. The salary shown for fiscal year 1996 is for a partial fiscal year's employment. Other Annual Compensation in fiscal year 1996 represents amounts paid for relocation costs related to the sale of Mr. Bender's prior residence and the cost of temporary housing upon commencement of his employment with the Company. In fiscal year 1996 he received a bonus of $30,080 for his contribution to the relocation of the Company's corporate headquarters. Mr. Bender resigned from the Company in May 1996. (5) Mr. Grossman's Other Annual Compensation in fiscal year 1996 is comprised of amounts paid for relocation expenses incurred as a result of the relocation of the corporate headquarters. Other Annual Compensation in fiscal year 1995 consists of amounts paid for relocation costs associated with the commencement of Mr. Grossman's employment with the Company. Amounts for fiscal year 1994 are not applicable as Mr. Grossman did not begin his employment with the Company until fiscal year 1995. (6) In fiscal year 1996, Mr. Smith received an aggregate bonus of $77,943 for his contribution to the relocation of the Company's headquarters and the relocation of the Company's former Corporate, Government and Education division. Other Annual Compensation includes amounts paid for expenses incurred as a result of the relocation of the Company's headquarters. (7) In fiscal year 1996, Mr. Conklin received an aggregate bonus of $62,940 for his contribution to the relocation of the Company's headquarters and the relocation of the Company's former Corporate, Government and Education division. Other Annual Compensation in fiscal year 1996 consists of amounts paid for expenses incurred as a result of the relocation of the Company's headquarters. Other Annual Compensation in fiscal year 1995 consists of amounts paid for relocation costs associated with the commencement of Mr. Conklin's employment with the Company. Amounts for fiscal year 1994 are not applicable as Mr. Conklin did not begin his employment with the Company until fiscal year 1995. OPTION GRANTS IN FISCAL YEAR 1996 The following table sets forth stock option grants during fiscal year ended March 30, 1996, to Mr. Strom, the Company's Chief Executive Officer, and the other Named Executive Officers, pursuant to the Company's 1993 Stock Option Plan and the Company's 1986 Combined Incentive and Non-Qualified Stock Option Plan. OPTION GRANTS IN FISCAL YEAR 1996
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE - ------------------------------------------------------------------------------------------- AT ASSUMED ANNUAL NUMBER OF RATES OF STOCK SECURITIES PRICE APPRECIATION FOR UNDERLYING % OF TOTAL OPTION TERM OPTIONS OPTIONS GRANTED EXERCISE ------------------------ GRANTED TO EMPLOYEES PRICE EXPIRATION 5% 10% NAME (#) (1) IN FISCAL YEAR ($/SHARE) DATE ($) (2) ($) (2) - --------------------------------- ----------- ------------------- --------- ----------- ----------- ----------- Terence M. Strom................. 0 0.0% N/A N/A $ 0 $ 0 Brian Bender..................... 40,000 6.5% 9.8800 5/18/05 248,413 629,528 5,000 0.8% 10.7500 6/7/05 33,803 85,664 Peter F. Grossman................ 20,000 3.2% 10.7500 6/7/05 135,212 342,655 Ronald J. Smith.................. 20,000 3.2% 10.7500 6/7/05 135,212 342,655 Kurt S. Conklin.................. 20,000 3.2% 10.7500 6/7/05 135,212 342,655
- ------------------------ (1) Options granted are nonqualified options, have terms of ten years from the date of grant and become exercisable over a three year period in increments of one-sixth, one-third and one-half of the total, respectively. The options were granted at fair market value on the date of grant. Upon the occurrence of certain business combination transactions, the exercisability of the options would be accelerated or assumed by the surviving or acquiring corporation. (SEE "EXECUTIVE COMPENSATION -- CHANGE OF CONTROL ARRANGEMENTS-OPTION PLANS.") (2) Amounts reported in these columns represent amounts that may be realized upon exercise of the options immediately prior to expiration of their terms assuming the specified compounded rates of appreciation on the base price (5% and 10%) of the Common Stock over the terms of the options. The 5% and 10% amounts are calculated based on rules required by the Securities and Exchange Commission and do not reflect the Company's estimate of future stock price growth. Actual gains, if any, on stock option exercises are dependent on the timing of such exercises and the future performance of the Common Stock. There can be no assurance that the rates of appreciation assumed in these columns can be achieved or that the amounts reflected will be received by the individuals. AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1996 AND FISCAL YEAR-END OPTION VALUES The following table sets forth information with respect to stock option grants made under the Company's stock option plans to Mr. Strom, the Chief Executive Officer, and the other Named Executive Officers, including (i) the number of shares of Common Stock purchased upon exercise of options in fiscal year 1996; (ii) the net value realized upon such exercise; (iii) the number of unexercised options outstanding at March 30, 1996; and (iv) the value of unexercised in-the-money options at March 30, 1996. AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1996 AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS ACQUIRED VALUE OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR END (1) ON EXERCISE REALIZED -------------------------- -------------------------- NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------------------- --------------- ------------- ----------- ------------- ----------- ------------- Terence M. Strom..................... 0 $ 0 108,335 141,665 $ 259,897 $ 274,478 Brian Bender......................... 0 0 0 45,000 0 32,500 Peter F. Grossman.................... 0 0 6,668 53,332 25,422 127,078 Ronald J. Smith...................... 0 0 14,668 42,332 18,756 93,744 Kurt S. Conklin...................... 0 0 1,251 26,249 4,769 23,824
- ------------------------ (1) Values are based on the difference between the option exercise price and the fair market value on March 30, 1996 ($10.6875 per share as quoted in the Nasdaq National Market), multiplied by the respective number of vested and unvested shares underlying the option. CHANGE OF CONTROL ARRANGEMENTS CHANGE OF CONTROL AGREEMENTS. In July 1996 the Company entered into Senior Management Employment Agreements with Peter F. Grossman, Ronald J. Smith, Kurt S. Conklin, Edward S. Wozniak, Tommy E. Collins, James F. Kalasky, Diane E. Cousineau and eight other executives. These agreements provide certain benefits in the event that, during the two-year period after execution, such executive's employment is terminated by the Company for any reason other than "cause" or by the executive for "good reason" (as both terms are defined in the agreement) following a "change of control" of the Company. Such benefits include (i) payment of the executive's base salary for the balance of such two-year period, (ii) payment of an amount equal to such executive's annual base salary for one year following termination (or six months in the case of certain executives) and (iii) continuation of life insurance, disability, medical and dental, and other similar employee benefits for the balance of such two-year period or for one year (or six months in the case of certain executives), whichever is longer. Such benefits are also payable by the Company in the event of the executive's death or disability following a change of control of the Company. All amounts payable under the Senior Management Employment Agreements are subject to the limitation that no amounts that would constitute an excess parachute payment (within the meaning of Section 280G(b) of the Internal Revenue Code) may be paid to any executive. On each anniversary, the Senior Management Employment Agreements are automatically extended for an additional year, unless the Company notifies the executive at least sixty (60) days prior to such anniversary. Except as described in the foregoing paragraphs, the Company has not entered into any employment agreements with its executive officers as of the date of this proxy statement. OPTION PLANS. The Company's stock option plans provide that, upon the occurrence of certain transactions, including certain mergers and other business combinations involving the Company, outstanding options will fully vest, subject to termination upon consummation of such transaction. In the alternative, at the discretion of the Company and the corporation(s) participating in such transactions, such options may be assumed by the acquiring or surviving corporation. DIRECTOR PLAN. The Company's Non-employee Director Stock Option Plan provides that upon the occurrence of certain transactions, including certain mergers and business combinations involving the Company, the vesting of outstanding options will be accelerated so that all options would be immediately exercisable. Any options not exercised would terminate upon consummation of such a transaction. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Messrs. Stroum and Orban, and Ms. Levinson, all shareholders and directors of the Company, together with Mr. Paul G. Allen, former director, were all members of the Compensation Committee of the Board during fiscal year 1996. Mr. Allen is a shareholder and director of Microsoft Corporation, the founder and Chairman of Asymetrix Corporation, and the President and sole shareholder of Vulcan Ventures Inc. In fiscal year 1996, aggregate software purchases by the Company directly from Microsoft were approximately $158,258,685. Additional Microsoft products were purchased by the Company through third-party distributors. In fiscal year 1996, aggregate purchases by the Company from Asymetrix were approximately $605,613. Both Asymetrix and Microsoft purchased products directly from the Company during fiscal year 1996 in the respective amounts of $112,186 and $9,838,497. All of such purchases were made in the ordinary course of business at prevailing rates for corporate customers. In a stock purchase agreement among Vulcan Ventures Inc. and certain shareholders of the Company (including certain of the Company's directors) dated June 18, 1987, such shareholders agreed to use their best efforts to encourage the Company and its subsidiaries to do business with the above entities as well as with any other affiliate of Mr. Allen or Vulcan Ventures Inc., provided the transaction is on an arm's-length basis. Mr. Stroum and his daughter, Marsha Sloan Glazer, were directors and shareholders of SureFind Corp. ("SureFind"), a company providing electronic interactive products, that was dissolved during fiscal year 1996. Mr. Allen (through Vulcan Ventures Inc.), Mr. Lebow, and another of Mr. Stroum's daughters, Cynthia Stroum Meagher, were also shareholders of SureFind until its dissolution. In July 1993, SureFind and the Company entered into an Interactive Express' Services Agreement ("Agreement"), having a term of approximately three and one-half years, under which SureFind was contracted to develop and license a telephonic information order system for the Company for approximately $700,000, plus certain service fees, subject to certain credits. In May 1994, SureFind and the Company agreed to modify the Agreement and settle obligations incurred to date at $600,000. The modification, having a term of two years from the original Agreement date, provided for payment to SureFind by the Company of a minimum of $30,000 per month, plus certain service fees, subject to certain credits, for ongoing project support and development of additional applications for the Company. Pursuant to the terms of the modification, the Agreement terminated in July 1995. During fiscal year 1996 prior to such termination, the Company paid SureFind an aggregate amount of $180,000 for such services. The Company has entered into an arrangement with Retail Enterprises, Inc. ("Retail Enterprises"), a retail consulting firm wholly-owned by George P. Orban, Chairman of the Company's Board of Directors. Pursuant to the arrangement, Retail Enterprises will provide consulting services and advice to the Company on retail strategy. The Company will pay Retail Enterprises a consulting fee of $25,000 per month for such services. BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION OVERVIEW AND PHILOSOPHY. The Compensation Committee of the Board (the "Committee") is responsible for recommending to the Board compensation for the Company's five highest-compensated executive officers, including the Company's Chief Executive Officer, and for reviewing and approving compensation recommendations made by the Chief Executive Officer for the other executive officers. The Committee is also responsible for administering all of the Company's compensation programs. The Committee's goal is to provide compensation that is fair and competitive and that will reward sustained high performance. The Committee also believes that executives should have the opportunity for a significant portion of their compensation to be "at risk" in the form of incentive compensation. The Company's executive compensation packages generally consist of base salary, annual incentive compensation in the form of bonuses, and long-term incentive compensation in the form of stock options. The Committee also administers and reviews any employment agreements between the Company and its executives. BASE SALARY. In determining the base salary for a particular executive within the salary range for his or her position, the Committee initially takes into account the salary necessary to encourage the executive to join the Company in lieu of pursuing other employment opportunities. In later years, the Committee considers the amount budgeted by the Board for salary increases and the executive's success in achieving the performance objectives established annually for such executive. The performance objectives established annually for executives consist of both quantitative goals (such as increasing revenue, margin or number of accounts, or decreasing returns) and qualitative goals (such as training subordinates, managing special projects, and responding to changing market conditions). There is generally no specific weighing of these factors. The base salaries received by the Named Executive Officers (other than the Chief Executive Officer) generally are above the median for base salaries of executives in similar positions at companies in the comparison group (the "Comparison Group"), which is composed of national retail companies with annual revenues ranging from $100 million to $2.5 billion, none of which companies are included in the CRSP Index for Nasdaq Stock Market (SIC 573) used in the Company's stock price performance graph which appears later in this document. The Company does not have a target range for base salaries for executive officers. ANNUAL INCENTIVE COMPENSATION. In fiscal year 1996, cash bonuses for executives were considered at the end of the fiscal year by the Committee in consultation with the Chief Executive Officer. Such consultation took into consideration the Company's financial performance, including the Company's earnings per share. Based upon the Company's financial performance, no executive officer received a bonus for fiscal year 1996, except as follows: Brian Bender, former Vice President, Secretary and Chief Financial Officer, received an aggregate bonus of $30,080 based upon his contribution to the relocation of the Company's headquarters; Kurt Conklin and Ronald Smith each received aggregate bonuses in the respective amounts of $62,940 and $77,943, which were based upon their contribution to the relocation of the Company's headquarters and the relocation of the Company's former Corporate, Government and Education ("CGE") division; and Ronald Foster, former Vice President of Operations, received a bonus of $45,746 based upon his contribution to the relocation of the Company's former CGE division. LONG-TERM INCENTIVE COMPENSATION. The primary objective of the Company's stock option program is to provide incentives tied to the performance of the Company as measured by stock price appreciation. The Committee believes that the Company's stock option program better aligns the interests of the Company's executives with those of its shareholders. The Committee generally grants nonqualified stock options with an exercise price equal to the fair market value of the Common Stock on the date of grant and a three year vesting schedule. In granting options, the Committee considers the amount and value of options currently held, but does not have a target ownership level for Common Stock holdings for executives. In fiscal year 1996, the Committee granted options to purchase 621,100 shares of Common Stock, of which options to purchase 185,000 shares were granted to executive officers, four of which are Named Executive Officers as referred to throughout this document, and the remaining 436,100 were granted to a broad range of employees, generally fixed by salary grade. Within the group of executive officers, the exact number of shares subject to options was recommended to the Committee by the Chief Executive Officer based upon the performance factors discussed under "Base Salary" above. CHIEF EXECUTIVE OFFICER COMPENSATION. Mr. Strom joined the Company as its President in June 1993. He became Chief Executive Officer in September 1993. Mr. Strom's compensation was governed in fiscal year 1996 by the terms of an employment agreement, which provided that he receive an annual base salary of $300,000 in fiscal year 1996, and an annual bonus (up to a maximum of 100% of his annual base salary) depending upon his achieving performance goals to be established for each fiscal year, with a minimum bonus of $300,000 for each of fiscal years 1994 and 1995. No bonus was paid to Mr. Strom for fiscal year 1996. The employment agreement expired on June 28, 1996. Additionally, upon commencement of employment, Mr. Strom received a stock grant of 68,000 shares of Common Stock and options to purchase an additional 200,000 shares. On November 30, 1994, Mr. Strom was granted a second option to purchase 50,000 shares. Both options vest over a three-year period from date of grant in annual increments of one-sixth, one-third, and one-half of the total shares. No stock options were granted to Mr. Strom in fiscal year 1996. The Chief Executive Officer's total compensation is slightly below the median for total annual compensation for executive officers in a similar position at companies in the Comparison Group. In structuring Mr. Strom's compensation, the Committee seeks to reward him for successful performance at the Company. In addition, the Committee believes that Mr. Strom's participation in the Company's stock price appreciation through his stock and option grants will encourage him to remain with the Company and align his interests with those of the shareholders. COMPENSATION COMMITTEE Richard P. Cooley Steven E. Lebow Linda Fayne Levinson Samuel N. Stroum, Chairman NON-EMPLOYEE DIRECTORS' COMPENSATION Directors who are not also employees of the Company are compensated at the rate of $25,000 per annum. In addition, non-employee directors receive $1,000 for each Board meeting attended and $1,000 for each Committee meeting attended, provided that such Committee meeting is not held in conjunction with a Board meeting. Non-employee directors are also reimbursed for actual travel and out-of-pocket expenses incurred in connection with Board membership. Pursuant to the Egghead, Inc. Non-Employee Director Stock Option Plan ("Plan"), each non-employee director is granted an option to purchase 22,500 shares of Common Stock upon his or her initial election to the Board at an annual shareholders meeting, subject to three-year vesting in annual increments of one-third. In addition, pursuant to this Plan, each non-employee director who is initially elected or appointed other than at an annual shareholders meeting is granted an option to purchase up to 7,500 shares of Common Stock, prorated for the number of months between the date of grant and the next annual shareholders meeting thereafter, subject to vesting in full on the date of such meeting. Each non-employee director who was in office on June 7, 1995 received a grant of an option to purchase 13,500 shares of Common Stock on that date. Each such option is two-thirds vested and subject to vesting of the remaining one-third on the date of the 1996 Annual Meeting. Under the Plan, each non-employee director who holds an option granted on or after June 7, 1995 that becomes fully vested thereafter automatically will be granted, on the day after the annual shareholders' meeting at which the prior option has become fully vested, an additional option to purchase 22,500 shares, subject to three-year vesting in annual increments of one-third. STOCK PRICE PERFORMANCE GRAPH The following two graphs show a comparison of cumulative total shareholder returns for the Company for the last five fiscal years ("Cumulative Shareholder Returns"), with the cumulative total return of the University of Chicago's Center for Research in Security Prices ("CRSP") Index for the Nasdaq Stock Market, U.S. and Foreign (the "Nasdaq Stock Market Index"). The first graph below shows a comparison of Cumulative Shareholder Returns and the cumulative total return of the Nasdaq Stock Market Index with the cumulative total return of the CRSP Index for the Nasdaq Stock Market Standard Industrial Classification ("SIC") Code 573, a Retail Trade index that includes computer and software stores (the "Nasdaq Index SIC 573"). The second graph shows a comparison of Cumulative Shareholder Returns and the cumulative total return of the Nasdaq Stock Market Index with the cumulative total shareholder return of the Nasdaq Stock Market SIC 504 Index, a Wholesale Trade SIC that includes computers, computer peripherals and computer software, combined with SIC 573, a Retail Trade SIC that includes computer and software stores (the "Nasdaq Index Combined SIC 504 & 573"). Due to the change in the Company's business resulting from the sale of its former Corporate, Government and Education ("CGE") division, the Company has selected a line of business index, the Nasdaq Index SIC 573, that represents a retail line of business, by contrast to the Nasdaq Index Combined SIC 504 & 573 which includes both retail and wholesale trade SIC codes and was used in the performance graph in the Company's 1995 proxy statement. Since the scope of the Company's business will now be restricted solely to retail, the Company believes that the Nasdaq Index SIC 573 is more representative of the Company's line of business than the Nasdaq Index Combined SIC 504 & 573. However, the CGE sale occurred close to the end of fiscal year 1996, and the graphs shown below include a comparison of the Company's total return with that of both the newly selected Nasdaq Index SIC 573 as well as the Nasdaq Index Combined SIC 504 & 573 used in last year's proxy statement. Each comparison assumes $100 was invested in the Company's Common Stock on March 30, 1991, in each of the foregoing indices, and assumes reinvestment of dividends, if any. The Company has not paid dividends. The stock performance shown on the graphs below is not necessarily indicative of future price performance. COMPARISON OF FIVE YEAR-CUMULATIVE TOTAL RETURNS PEFORMANCE GRAPH FOR EGGHEAD, INC. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
EGGHEAD, INC. NASDAQ STOCK MARKET INDEX NASDAQ INDEX SIC-573 (US + FOREIGN) (U.S. & Foreign) 3/28/91 100 100 100 4/30/91 96.7 100.6 101.2 5/31/91 98.3 105.3 110.7 6/28/91 95.0 99.1 107.5 7/31/91 90.0 104.9 114.7 8/30/91 103.3 109.9 127.3 9/30/91 116.7 110.5 135.9 10/31/91 140.0 114.1 133.5 11/29/91 115.0 110.3 121.2 12/31/91 111.7 123.4 116.0 1/31/92 128.3 130.8 139.9 2/28/92 166.7 133.7 168.4 3/27/92 180.0 127.5 155.6 4/30/92 166.7 122.1 140.4 5/29/92 145.0 123.6 132.9 6/30/92 122.5 118.9 121.8 7/31/92 123.3 122.8 117.9 8/31/92 66.7 119.1 102.4 9/30/92 59.2 123.3 114.1 10/30/92 66.7 128.0 132.3 11/30/92 66.7 138.0 140.8 12/31/92 65.8 143.2 142.0 1/29/93 65.8 147.4 147.2 2/26/93 54.2 142.1 139.3 4/2/93 52.5 146.4 141.7 4/30/93 54.2 140.6 133.6 5/28/93 57.5 149.0 140.1 6/30/93 54.2 150.0 129.3 7/30/93 47.5 150.2 131.5 8/31/93 48.3 158.0 137.2 9/30/93 46.7 162.5 151.6 10/29/93 49.2 166.2 153.5 11/30/93 57.5 161.0 149.6 12/31/93 60.0 165.7 141.7 1/31/94 63.3 171.0 133.8 2/28/94 63.3 169.2 127.6 3/31/94 57.5 158.8 114.0 4/29/94 56.7 156.7 106.2 5/31/94 52.5 156.9 100.3 6/30/94 48.3 150.7 92.9 7/29/94 44.2 154.3 93.9 8/31/94 45.8 163.7 97.4 9/30/94 47.5 163.4 101.8 10/31/94 56.7 166.3 101.5 11/30/94 68.3 160.5 105.0 12/30/94 78.3 160.3 98.3 1/31/95 71.7 161.0 96.9 2/28/95 70.0 169.3 90.1 3/31/95 56.7 174.1 86.6 4/28/95 63.3 179.1 85.3 5/31/95 68.3 183.6 86.9 6/30/95 89.2 198.0 96.0 7/31/95 87.5 211.7 96.3 8/31/95 80.0 215.5 96.0 9/29/95 54.2 221.9 86.7 10/31/95 45.8 219.7 75.2 11/30/95 53.3 224.2 69.6 12/29/95 42.9 222.7 58.0 1/31/96 40.8 223.2 55.5 2/29/96 38.8 232.1 54.1 3/29/96 71.3 232.8 60.6
Notes: A. The lines represent monthly index levels derived from compounded daily returns that include all dividends B. The indexes are reweighted daily, using the market capitalization on the previous trading day. C. If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used. D. The index level for all series was set to $100.0 on 03/28/91. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
EGGHEAD, INC. NASDAQ STOCK MARKET INDEX NASDAQ INDEX COMBINED SIC 504 & 573 (US & Foreign) (US + Foreign) 3/28/91 100 100 100.0 4/30/91 96.7 100.6 100.1 5/31/91 98.3 105.3 109.6 6/28/91 95.0 99.1 108.5 7/31/91 90.0 104.9 121.8 8/30/91 103.3 109.9 133.4 9/30/91 116.7 110.5 147.2 10/31/91 140.0 114.1 156.8 11/29/91 115.0 110.3 144.0 12/31/91 111.7 123.4 144.3 1/31/92 128.3 130.8 166.4 2/28/92 166.7 133.7 197.2 3/27/92 180.0 127.5 180.7 4/30/92 166.7 122.1 161.5 5/29/92 145.0 123.6 157.1 6/30/92 122.5 118.9 143.0 7/31/92 123.3 122.8 139.1 8/31/92 66.7 119.1 120.5 9/30/92 59.2 123.3 135.3 10/30/92 66.7 128.0 151.6 11/30/92 66.7 138.0 162.1 12/31/92 65.8 143.2 162.6 1/29/93 65.8 147.4 174.4 2/26/93 54.2 142.1 165.9 4/2/93 52.5 146.4 169.4 4/30/93 54.2 140.6 155.6 5/28/93 57.5 149.0 167.8 6/30/93 54.2 150.0 159.7 7/30/93 47.5 150.2 165.0 8/31/93 48.3 158.0 172.1 9/30/93 46.7 162.5 183.0 10/29/93 49.2 166.2 187.4 11/30/93 57.5 161.0 182.2 12/31/93 60.0 165.7 186.8 1/31/94 63.3 171.0 182.3 2/28/94 63.3 169.2 182.7 3/31/94 57.5 158.8 162.0 4/29/94 56.7 156.7 154.3 5/31/94 52.5 156.9 153.0 6/30/94 48.3 150.7 133.0 7/29/94 44.2 154.3 136.3 8/31/94 45.8 163.7 140.0 9/30/94 47.5 163.4 140.9 10/31/94 56.7 166.3 141.1 11/30/94 68.3 160.5 140.6 12/30/94 78.3 160.3 135.9 1/31/95 71.7 161.0 138.2 2/28/95 70.0 169.3 133.6 3/31/95 56.7 174.1 140.6 4/28/95 63.3 179.1 141.7 5/31/95 68.3 183.6 144.0 6/30/95 89.2 198.0 156.0 7/31/95 87.5 211.7 166.1 8/31/95 80.0 215.5 167.8 9/29/95 54.2 221.9 171.1 10/31/95 45.8 219.7 157.5 11/30/95 53.3 224.2 159.0 12/29/95 42.9 222.7 163.0 1/31/96 40.8 223.2 160.8 2/29/96 38.8 232.1 169.4 3/29/96 71.3 232.8 167.1
Notes: A. The lines represent monthly index levels derived from compounded daily returns that include all dividends B. The indexes are reweighted daily, using the market capitalization on the previous trading day. C. If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used. D. The index level for all series was set to $100.0 on 03/28/91. ITEM 12. COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information relating to the beneficial ownership, as of July 22, 1996, of the Company's Common Stock for the following persons: (i) each person known by the Company to be the beneficial owner of more than five percent of the outstanding shares of Common Stock; (ii) each director and nominee as of the date hereof; (iii) the Chief Executive Officer of the Company; (iv) the four highest paid executive officers of the Company during fiscal year 1996 (collectively, with the Chief Executive Officer, the "Named Executive Officers"); and (v) all directors, nominees, and executive officers of the Company as a group. BENEFICIAL OWNERSHIP
COMMON STOCK ----------------------------------------- AMOUNT AND NATURE OF BENEFICIAL PERCENT OF SHARES OWNERSHIP (1) OUTSTANDING ---------------------- ----------------- GREATER THAN 5% SHAREHOLDERS (2) Cramer Rosenthal McGlynn, Inc. (3) .................................... 1,718,550 9.78% 707 Westchester Avenue White Plains, New York 10604 Morgan Stanley Asset Management Ltd. (4) .............................. 1,764,850 10.04% 25 Cabot Square, Canary Wharf London, E14 4QA, England Vanguard Explorer Fund, Inc. (5) ...................................... 900,000 5.12% P O Box 2600 Valley Forge, PA 19482-2600 Wellington Management Company (6) ..................................... 900,000 5.12% 75 State Street Boston, MA 02109 David A. Rocker (7) ................................................... 1,644,900 9.36% 45 Rockefeller Plaza, Suite 1759 New York, New York 10111 Paul G. Allen (8) ..................................................... 1,666,934 9.47% 110 - 110th N.E. Ave., #550 Bellevue, WA 98004 DIRECTORS AND NOMINEES Richard P. Cooley (9).................................................. 27,500 * Steven E. Lebow (10)................................................... 32,210 * Linda F. Levinson (11)................................................. 22,500 * George P. Orban (12)................................................... 213,994 1.22% Eric P. Robison (13)................................................... 1,250 * Terence M. Strom (14).................................................. 276,335 1.55% Samuel N. Stroum (15).................................................. 172,596 * Melvin A. Wilmore (16)................................................. 1,250 * NAMED EXECUTIVE OFFICERS (17) Brian W. Bender........................................................ 0 * Peter F. Grossman(18).................................................. 24,747 * Ronald J. Smith (19)................................................... 30,227 * Kurt S. Conklin (20)................................................... 5,833 * All of the above directors and nominees, the Named Executive Officers, and other executive officers as a group (17 persons) (21)............. 833,021 4.6%
- ------------------------ * Percentage of beneficial ownership is less than one percent (1) The persons named in the above table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, except as otherwise described in these footnotes. As noted in these footnotes, shares beneficially owned may include shares subject to options that are exercisable within 60 days from July 22, 1996 (i.e., September 20, 1996). (2) Deemed beneficial owners of the shares by virtue of the direct or indirect investment and/or voting discretion possessed pursuant to the provisions of investment advisory agreements with their clients or other fiduciary arrangements such as partnership agreements. (3) Based on Schedule 13G Statement filed with the Securities and Exchange Commission ("SEC") dated May 1, 1996. (4) Based on joint filing of Amendments No. 1 and 2 to Schedule 13G Statement of Morgan Stanley Group, Inc. and its wholly owned subsidiary, Morgan Stanley Asset Management Limited, filed with the SEC and dated February 13, 1996 and February 16, 1996, respectively. (5) Based on Schedule 13G Statement filed with the SEC dated February 14, 1996. Vanguard Explorer Fund, Inc. ("Vanguard") has sole voting power and shared investment power with respect to these shares. These shares are the same shares reported in the table as beneficially owned by Wellington Management Company ("Wellington") with respect to which Wellington filed a Schedule 13G Statement as noted below in footnote (6). (6) Based on Schedule 13G Statement filed with the SEC dated January 29, 1996. Wellington has shared investment power and no voting power with respect to these shares. These shares are the same shares reported in the table as beneficially owned by Vanguard with respect to which Vanguard filed a Schedule 13G as noted above in footnote (5). (7) Based on Amendments No. 3 and 4 to Schedule 13D Statement filed with the SEC, dated November, 9, 1995 and February 21, 1996, respectively. (8) Includes 1,648,934 shares held by Vulcan Ventures Inc., a private investment firm of which Mr. Allen is President and sole shareholder, and 18,000 shares subject to options that are exercisable now or within 60 days of July 22, 1996. (9) Includes 5,000 shares held directly and 22,500 shares subject to options that are exercisable now or within 60 days of July 22, 1996. (10) Includes 9,710 shares held directly and 22,500 shares subject to options that are exercisable now or within 60 days of July 22, 1996. (11) Represents 22,500 shares subject to options that are exercisable now or within 60 days of July 22, 1996. (12) Includes 84,000 shares held by Orban Partners, a general partnership of which Mr. Orban is General Partner, 107,494 shares held directly, and 22,500 shares subject to options that are exercisable now or within 60 days of July 22, 1996. (13) Represents 1,250 shares subject to options that are exercisable now or within 60 days of July 22, 1996. (14) Includes 68,000 shares held directly and 208,335 shares subject to options that are exercisable now or within 60 days of July 22, 1996. (15) Includes 150,002 shares held directly, 94 shares owned with his spouse, and 22,500 shares subject to options that are exercisable now or within 60 days of July 22, 1996. Does not include 150,000 shares transferred by Mr. Stroum to the Stroum Foundation and 150,000 shares transferred by Mr. Stroum to the Stroum Family Foundation, with respect to which Mr. Stroum disclaims beneficial ownership. (16) Represents 1,250 shares subject to options that are exercisable now or within 60 days of July 22, 1996. (17) Brian W. Bender, Peter F. Grossman, Ronald J. Smith and Kurt S. Conklin are included as Named Executive Officers of the Company because they were the four most highly paid executive officers during fiscal year 1996, other than the Chief Executive Officer. Terence M. Strom, the Chief Executive Officer, is also a Named Executive Officer. (18) Includes 1,413 shares held directly and 23,334 shares subject to options exercisable now or within 60 days of July 22, 1996. (19) Includes 2,393 shares held directly and 27,834 shares subject to options exercisable now or within 60 days of July 22, 1996. (20) Represents shares subject to options exercisable now or within 60 days of July 22, 1996. (21) Includes shares subject to options exercisable now or within 60 days of July 22, 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ------------------------ During fiscal year 1996, Steven E. Lebow and Samuel N. Stroum, shareholders and directors of the Company, and Paul G. Allen, a director during fiscal year 1996, were parties to certain transactions with the Company. (SEE "EXECUTIVE COMPENSATION -- COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.") Richard P. Cooley, a shareholder and director of the Company, serves as an Honorary Director of Seafirst Bank. On December 8, 1995, the Company entered into a Revolving Loan Agreement with Seattle-First National Bank ("Seafirst Bank") and U.S. Bank of Washington, National Association, which provided for secured borrowings of up to $35,000,000. The Revolving Loan Agreement expired April 30, 1996 and was not renewed. On March 25,1996 the Company announced it had entered into an agreement to sell to Software Spectrum, Inc., a Texas corporation, the Company's CGE division. The sale was effective May 13, 1996. Steven E. Lebow, a shareholder and director of the Company, is a Managing Director of the Investment Banking Division of Donaldson, Lufkin, & Jenrette Securities Corporation ("DLJ"), an investment banking firm that assisted the Company with the CGE transaction. During fiscal year 1996 the Company employed DLJ to represent the Company in connection with the proposed sale of the assets of the Company's former CGE division. In this connection, DLJ was paid a fee of $1,210,200. INDEBTEDNESS OF MANAGEMENT The following table sets forth information for fiscal year 1996 with respect to certain loans made to executive officers by the Company.
LARGEST AMOUNT RATE OF OUTSTANDING DURING AMOUNT OUTSTANDING NAME REASON INTEREST FY1996 AS OF 7/22/96 - ---------------------------------- -------------------------- ------------ ------------------ ------------------------- Brian W. Bender .................. Moving expenses 6.0% $ 110,541 0 Former Vice President and Chief Financial Officer Peter F. Grossman ................ Moving expenses 6.0% $ 83,400 0 Executive Vice President Ronald J. Smith .................. Moving expenses 6.0% $ 67,687(1) 0 Senior Vice President
(1) Of this amount, $50,000 was repaid by Mr. Smith and $17,687 was forgiven by the Company. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K A) Documents filed as a part of this report: 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. 2a. Exhibits (i) 3.1 Restated Articles of Incorporation of the Company (vii) 3.2 Amended Bylaws of the Company (x) 10.1 * Microsoft 1995/1996 Channel Agreement dated July 1, 1995, as amended through January 1, 1996. 10.2 (Intentionally left blank.) 10.3 (Intentionally left blank.) 10.4 (Intentionally left blank.) (iv) 10.5 * Microsoft January - June, 1993 Reseller Rebate and Marketing Fund Agreement. (v) 10.6 * Microsoft 1993/1994 Channel Agreement dated July 1, 1993. (v) 10.7 * Rebate and Marketing Fund Addendum to the 1993/1994 Microsoft Channel Agreement dated November 1, 1993. (v) 10.8 * Amendment to the Microsoft 1993/1994 Channel Agreement (appointment as a Major Chain Reseller) dated November 10, 1993. (v) 10.9 * Reseller agreement with WordPerfect Corporation dated April 1, 1994. (vi) 10.10 * Microsoft 1994/1995 Channel Agreement dated July 1, 1994. (vi) 10.11 * Addendum to the Microsoft 1994/1995 Channel Agreement dated July 1, 1994. (vii) 10.11a Amendment No. 1 to the Addendum to the Microsoft 1994/1995 Channel Agreement (Appointment as a Large Account Reseller) dated July 1994. (vi) 10.12 * Follow up letter dated August 2, 1994, from Microsoft regarding Microsoft 1994/1995 Channel Agreement dated July 1, 1994. (vii) 10.13 * Addendum to the 1994/1995 Microsoft Channel Agreement dated January 1995. 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 the Company's administrative headquarters. (Previously filed with registrant's Form 10-K for the fiscal year ended April 1, 1989, as Exhibit 10.46.) 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. (Previously filed with registrant's Form 10-K for the fiscal year ended March 31, 1990, as Exhibit 10.46a.) ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED) 10.17 Lease dated March 23, 1992 between Sammamish Park Place II Limited Partnership as Landlord and DJ&J Software Corporation as Tenant regarding the Company's administrative headquarters. (Previously filed with registrant's Form 10-K for the fiscal year ended March 28, 1992, as Exhibit 10.47.) 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 the Company's administrative headquarters. (Previously filed with registrant's Form 10-Q for the first quarter of fiscal 1995 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. (iii) 10.19 Lease dated March 23, 1989, between The CHY Company as Landlord and DJ&J Software as Tenant regarding the Company's Sacramento distribution facility. (iii) 10.20 First amendment to lease between The CHY Company as Landlord and DJ&J Software, as Tenant regarding the Company's Sacramento distribution facility. 10.21 (Intentionally left blank.) (i) 10.22 Lease Agreement dated January 7, 1988, with Granite Properties, a limited partnership, as Landlord and DJ&J Software Corporation, as Tenant regarding Lancaster distribution facility. (i) 10.23 Master License Agreement dated February 12, 1988, with Staples, Inc. as Licensor and DJ&J Software Corporation as Licensee, regarding an exclusive right to sell items in Staples' discount stores. 10.24 First Amendment to Master License Agreement between Staples, Inc. and DJ&J Software Corporation dated November 14, 1990. (Previously filed with registrant's Form 10-K for the fiscal year ended March 30, 1991, as same Exhibit number.) (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 Form of Indemnification Agreement between the Company and its directors. (Previously filed with registrant's Form 10-Q for the third quarter of fiscal 1995 ended December 31, 1994.) 10.28 Form of Indemnification Agreement between DJ&J Software Corporation and its directors. (Previously filed with registrant's Form 10-Q for the third quarter of fiscal 1995 ended December 31, 1994.) ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED) (vi) 10.29 Revolving Loan Agreement dated September 30, 1994, among Seattle-First National Bank and U.S. Bank of Washington, National Association, Egghead, Inc., and DJ&J Software Corporation. 10.30 Revolving Loan Agreement dated September 30, 1993 among Seattle-First National Bank and U.S. Bank of Washington, National Association, Egghead, Inc., and DJ&J Software Corporation. (Previously filed with registrant's Form 10-Q dated October 16, 1993, as same exhibit number.) 10.31 (Intentionally left blank.) 10.32 (Intentionally left blank.) 10.33 ** Executive employment agreement between Egghead, Inc. and Terence M. Strom dated June 28, 1993. (Previously filed with registrant's Form 10-Q dated October 16, 1993, as Exhibit 10.34.) (ii) 10.34 ** Egghead, Inc. 1989 Executive Retention Incentive Stock Option Plan. (ii) 10.35 ** Egghead, Inc. 1989 Executive Retention Incentive Stock Option Agreement between Egghead, Inc. and Stuart M. Sloan dated February 23, 1989. (ii) 10.36 ** Egghead, Inc. 1989 Executive Retention Non- Qualified Stock Option Agreement between Egghead, Inc. and Stuart M. Sloan dated February 23, 1989. (iii) 10.36a ** Amendment No. 1 to Egghead, Inc. 1989 Executive Retention Non-Qualified Stock Option Agreement between Egghead, Inc. and Stuart M. Sloan dated April 17, 1991. 10.37 (Intentionally left blank.) 10.38 (Intentionally left blank.) (ii) 10.39 ** Egghead, Inc. 1989 Executive Retention Incentive Stock Option Agreement between Egghead, Inc. and Ronald A. Weinstein dated February 23, 1989. (iii) 10.39a ** Amendment No. 1 to Egghead, Inc. 1989 Executive Retention Incentive Stock Option Agreement between Egghead, Inc. and Ronald A. Weinstein dated April 17, 1991. (ii) 10.40 ** Egghead, Inc. 1989 Executive Retention Non- Qualified Stock Option Agreement between Egghead, Inc. and Ronald A. Weinstein dated February 23, 1989. (iii) 10.40a ** Amendment No. 1 to Egghead, Inc. 1989 Executive Retention Non-Qualified Stock Option Agreement between Egghead, Inc. and Ronald A. Weinstein dated April 17, 1991. 10.41 (Intentionally left blank.) 10.42 (Intentionally left blank.) (ii) 10.43 ** Egghead, Inc. 1989 Executive Retention Incentive Stock Option Agreement between Egghead, Inc. and Matthew J. Griffin dated February 23, 1989. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED) (ii) 10.44 ** Egghead, Inc. 1989 Executive Retention Non- Qualified Stock Option Agreement between Egghead, Inc. and Matthew J. Griffin dated February 23, 1989. (iii) 10.44a ** Egghead, Inc. 1989 Executive Retention Non- Qualified Stock Option Agreement between Egghead, Inc., and Matthew J. Griffin dated April 17, 1991. 10.45 (Intentionally left blank.) 10.46 (Intentionally left blank.) 10.47 (Intentionally left blank.) 10.48 ** Egghead, Inc. 1989 Employee Stock Purchase plan. (Previously filed with registrant's Form S-8 dated June 23, 1990, as Exhibit 10.) 10.49 ** Egghead, Inc. 1993 Stock Option Plan. (Previously filed with registrant's Form 10-Q dated October 16, 1993, as Exhibit 10.31.) (x) 10.50 ** Egghead, Inc. Restated Nonemployee Director Stock Option Plan. (x) 21.1 Schedule of subsidiaries. (ix) 23.1 Consent of Independent Public Accountants. (x) 24.1 Power of Attorney. (x) 27 Financial Data Schedule. Footnotes (i) Previously filed with registrant's Registration Statement on Form S-1, Registration No. 33-21472, as same Exhibit number. (ii) Previously filed with the registrant's Form 8-K dated February 23, 1989, as Exhibit numbers 10.1 to 10.13. (iii) Previously filed with registrant's Form 10-K for the fiscal year ended March 28, 1992, as same Exhibit number. (iv) Previously filed with registrant's Form 10-K for the fiscal year ended April 3, 1993, as same Exhibit number. (v) Previously filed with registrant's Form 10-K for the fiscal year ended April 2, 1994, as same Exhibit number. (vi) Previously filed with registrant's Form 10-Q for the second quarter of fiscal 1995 ended October 1, 1994. (vii) Previously filed with registrant's Form 10-K for the fiscal year ended April 1, 1995, as same Exhibit number. (viii) Previously filed with registrant's Form 8-K dated March 23, 1996, as Exhibit number 2.1. (ix) Filed herewith. (x) Previously filed with registrant's Form 10-K for the fiscal year ended March 30, 1996, as the same Exhibit number. * Confidential portions of this exhibit have been omitted and filed separately with the Commission pursuant to an Application for Confidential Treatment under Rule 24b-2 under the Securities Exchange Act of 1934. Each exhibit has been marked to identify the confidential portions that are omitted. ** Designates management contract or compensatory plan or arrangement. 2b. Form 8-K Egghead, Inc., filed one report on Form 8-K, dated March 23, 1996, during the fourth quarter of its fiscal year ended March 30, 1996, which reported on Items 5 and 7 of Form 8-K. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Liberty Lake, State of Washington, on July 26, 1996. EGGHEAD, INC. By /S/ TERENCE M. STROM ------------------------------------ Terence M. Strom President and Chief Executive Officer EX-23.1 2 EXHIBIT 23.1 Arthur Andersen & Co. Exhibit 23.1 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 Registration Statements No. 33-24978, (Egghead, Inc. 1986 Combined Incentive and Non-Qualified Stock Option Plan); No. 33-29453, (Egghead, Inc. 1989 Employee Stock Purchase Plan); No. 33-33101, (Egghead, Inc. 1989 Executive Retention Incentive Stock Option Plan); No. 33-59779, (Egghead, Inc. 1993 Stock Option Plan); and No. 33-64033. (Egghead, Inc. Restated Nonemployee Director Stock Option Plan). Arthur Andersen Seattle, Washington July 29, 1996 -----END PRIVACY-ENHANCED MESSAGE-----