Egghead to file for bankruptcy

Egghead spokeswoman Joanne Hartzell said the company plans to file for Chapter 11 bankruptcy later on Wednesday, and that it laid off about 180 employees as part of the move.

Fry's is buying Egghead's Web site and "ongoing operations," Hartzell said, though she declined to list what assets Fry's is buying or how much the company is paying for them. Fry's is purchasing the assets before the bankruptcy filing and will go into the proceedings as a debtor in possession, Hartzell said.

Menlo Park, Calif.-based Egghead said in a statement Wednesday that Fry's plans to continue operating Egghead's Web site. "This was the best opportunity for us to get the most back for our creditors and keep the Egghead brand alive," Hartzell said.

Egghead suffered a deep decline in sales recently, which forced the bankruptcy filing and asset sale, Jeff Sheahan, Egghead's chief executive, said in the statement.

"We investigated a number of alternatives," Sheahan said in the statement. "We believe this action will allow the company to realize a value for its assets which will benefit our creditors."

The move represents a bulking up of Fry's online efforts and could explain why it ended its flirtation with electronics e-tailer Cyberian Outpost, which runs Outpost.com, an Egghead rival. On Friday, Fry's withdrew its offer to take over Cyberian Outpost. Fry's, which owns 11 percent of Outpost, did not explain the withdrawal of the offer at the time.

Fry's, which has a successful chain of 18 electronics stores in California, Texas, Oregon and Arizona, has done little online beyond selling DSL access through a rudimentary Web site.

A Fry's surprise?
The company, which seemed perfectly positioned to move online with the tech boom, was ridiculed for not even having a Web site until early 2000, and then it just offered high-speed Internet access and no products. Running an e-commerce store will be a huge departure for Fry's. The company built its low-margin, high-volume business by advertising certain products at greatly reduced prices and offering a broad selection of products in its stores--about 50,000 items.

"Fry's Web site has been so pathetic that you can't find out if they carry a certain product in their store," said Vernon Keenan, an analyst with Keenan Vision. "I'm surprised that Fry's is branching into e-comerce when it is hitting a low point, but the move gives them a national profile. And at this point it appears they are getting a finished e-commerce system for pennies on the dollar."

For Fry's to succeed where Egghead failed, it must lean on Egghead's former executive staff, Keenan said.

"Fry's doesn't have any online experience to date," Keenan said. "Because they are a neophyte in e-commerce, they must retain Egghead staff."

Manuel Vallerio, a Fry's spokesman, said Fry's plans to continue to retain some of Egghead's former employees to keep the site operating.

"As for right now, we don't plan any changes other than to work with the Egghead team to reinvigorate the Web store," Vallerio said.

Chief Executive John Fry said in a statement that Egghead executives "have done an excellent job of building a strong brand and sizable online business which enables us to move online quickly with a robust and proven site."

Egghead also filed an incomplete earnings report with the Securities and Exchange Commission on Wednesday that showed the decline in the company's sales and its tenuous cash position. In the second quarter, Egghead lost $4.7 million on $59 million in revenue. Although the net loss was an improvement from the $17.7 million the company lost in the second quarter of 2000, Egghead's revenue was down 53 percent from the year-ago quarter and down 29 percent from the first quarter of 2001.

Egghead's results do not include the impairment of goodwill as a result of the bankruptcy. In its regulatory filing, the company told the SEC that it does not plan to calculate the value of its impaired assets because doing so would require "unreasonable effort or expense."

Like its revenue, Egghead's assets fell precipitously this year, according to the filing. At the end of last year, Egghead had about $32.7 million in cash and short-term investments. By the end of June, the company had just $4.7 million in cash and short-term investments.

But $1.2 million of that was restricted, serving as collateral on the company's office and warehouse leases. By the time of the filing, Egghead had just $750,000 in cash and cash equivalents.

Not enough capital
Egghead laid off 77 employees in March to cut expenses. In another cost-saving move, the company moved about 20 percent of its jobs from Menlo Park to offices in Vancouver, Wash.

Egghead's restructuring moves were the right way to go, but the company didn?t have enough capital to see them through, Sheahan told CNET News.com.

"We did not anticipate such a softening of the marketplace," he said. "We couldn't cost-cut our way to success at this point."

Egghead's stock has closed consistently below $1 a share since February, prompting the Nasdaq to warn Egghead in April that its stock would be delisted if it was not able to maintain the $1 per-share minimum price.

In June, Egghead executives authorized a reverse stock split as part of a strategy to avoid being delisted. Reverse stock splits, which have failed to work for scores of other ailing tech companies, are designed to artificially boost the price of a stock.

Companies risk delisting if they cannot maintain a $1 minimum share price for 30 days. Egghead's stock last topped a dollar on May 2.

Start-up e-tailer Onsale.com changed its name to Egghead.com after purchasing the former brick-and-mortar software retailer in 1999. Like Onsale, which launched the first online auction site, Egghead was also a pioneer. In 1998, the company shut down all of its brick-and-mortar retail stores to focus on Internet sales.

Onsale's purchase of Egghead was one of a number of acquisitions of traditional companies by online players as their share prices swelled and as the Internet took off.

Onsale rival eBay, for instance, bought traditional auction house Butterfield & Butterfield and classic car auctioneer Kruse International in 1999. Earlier this year, AOL completed its takeover of entertainment giant Time Warner, one year after announcing the deal.

Tide turns
However, more recently, the tide has been flowing in the other direction, with traditional companies picking up the pieces of failed dot-com companies or bringing their own struggling online operations back in-house.

Brick-and-mortar toy retailer KB Toys, for instance, has been picking up the pieces of failed e-tailer eToys. Last month, Wal-Mart and Kmart both announced they were going to fold their online businesses back into their main operations.

Last month, Egghead handed over maintenance of its auctions to auction service company FairMarket. However, since then, the company has maintained fewer than 100 auctions at any one time--far fewer than normal and a fraction of those found on uBid, eBay or other auction sites.

Chairman Jerry Kaplan, the co-founder of Onsale, also founded pen-based computing company Go Corporation, the remnants of which AT&T shut down in 1994 after the company blew through $75 million in one of the biggest start-up failures before the dot-com age.

Egghead's Hartzell said the company has about 130 employees left, 105 of which are in Vancouver. Those employees will remain with the company through the bankruptcy and may be offered positions at Fry's after the bankruptcy proceedings have been completed.

News.com's Greg Sandoval contributed to this report.