<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter period ended March 31, 1998
------------------------------------
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 0-14134
-------------------
THE GOOD GUYS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-2366177
- --------------------------------------------------------------------------------
(State of jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7000 Marina Boulevard, Brisbane, California 94005
- --------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
(415) 615-5000
- --------------------------------------------------------------------------------
(Registrant's telephone number including area code)
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
----- -----
The registrant had 14,081,165 shares of common stock outstanding as of April 30,
1998.
<PAGE> 2
THE GOOD GUYS, INC.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets as of
March 31, 1998 (Unaudited) and
September 30, 1997 (Unaudited) 3
Consolidated Statements of Operations
for the Three and Six Month Periods Ended
March 31, 1998 and 1997 (Unaudited) 4
Consolidated Statement of Changes in
Shareholders' Equity for the Six Month
Period Ended March 31, 1998 (Unaudited) 5
Consolidated Statements of Cash Flows
for the Six Month Periods Ended
March 31, 1998 and 1997 (Unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
Part II. OTHER INFORMATION 11-12
SIGNATURE PAGE 13
</TABLE>
2
<PAGE> 3
THE GOOD GUYS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
--------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,228 $ 18,951
Accounts receivable, net 29,291 21,711
Income taxes receivable 0 6,176
Merchandise inventories 145,434 117,768
Prepaid expenses 6,896 6,716
-------- --------
Total current assets 186,849 171,322
Property and equipment 127,226 120,121
Less accumulated depreciation and amortization 63,225 57,968
-------- --------
Property and equipment, net 64,001 62,153
Other assets 1,338 2,587
-------- --------
Total assets $252,188 $236,062
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 86,276 $ 75,517
Accrued expenses and other liabilities:
Payroll 12,016 13,434
Sales taxes 5,602 5,226
Other 28,737 23,781
-------- --------
Total current liabilities 132,631 117,958
Shareholders' equity:
Preferred stock, $.001 par value;
authorized 2,000,000 shares;
none issued
Common stock, $.001 par value;
authorized 40,000,000 shares;
issued and outstanding, 14,015,429 shares and
13,810,310 shares, respectively 14 14
Additional paid-in capital 63,360 62,316
Retained earnings 56,183 55,774
-------- --------
Total shareholders' equity 119,557 118,104
-------- --------
Total liabilities and shareholders' equity $252,188 $236,062
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
THE GOOD GUYS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended March 31, Ended March 31,
------------------------ ----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 209,062 $ 205,091 $499,365 $ 491,656
Cost of sales 156,730 153,137 375,412 368,007
--------- --------- -------- ---------
Gross profit 52,332 51,954 123,953 123,649
Selling, general and
administrative expenses 55,243 57,147 122,810 125,323
--------- --------- -------- ---------
Income (loss) from operations (2,911) (5,193) 1,143 (1,674)
Interest expense, net 242 129 495 371
--------- --------- -------- ---------
Income (loss) before income
taxes (3,153) (5,322) 648 (2,045)
Income tax expense (benefit) (1,159) (2,040) 239 (729)
--------- --------- -------- ---------
Net income (loss) $ (1,994) $ (3,282) $ 409 $ (1,316)
========= ========= ======== =========
Net income (loss) per common
share
Basic: $ (.14) $ (.24) $ .03 $ (.10)
--------- --------- -------- ---------
Diluted: $ (.14) $ (.24) $ .03 $ (.10)
--------- --------- -------- ---------
Weighted average shares
Basic: 13,995 13,616 13,856 13,539
--------- --------- -------- ---------
Diluted: 13,995 13,616 13,889 13,539
--------- --------- -------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
THE GOOD GUYS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX-MONTH PERIOD ENDED MARCH 31, 1998
(In thousands except share data)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
---------------------- paid-in Retained
Shares Amount capital Earnings Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at
September 30, 1997 13,810,310 $ 14 $ 62,316 $55,774 $ 118,104
Issuance of common stock 401,419 1 2,425 -- 2,426
Repurchase and retirement
of common stock (196,300) (1) (1,381) -- (1,382)
Net Income for the
six-month period
Ended March 31, 1998 -- -- -- 409 409
----------- ---- -------- ------- ---------
Balance at
March 31, 1998 14,015,429 $ 14 $ 63,360 $56,183 $ 119,557
=========== ==== ======== ======= =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
THE GOOD GUYS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended March 31,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 409 $ (1,316)
-------- --------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,258 4,828
Change in assets and liabilities:
Accounts receivable (7,580) (1,168)
Income taxes receivable 6,176 7,148
Merchandise inventories (27,666) (13,496)
Prepaid expenses and other assets 1,069 (57)
Accounts payable 10,759 (8,835)
Accrued expenses and other liabilities 3,914 4,968
-------- --------
Total adjustments (8,070) (6,612)
-------- --------
Net cash used in operating activities (7,661) (7,928)
-------- --------
Cash Flows from Investing Activities:
Capital expenditures (7,106) (1,469)
-------- --------
Net cash used in investing activities (7,106) (1,469)
-------- --------
Cash Flows from Financing Activities:
Issuance of common stock 2,426 1,092
Repurchase and retirement of common stock (1,382) (1,009)
-------- --------
Net cash provided by financing activities 1,044 83
-------- --------
Net decrease in cash and
cash equivalents (13,723) (9,314)
Cash and cash equivalents at
beginning of period 18,951 21,965
-------- --------
Cash and cash equivalents at
end of period $ 5,228 $ 12,651
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
THE GOOD GUYS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and
reflect all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the information contained therein.
The results of operations for the three and six months ended March 31,
1998 and 1997 are not necessarily indicative of the results to be
expected for the full year. The consolidated financial statements should
be read in conjunction with the financial statements, notes and
supplementary data included and incorporated by reference in the
Company's Annual Report on Form 10-K for the fiscal year ended September
30, 1997.
2. Net Income per common share has been computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" (SFAS 128). SFAS 128 requires a dual presentation of basic and
diluted EPS. Basic EPS excludes dilution and is computed by dividing net
income available to common shareholders by the weighted average of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that would occur if securities or other contracts to
issue common stock were exercised or converted into common stock. Net
income per common share for prior periods have been restated to conform
to SFAS 128.
3. New Accounting Pronouncements:
SFAS No. 130, "Reporting Comprehensive Income" establishes standards for
reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-purpose
financial statements. This statement requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. In
addition, this statement requires that an enterprise classify items of
other comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income separately
from the retained earnings and additional paid in capital in the equity
section of a statement of financial position. This statement is
effective for fiscal years beginning after December 15, 1997. Management
believes this will have no impact on the Company's financial position or
results of operations.
SFAS No. 131, "Disclosures about Segment Reporting of an Enterprise and
Related Information" establishes standards for the way that public
business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for
related disclosure about products and services, geographic areas, and
major customers. The adoption of this statement will not impact the
Company's financial position, results of operations or cash flows and
any effect will be limited to the form and content of its disclosures.
This statement is effective for fiscal years beginning after December
15, 1997.
7
<PAGE> 8
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
To the extent forward-looking statements are made in this Form 10-Q, such
statements are subject to certain risks and uncertainties, including but not
limited to increases in promotional activities of the Company's competitors,
changes in consumer buying attitudes, the presence or absence of new products or
product features in the Company's merchandise categories, changes in vendor
support for advertising and promotional programs, changes in the Company's
merchandise sales mix, general economic conditions, and other factors referred
to in the Company's 1997 Annual Report on Form 10-K under "Information Regarding
Forward Looking Statements".
RESULTS OF OPERATIONS
Net sales for the quarter ended March 31, 1998 were $209.1 million, an increase
of 2% from sales of $205.1 million for the quarter ended March 31, 1997. For the
six months ended March 31, 1998, net sales increased 2% to $499.4 million,
compared to $491.7 million for the six months ended March 31, 1997. Comparable
store sales increased 2% for the quarter and 1% for the six months ended March
31, 1998.
Gross profit as a percentage of net sales was 25.0% for the quarter ended March
31, 1998, as compared to 25.3% for the quarter ended March 31, 1997. For the six
months ended March 31, 1998, gross profit as a percentage of sales was 24.8%
compared to 25.1% for the six months ended March 31, 1997. The decrease in gross
profit was primarily due to shifts in product mix between extended warranties
and other product categories.
For the quarter ended March 31, 1998, selling, general and administrative
expenses were 26.4% of net sales compared to 27.8% for the quarter ended March
31, 1997. For the six months ended March 31, 1998, selling, general and
administrative expenses were 24.6% of net sales as compared to 25.5% of net
sales for the six months ended March 31, 1997. The decrease in selling, general
and administrative costs as a percentage of sales for the quarter and six months
ended March 31, 1998 is primarily due to reductions in general and
administrative and advertising expenses and an increase in same store sales.
The effective income tax rate for the quarter and six months ended March 31,
1998 was 36.8% as compared with 38.3% and 35.6% for the quarter and six months
ended March 31, 1997, respectively.
The net loss for the quarter ended March 31, 1998 was $2.0 million ($0.14 per
share) or 0.9% of net sales for the period. These results compare to a net loss
of $3.3 million ($0.24 per share) or 1.6% of net sales for the quarter ended
March 31, 1997. For the six months ended March 31, 1998, net income was $409,000
($0.03 per share) or 0.1% of net sales as compared to a net loss of $1.3 million
($ 0.10 per share) or 0.3% of net sales for the six months ended March 31, 1997.
8
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had working capital of $54.2 million. Net cash
used in operating activities was $7.7 million for the six months ended March 31,
1998, compared to $7.9 million for the six months ended March 31, 1997. The
decrease in net cash used in operating activities was primarily due to an
increase in net income, partially offset by an increase in merchandise
inventories.
Net cash used in investing activities, which primarily consists of expenditures
for stores, distribution facilities and administrative property and equipment,
was $7.1 million for the six months ended March 31, 1998, as compared to $1.5
million during the same period last year. This increase in cash used in
investing activities primarily relates to the building of new stores and the
continued remodeling of existing stores to the new Audio/Video Exposition
format. The Company continues to identify stores for remodeling to the new
Audio/Video Exposition format and plans to renovate four to seven existing
locations in calendar 1998. In addition, the Company plans to open three new
stores in the Exposition format during calendar 1998.
The Company maintains a revolving line of credit, which provides a maximum
borrowing level of $75,000,000. The credit agreement contains restrictive loan
covenants, which if violated could be used as a basis for termination of the
agreement. For the quarter ending March 31, 1998, the Company was in compliance
with all covenants under the credit agreement. There were no borrowings
outstanding under the credit agreement at March 31, 1998.
The Company expects to fund its working capital requirements and expansion plans
with a combination of cash flows from operations, normal trade credit, financing
arrangements and continued use of lease financing.
The Company believes that because of competition among manufacturers and the
technological changes in the consumer electronics industry, inflation has not
had an effect on net sales and cost of sales.
YEAR 2000
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
data-based information.
The Company has identified all significant applications that will require
modification to ensure Year 2000 Compliance. Internal and external resources are
being used to make the required modifications and test Year 2000 Compliance. The
Company plans on completing the testing process of all significant applications
by Mid 1999.
9
<PAGE> 10
In addition, the Company has communicated with others with whom it does
significant business to determine their Year 2000 Compliance readiness and the
extent to which the Company is vulnerable to any third party Year 2000 issues.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would have a material adverse effect on the Company.
The total cost to the Company of these Year 2000 Compliance activities has not
been and is not anticipated to be material to its financial position or results
of operations in any given year. These costs and the date on which the Company
plans to complete the Year 2000 modification and testing processes are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
guarantees that these estimates will be achieved and actual results could differ
from those plans.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Not applicable
10
<PAGE> 11
PART II. OTHER INFORMATION
ITEM 1 Legal Proceedings
On July 19, 1996, McBride-Newall, Inc. dba Carphones, Inc. and numerous other
individuals filed a complaint against the Company and 21 other named defendants
entitled McBride-Newall, Inc., et al. v. Mobilworks, Inc. et al., San Diego
Superior Court Case No. 695897. Plaintiffs, who are small agents of the cellular
service providers offering cellular telephone products and service in the San
Diego area, alleged a conspiracy to sell cellular telephone equipment below cost
with the intent to drive the plaintiffs out of business. Plaintiffs sought
treble damages under the California antitrust laws. The lawsuit has been settled
on a basis that is not material to the financial condition of the Company.
On October 31, 1997, Mike Kashri dba Car Phone Express, filed a complaint
against the Company and seven other named Defendants entitled Kashri, et at. vs.
Los Angeles Cellular Telephone Company, et al., Orange County Superior Court
Case No. 786296. Plaintiffs, who are small agents of the cellular service
providers offering cellular telephone products and service in the Orange County
area, allege a conspiracy to sell cellular telephone equipment below cost with
the intent to drive the Plaintiffs out of business. Plaintiffs seek treble
damages under the California Antitrust laws. The Complaint was not served on the
Company until April 1, 1998. The Company believes it has meritorious defenses to
the claims alleged in the lawsuit and intends to defend the action vigorously.
ITEM 2-3 Not applicable
11
<PAGE> 12
ITEM 4 Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders of The Good Guys, Inc. held on
February 13, 1998, 12,691,192 shares were present in person or by proxy
out of 13,810,310 outstanding shares on December 19, 1997, the record
date. The shareholders voted as follows:
1. On nominees for election as Directors of the Corporation:
<TABLE>
<CAPTION>
Number of Shares
------------------------
Nominees For Withheld
-------- --- --------
<S> <C> <C>
Stanley R. Baker 11,634,474 1,175,183
Robert A. Gunst 11,612,278 1,197,379
Russell M. Solomon 11,643,088 1,166,569
W. Howard Lester 11,648,668 1,160,989
John E. Martin 11,650,056 1,159,601
Horst H. Schulze 11,652,812 1,156,845
</TABLE>
2. On approval of the Amended and Restated 1994 Stock Incentive
Plan:
<TABLE>
<CAPTION>
Number of shares
----------------
<S> <C>
For the proposal: 6,897,126
Against the proposal: 3,106,679
Withheld: 315,850
Non-Votes: 2,371,537
</TABLE>
3. On Ratification of the appointment of Deloitte & Touche, LLP as
independent Certified Public Accountants.
<TABLE>
<CAPTION>
Number of shares
----------------
<S> <C>
For the proposal: 12,623,169
Against the proposal: 37,495
Withheld: 30,528
</TABLE>
ITEM 5 Not applicable
ITEM 6 Exhibits and Reports on Form 8-K
(a) No reports on Form 8-K were filed during the quarter for which
this report is filed.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements 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.
THE GOOD GUYS, INC.
-------------------------------------
Registrant
May xx, 1998 /s/ DENNIS C. CARROLL
- ----------------------- -------------------------------------
Date Dennis C. Carroll
Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,228
<SECURITIES> 0
<RECEIVABLES> 30,285
<ALLOWANCES> 994
<INVENTORY> 145,434
<CURRENT-ASSETS> 186,849
<PP&E> 127,226
<DEPRECIATION> 63,225
<TOTAL-ASSETS> 252,188
<CURRENT-LIABILITIES> 132,631
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 119,543
<TOTAL-LIABILITY-AND-EQUITY> 252,188
<SALES> 499,365
<TOTAL-REVENUES> 499,365
<CGS> 375,412
<TOTAL-COSTS> 375,412
<OTHER-EXPENSES> 122,810
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 495
<INCOME-PRETAX> 648
<INCOME-TAX> 239
<INCOME-CONTINUING> 409
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 409
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
