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Egghead makes direct sales pitch

Hoping to grab a share of the direct software market, shareholders of the struggling retail vendor approve the acquisition of direct computer and software marketer Surplus Direct.

Hoping to grab a share of the direct software market, shareholders of struggling retail vendor Egghead Software (EGGS) today approved the acquisition of Surplus Direct, a direct marketer of computers and software, in a $31.5 million stock swap deal.

Egghead, facing competition from a plethora of software superstores and Web sites that allow software downloads, acquired Surplus Direct for 5.6 million newly issued shares of common stock and will pay off $5.6 million of Surplus Direct debt.

"This is a very significant event for us today," said Egghead chief financial officer Brian Bender. "We're thrilled that the merger is complete and we're looking forward to bringing the business back around."

Under the agreement, Egghead will sell Surplus Direct merchandise at its retail stores, while Surplus Direct will sell Egghead products through its catalogue and online channels, which include both its main site and its Surplus Auction site.

While Egghead is clearly hanging its recovery hopes on the direct sales that will come from the merger, Bender emphasized that the deal was mutually beneficial. "Surplus Direct is a growth company that has been capital-constrained. With capital available through Egghead they have the opportunity to grow their business," Bender said.

Surplus Direct, formed in 1992, serves mainly as a direct marketer of other companies' excess software and hardware inventories over the Internet. PC Meter, a New York research firm that tracks Internet users, ranked the Surplus Direct site sixth among Internet commerce sites.

"This [acquisition] is a move into direct sales," said John Taylor, an analyst with Arcadia Investment. "Surplus generates revenue from direct sales through the mail and its Web site, and this is an attempt to increase revenue."

Egghead "brought some people on who know how to market directly via the mail or Internet...people who have skill sets that they do not have," said Taylor. He added that the deal gives Egghead access to hardware vendors, with which the company has had little contact before.

Analysts believe that the deal will guide Egghead through its transition while bolstering its presence in the e-commerce market. Taylor pointed out that the acquisition will help Egghead increase revenues without building new stores.

Egghead can use all the help it can get. The troubled software retailer closed half of its 156 stores in January, the same month it posted a 7.5 percent drop in revenue for the third quarter. In January, CEO Terry Strom and vice presidents Kurt Conklin and Ron Smith resigned.

The fourth quarter saw heavy losses at Egghead. But recovery efforts appear to be paying off. Last month Egghead posted a shrinking net loss for the first quarter of $3.7 million, compared with a loss of $12.4 million for the first quarter last year. The company attributed the improvement to a 55 percent reduction in expenses, including 100 store closures in 1997.

Reporters Suzanne Galante and Stephanie Miles contributed to this report.