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Egghead Fights For Survival Shrinking Software Company Faces The Possibility Of A Takeover Attempt

Michael Murphey Staff writer

A year ago, Spokane economic development leaders basked in the adulation of the ultimate economic coup - the capture of a corporate headquarters.

Egghead Software transplanted here from Seattle with more than 500 employees and $400 million in annual sales - a beacon that might lead other Egghead-sized companies to bring their corporate offices to Spokane as well.

Since that time, though, Egghead has put on a steady disappearing act.

It reached its peak employment of about 550 in December 1995. Within a matter of weeks, the whittling began. Late that month, a slowing of retail sales resulted in a handful of layoffs.

In the spring, Egghead announced a deal to sell its Corporate, Government and Education (CGE) Division - responsible for about half of the company’s annual sales figure - to Software Spectrum Inc., a Dallas-based firm. That pared 230 from the Egghead payroll. Another 50 jobs associated with the CGE sale were eliminated in June.

Each move, company officials said, was designed to fine-tune the company, reposition it as a player in the volatile combination of retailing and software industries.

But what the company has really succeeded in doing, some analysts say, is maneuvering itself into the position of being takeover bait. A recent Business Week article mentioned CompUSA, Blockbuster Video, and the Japanese conglomerate Softbank as possible buyers.

“Yes, buyout is an issue,” says Thomas Carley, an analyst with Portland-based Jensen Securities Co., who has covered Egghead for several years. “If it wasn’t, they wouldn’t have instituted change-in-control agreements for the whole top management team.

“Any time you are sitting on (a cash equivalent of) $5.42 cents per share, and your stock is trading at $6, you don’t sleep well at night.

“I would say,” Carley adds, “that the coming Christmas season is pretty crucial to this company.”

Lots of cash, not much growth

Egghead has been free of long-term debt for years.

In a 1995 interview, Egghead Chief Executive Officer Terence M. Strom described the problem he found at Egghead when he got there.

“What you had with Egghead in 1993,” Strom said, “was a financially healthy company that was failing to grow … We are trying to reposition the company so it can grow again.”

A year later, Egghead is even more robust financially, but the growth hasn’t materialize.

By selling its CGE division to Software Spectrum for $45 million, Egghead left itself with $95 million in cash. The company’s stock price, which has bounced around a broad range between $13 and $5 a share over the past three years, jumped following the announcement of the deal to $12 in anticipation of the company’s strong financial position.

But Egghead was not forthcoming on its plans for the cash. The previously highly-accessible corporate executives have cut themselves off from inquiring analysts and the news media.

“Nobody at Egghead is going to make themselves available for an interview with anyone,” Nancy Goodspeed, a public relations spokesperson with The Rockey Co., said last week.

And amid the uncertainty, the company’s stock has been in decline. It closed Thursday at $6 per share on the Nasdaq Stock Market.

“With $95 million on your balance sheet,” says Carley, “that makes you pretty attractive to someone who thinks they can get the retail operation going again.”

But Carley is not so sure any of the big software retailers are willing to take on Egghead’s woes. Egghead is trying to find its way out of a retail format dilemma characterized by its performance in August when comparable store sales were down 34 percent from August 1995.

Egghead was founded in Seattle in 1984 by Victor Alhadeff, who was its CEO until 1990. It thrived in the early years as a reseller of software in tiny specialty stores and as a direct marketer of software to large government, school and corporate customers nationwide.

But by 1990, competition had stepped up. The big “superstore” chains like Wal-Mart and ShopKo began selling software and the Egghead model wasn’t competitive anymore.

The company quickly went through two more management administrations before Strom joined Egghead in 1993. He cut prices and began closing many of Egghead’s 209 tiny retail outlets. It now has about 160 stores.

And he moved the company from the Puget Sound area to Spokane in search of a less expensive business environment.

The move produced lower expenses, but it put the company in another kind of bind. It disrupted the activities of Egghead’s profitable CGE division, opening the door for competitors like Software Spectrum to step in and grab some of Egghead’s big corporate customers.

Faced with the difficult task of rebuilding the division in the face of stiff competition, Egghead decided instead to sell the division to Software Spectrum and concentrate on being a retailer.

Strom focused on a new retail format someplace between Egghead’s traditional model and the big warehouse discount stores.

Egghead has opened 11 of the larger stores so far, some of them conversions of old stores, and others brand new stores like the Egghead outlet on North Division in Spokane. It had planned to open more, but the results from the new stores have been mixed, and the company has backed off its new-store schedule.

“The jury is still out on whether this new format is going to work,” says analyst Carley. “Is there a place for a 5,000-square-foot convenience store in this market? We don’t know yet.”

And Carley doesn’t think a big buyer will be anxious to pick up Egghead until that question is answered, even with that $95 million lump of cash ripe for the picking.

There’s also a wild card in this scenario.

Last year, Egghead sunk several million dollars into the development of a subsidiary company called Elekom. In partnership with Lotus Development Corp. and AT&T, the company created software that allows personal computer users to make purchases through on-line catalogues. With a carefully-developed security feature, the system is aimed at corporate purchasing offices.

Carley says an Egghead buyer might be willing to do a takeover betting on Elekom’s potential.

“It’s a moving target because no one really knows the value of Elekom,” Carley says. “But with all the focus right now on electronic commerce and the Internet, Elekom could represent a significant hidden asset.”

Pinning hopes on the holidays

Meanwhile, Egghead officials are keeping their heads down and apparently working toward fine-tuning the new retail format in hopes that a strong holiday season will earn some money and push the company’s stock to a higher, safer range.

George P. Orban, a long-time Egghead board member who was appointed board chairman in May, has stepped in to take a direct hand in management. Orban, 50, is an experienced retailer who founded Ross Stores Inc., a discount clothing chain, and Office Mart Inc., in Florida.

“He’s supposedly in Spokane right now, working full time,” Carley says. “I think he’s taken charge of the company.”

Carley doesn’t see that as a sign that Strom is on his way out. Rather, he thinks Orban is “supplementing a pretty lean management team that has a lot on its plate right now.”

While they aren’t saying much to the financial world or the media right now, one Egghead official did talk briefly about the company’s condition to the Spokane Advertising Federation earlier this month.

Of the move to Spokane, Kurt Conklin, Egghead’s vice president of human resources, said, “We’re pleased with the expense outcome, but we didn’t do a good job on the customer relations side.”

He said the company needs to “generate more sales and put in more stores.”

But, Conklin added, “I think our place in the market and our reputation for customer service will help us get over the economic situation we are in.”

, DataTimes

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