March 08, 1999 16:19
EGGHEAD COM INC amends 1226 qtr 10-Q.
Excerpted from 10-Q/A filed on 03/08 by EGGHEAD COM INC:
EGGHEAD COM INC amends 1226 qtr 10-Q.
Selling and Marketing Expenses. Selling and marketing expenses consist primarily of operating expenses related to marketing, inbound telephone support, online store support and distribution. Such operating expenses include promotional agreements for online and offline advertising, credit card processing costs, payroll and benefits, telecommunications, bad debts and supplies, in addition to retail occupancy costs prior to the closure of the retail
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store network. The selling and marketing expenses for the third quarter of fiscal 1999 were $11.0 million as compared to online selling and marketing expenses of $4.4 million for the third quarter of fiscal 1998. The selling and marketing expenses as a percentage of online net sales increased to 26.2% for the third quarter of fiscal 1999 as compared to 18.4% for the third quarter of fiscal 1998. The selling and marketing expenses for the first nine months of fiscal 1999 increased 100% to $23.7 million as compared to the selling and marketing expenses of $11.8 million (online pro forma) for the first nine months of fiscal 1998. Selling and marketing expenses as a percentage of online net sales increased to 22.2% for the first nine months of fiscal 1999 as compared to 21.6% (online pro forma) for the first nine months of fiscal 1998. The increase in selling and marketing expenses was primarily due to increased promotion related to the shift in primary business emphasis to electronic commerce in February 1998. Retail selling and marketing expenses were eliminated with the closure of the retail stores in February 1998. We expect selling and marketing expenses to increase significantly as we endeavor to enhance our brand name recognition, expand our online shopping capabilities and increase our market share. However, we cannot assure you that the increase in such expenses will actually result in enhanced brand name recognition, expanded Web site capabilities or increased market share.
The total selling and marketing expenses for the third quarter of fiscal 1999 decreased 33% to $11.0 million as compared to $16.4 million for the third quarter of fiscal 1998. The total selling and marketing expenses for the first nine months of fiscal 1999 decreased 35% to $23.7 million as compared to $36.3 million for the first nine months of fiscal 1998. This decrease was primarily due to the closure of the retail store chain and was partially offset by the increase in expenses related to the online store and expenses related to acquired operations of Surplus Direct.
General and Administrative Expenses. General and administrative expenses consist primarily of payroll and related expenses of headquarters support functions, such as executive, merchandising, purchasing, engineering, accounting, recruiting and facilities expenses and other general corporate expenses. The general and administrative expenses for the third quarter of fiscal 1999 decreased 15% to $4.1 million as compared to $4.9 million for the third quarter of fiscal 1998. The general and administrative expenses for the first nine months of fiscal 1999 decreased 18% to $10.9 million as compared to $13.3 million for the first nine months of fiscal 1998. These decreases were primarily due to the recapitalization of our wholly owned subsidiary Elekom Corporation in November 1997. See Note 9 of Notes to Consolidated Financial Statements. Prior to the recapitalization of Elekom, expenses of $2.2 million were recorded in general and administrative expenses for the first nine months of fiscal 1998. After the recapitalization, the results of Elekom were recorded using the equity method of accounting. In addition, the expenses for the first nine months of fiscal 1998 were affected by the costs related to the acquisition of Surplus Direct in August 1997. See Note 7 of Notes to Consolidated Financial Statements. General and administrative expenses as a percentage of net sales increased to 9.9% for the third quarter of fiscal 1999 as compared to 4.9% for the third quarter of fiscal 1998. General and administrative expenses as a percentage of net sales increased to 10.2% for the first nine months of fiscal 1999 as compared to 6.1% for the first nine months of fiscal 1998. This increase was due primarily to a reduction in net sales. We expect our general and administrative expenses to increase as we continue to build our business and, in particular, increase our information systems support.
Depreciation and Amortization Expenses. Depreciation and amortization expenses primarily include depreciation of our capital equipment and amortization of the goodwill recorded in connection with the acquisition of Surplus Direct in August 1997. The depreciation expense for the third quarter of fiscal 1999 decreased to $0.7 million as compared to $1.3 million for the third quarter of fiscal 1998. The depreciation expense for the first nine months of fiscal 1999 decreased to $1.6 million as compared to $3.7 million for the first nine months of fiscal 1998. These decreases were primarily due to the closure of the retail stores in February 1998. Amortization expense for the third quarter of fiscal 1999 and fiscal 1998 was $0.4 million. Amortization expense for the first nine months of fiscal 1999 increased to $1.3 million as compared to $0.6 million for the first nine months of fiscal 1998. This increase in amortization expense reflects the goodwill recorded for the Surplus Direct acquisition. See Note 7 of Notes to Consolidated Financial Statements.
Other Income, Net. Other income, net for the third quarter of fiscal 1999 increased to $4.0 million from $0.6 million for the third quarter of fiscal 1998. Other income, net for the first nine months of fiscal 1999 increased to $5.7 million from $2.5 million for the first nine months of fiscal 1998. These increases were primarily due to a gain of $3.3 million from the November 1998 sale of all our equity interest in Elekom Corporation. See Note 9 of
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Notes to Consolidated Financial Statements.
Income Taxes. Due to our net operating losses, we did not record a provision for income taxes for the first nine months of fiscal 1999 or fiscal 1998. Given our recent losses, we have determined that our deferred tax assets do not meet the realization criteria of Statement of Financial Accounting Standards No. 109 (SFAS 109). Under SFAS 109, the realization of the deferred tax assets depends on generating future taxable income. We have determined that it is more likely than not that the deferred tax assets could not currently be realized. Until we have determined that all of the existing net operating losses are realizable, we will not record a tax charge or benefit for future operating results. Our net operating losses can be recovered for tax purposes over a 15-year period from origin if profitability is achieved. See Note 3 of Notes to Consolidated Financial Statements.
Liquidity and Capital Resources
In recent fiscal years, we have funded our operations through cash provided by operations, asset sales, exercises of stock options and the proceeds relating to the sale of the Corporate, Government and Educational Sales Division.
Cash and cash equivalents decreased to $59.0 million as of December 26, 1998 from $67.4 million at March 28, 1998. The decrease in the cash balance was primarily due to the net operating loss of $21.6 million, the decrease in restructuring liabilities of $9.3 million and the increase in merchandise inventories of $1.7 million, partially offset by $14.3 million in stock issuances under our stock option and stock purchase plans, net proceeds of $7.1 million from the sale of our former headquarters building and net proceeds of $3.3 million on the sale of our interest in Elekom Corporation. Cash and cash equivalents decreased $16.1 million from $83.5 million at the end of fiscal 1997 to $67.4 million at March 28, 1998. The decrease in the cash balance was primarily due to a reduction in accounts payable and liabilities related to the Corporate, Government and Educational Sales Division (CGE), partially offset by a reduction in accounts receivable and merchandise inventories.
Cash used by operating activities of $27.4 million for the first nine months of fiscal 1999 was primarily due to the net loss of $21.6 million, a decrease in restructuring liabilities of $9.3 million and an increase in merchandise inventories of $1.7 million, partially offset by a decrease in accounts receivable of $4.0 million. Cash used by operating activities of $10.9 million for the year ended March 28, 1998 was primarily due to the net loss of $50.2 million and reductions in accounts payable of $25.8 million, partially offset by a reduction in accounts receivable of $12.2 million and a reduction in merchandise inventories of $29.9 million. For fiscal 1997, operating activities used $7.8 million in cash related to a reduction in accounts payable partially offset by a decrease in accounts receivable and merchandise inventories.
Net cash provided by investing activities was $4.7 million for the first nine months of fiscal 1999 and primarily consisted of net proceeds of $7.1 million from the sale of the former headquarters building and net proceeds of $3.3 million from the sale of our equity interest in Elekom Corporation, partially offset by capital expenditures of $5.7 million primarily related to the upgrading of the Web site software platforms and related hardware. See Note 9 of Notes to Consolidated Financial Statements. Net cash used in investing activities was $2.7 million for fiscal 1998 and primarily consisted of asset purchases of $2.8 million, primarily for retail store leasehold improvements and computer hardware. For fiscal 1997, investing activities provided net cash of $41.7 million primarily related to the $45.0 million proceeds from the sale of CGE, partially offset by capital expenditures of $5.1 million.
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