<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 June 30, 1998
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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
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THE GOOD GUYS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 94-2366177
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(State of jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7000 Marina Boulevard, Brisbane, California 94005
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(Address of principal executive offices) (zip code)
(415) 615-5000
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(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 14,247,718 shares of common stock, outstanding as of July 31,
1998.
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THE GOOD GUYS, INC. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets as of
June 30, 1998 (Unaudited) and
September 30, 1997 (Unaudited) 3
Consolidated Statements of Operations
for the Three and Nine Month Periods Ended
June 30, 1998 and 1997 (Unaudited) 4
Consolidated Statement of Changes in
Shareholders' Equity for the Nine Month
Period Ended June 30, 1998 (Unaudited) 5
Consolidated Statements of Cash Flows
for the Nine Month Periods Ended
June 30, 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
SIGNATURE PAGE 12
EXHIBIT 27.1 Financial Data Schedule 13
</TABLE>
2
<PAGE> 3
THE GOOD GUYS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,469 $ 18,951
Accounts receivable, net 33,039 21,711
Income taxes receivable 914 6,176
Merchandise inventories 150,575 117,768
Prepaid expenses 6,350 6,716
------------- -------------
Total current assets 199,347 171,322
Property and equipment 131,929 120,121
Less accumulated depreciation and amortization 66,060 57,968
------------- -------------
Property and equipment, net 65,869 62,153
Other assets 1,697 2,587
------------- -------------
Total assets $ 266,913 $ 236,062
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 100,589 $ 75,517
Accrued expenses and other liabilities:
Payroll 9,580 13,434
Sales taxes 3,646 5,226
Other 27,367 23,781
------------- -------------
Total current liabilities 141,182 117,958
Revolving credit debt 7,957 --
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, 14,116,051 shares and
13,810,310 shares, respectively 14 14
Additional paid-in capital 64,168 62,316
Retained earnings 53,592 55,774
------------- -------------
Total shareholders' equity 117,774 118,104
------------- -------------
Total liabilities and shareholders' equity $ 266,913 $ 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 OPERATIONS
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 209,057 $ 194,834 $ 708,422 $ 686,490
Cost of sales 155,792 145,094 531,204 513,101
------------- ------------- ------------- -------------
Gross profit 53,265 49,740 177,218 173,389
Selling, general and
Administrative expenses 57,103 56,166 179,913 181,489
------------- ------------- ------------- -------------
Loss from operations (3,838) (6,426) (2,695) (8,100)
Interest expense, net 252 208 747 579
------------- ------------- ------------- -------------
Loss before income taxes (4,090) (6,634) (3,442) (8,679)
Income tax benefit (1,499) (2,488) (1,260) (3,217)
------------- ------------- ------------- -------------
Net loss $ (2,591) $ (4,146) $ (2,182) $ (5,462)
============= ============= ============= =============
Net loss per common share
Basic: $ (.18) $ (.30) $ (.16) $ (.40)
------------- ------------- ------------- -------------
Diluted: $ (.18) $ (.30) $ (.16) $ (.40)
------------- ------------- ------------- -------------
Weighted average shares
Basic: 14,086 13,620 13,932 13,566
------------- ------------- ------------- -------------
Diluted: 14,086 13,620 13,932 13,566
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
4
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THE GOOD GUYS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE-MONTH PERIOD ENDED June 30, 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 502,041 1 3,233 -- 3,234
Repurchase and retirement of
common stock (196,300) (1) (1,381) -- (1,382)
Net loss for the nine-month
period
Ended June 30, 1998 -- -- -- (2,182) (2,182)
------------- ------------- ------------- ------------- -------------
Balance at
June 30, 1998 14,116,051 $ 14 $ 64,168 $ 53,592 $ 117,774
============= ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
5
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THE GOOD GUYS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
--------------------------------
1998 1997
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<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (2,182) $ (5,462)
------------- -------------
Adjustments to reconcile net loss to net cash
Provided by (used in) operating activities:
Depreciation and amortization 8,096 7,222
Change in assets and liabilities:
Accounts receivable (11,328) 780
Income tax receivable 5,262 5,257
Merchandise inventories (32,807) (18,763)
Prepaid expenses and other assets 1,252 590
Accounts payable 25,072 10,743
Accrued expenses and other liabilities (1,848) (5,903)
------------- -------------
Total adjustments (6,301) (74)
------------- -------------
Net cash used in operating activities (8,483) (5,536)
------------- -------------
Cash Flows from Investing Activities:
Capital expenditures (11,808) (3,811)
------------- -------------
Net cash used in investing activities (11,808) (3,811)
------------- -------------
Cash Flows from Financing Activities:
Issuance of common stock 3,233 1,090
Repurchase and retirement of common stock (1,381) (1,008)
Proceeds from borrowings 7,957 --
------------- -------------
Net cash provided by financing activities 9,809 82
------------- -------------
Net decrease in cash and
cash equivalents (10,482) (9,265)
Cash and cash equivalents at
beginning of period 18,951 21,965
------------- -------------
Cash and cash equivalents at
end of period $ 8,469 $ 12,700
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
6
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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 nine
months ended June 30, 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. Management believes this will have no impact on the
Company's financial position or results of operations. This statement
is effective for fiscal years ending September 30, 1999.
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 ending September 30, 1999.
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 June 30, 1998 were $209.1 million, an increase
of 7% from sales of $194.8 million for the quarter ended June 30, 1997. For the
nine months ended June 30, 1998, net sales increased 3% to $708.4 million,
compared to $686.5 million for the nine months ended June 30, 1997. Comparable
store sales increased 6% for the quarter and 3% for the nine months ended June
30, 1998.
Gross profit as a percentage of net sales was 25.5% for both the quarter ended
June 30, 1998 and for the quarter ended June 30, 1997. For the nine months ended
June 30, 1998, gross profit as a percentage of sales was 25.0% compared to 25.3%
for the nine months ended June 30, 1997.
For the quarter ended June 30, 1998, selling, general and administrative
expenses were 27.3% of net sales compared to 28.8% for the quarter ended June
30, 1997. For the nine months ended June 30, 1998, selling, general and
administrative expenses were 25.4% of net sales as compared to 26.5% of net
sales for the nine months ended June 30, 1997. The decrease in selling, general
and administrative costs as a percentage of sales for the quarter and nine
months ended June 30, 1998 is primarily due to reductions in net advertising
expenses and an increase in same store sales.
The effective income tax rates for the quarter and nine months ended June 30,
1998 were 36.7% and 36.6%, compared with 37.5% and 37.1% for the quarter and
nine months ended June 30, 1997, respectively.
The net loss for the quarter ended June 30, 1998 was $2.6 million ($0.18 per
share) or 1.2% of net sales for the period. These results compare to a net loss
of $4.1 million ($0.30 per share) or 2.1% of net sales for the quarter ended
June 30, 1997. For the nine months ended June 30, 1998, the net loss was $2.2
million ($0.16 per share) or 0.3% of net sales as compared to a net loss of $5.5
million ($ 0.40 per share) or 0.8% of net sales for the nine months ended June
30, 1997.
8
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had working capital of $58.2 million. Net cash
used in operating activities was $8.5 million for the nine months ended June 30,
1998, compared to $5.5 million for the nine months ended June 30, 1997. The
increase in net cash used in operating activities was primarily due to an
increase in merchandise inventory and accounts receivable, partially offset by
an increase in accounts payable and a decrease in the year to date net loss.
Net cash used in investing activities, which primarily consists of expenditures
for stores, distribution facilities and administrative property and equipment,
was $11.8 million for the nine months ended June 30, 1998, as compared to $3.8
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 Audio/Video 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 June 30, 1998, the Company was in compliance
with all covenants under the credit agreement. There were borrowings of $8.0
million outstanding under the credit agreement at June 30, 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 Risk
Not applicable
10
<PAGE> 11
PART II. OTHER INFORMATION
ITEM 1 Legal Proceedings
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 lawsuit has been settled on a basis that is not
material to the financial condition of the Company.
On July 7, 1998, the Company was named as a defendant in a purported class
action entitled Cavnar, et al. v National Semiconductor Corp., et al., Case No.
996297, filed in San Francisco County Superior Court. Plaintiffs have named as
defendants National Semiconductor Corporation, Cyrix Corporation, Compaq
Computer Corporation, and fourteen retailers and wholesalers of personal
computers systems, including The Good Guys. Plaintiffs allege that since 1994,
the defendants have misrepresented to the public the random access memory (RAM)
available for software processing applications on personal computers containing
the Cyrix MediaGX(TM) central processing unit (CPU). The case is at an early
stage, discovery has not yet commenced, and it is too early to be able to
express any opinion as to the likely outcome of the matter. The Company believes
it has meritorious defenses to the claims alleged in the lawsuit and intends to
defend the action vigorously. The Company also believes it has meritorious
claims for indemnification from the computer manufacturer or manufacturers from
which it has purchased personal computer systems that contain the Cyrix
MediaGX(TM) (CPU)
ITEM 2-5 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.
11
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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
August 12, 1998 /s/ DENNIS C. CARROLL
--------------- --------------------------
Date Dennis C. Carroll
Chief Financial Officer
12
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Exhibit Index
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,469
<SECURITIES> 0
<RECEIVABLES> 34,965
<ALLOWANCES> 1,012
<INVENTORY> 150,575
<CURRENT-ASSETS> 199,347
<PP&E> 131,929
<DEPRECIATION> 66,060
<TOTAL-ASSETS> 266,913
<CURRENT-LIABILITIES> 141,182
<BONDS> 7,957
0
0
<COMMON> 14
<OTHER-SE> 117,760
<TOTAL-LIABILITY-AND-EQUITY> 266,913
<SALES> 708,422
<TOTAL-REVENUES> 708,422
<CGS> 531,204
<TOTAL-COSTS> 531,204
<OTHER-EXPENSES> 179,913
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 747
<INCOME-PRETAX> (3,442)
<INCOME-TAX> (1,260)
<INCOME-CONTINUING> (2,182)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,182)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
