<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
or
[ ] TRANSITION REPORTS 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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7000 Marina Blvd.
Brisbane, CA 94005-1840
(Address of principal executive offices)
(650) 615-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
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. [X] Yes [ ] No
CLASS OUTSTANDING AS OF April 30, 2000
----- --------------------------------
Common Stock 20,557,880
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THE GOOD GUYS, INC.
INDEX
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION Page
- ------------------------------ ----
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets -
March 31, 2000 and September 30, 1999 3
Consolidated Statements of Operations -
Three month and six month period ended March 31, 2000 and 1999 4
Consolidated Statements of Changes in Shareholders' Equity -
Six month period ended March 31, 2000 5
Consolidated Statements of Cash Flows -
Six month period ended March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other events 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
</TABLE>
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THE GOOD GUYS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
--------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,885 $ 2,556
Accounts receivable, net 18,319 19,021
Merchandise inventories 120,609 110,276
Prepaid expenses 13,312 6,637
-------- --------
Total current assets 154,125 138,490
PROPERTY AND EQUIPMENT, NET
Land - 2,306
Leasehold improvements 73,502 73,298
Furniture, fixtures and equipment 76,298 72,686
Construction in progress - 3,785
-------- --------
Total property and equipment 149,800 152,075
Less accumulated depreciation and amortization 78,905 72,121
-------- --------
Property and equipment, net 70,895 79,954
OTHER ASSETS 7,644 7,646
-------- --------
Total Assets $232,664 $226,090
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 58,545 $ 36,571
Accrued expenses and other liabilities:
Accrued payroll 9,769 9,615
Sales taxes payable 4,403 4,936
Other 18,020 22,584
-------- --------
Total current liabilities 90,737 73,706
REVOLVING CREDIT DEBT 46,784 56,504
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value:
Authorized - 2,000,000 shares
Issued - none -- --
Common stock, $.001 par value
Authorized -40,000,000 shares
Issued and outstanding -20,418,279 and
19,636,022 shares, respectively 20 20
Additional paid-in-capital 92,207 88,332
Retained earnings 2,916 7,528
-------- --------
Total shareholders' equity 95,143 95,880
-------- --------
Total Liabilities and Shareholders' Equity $232,664 $226,090
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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THE GOOD GUYS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 190,364 $ 219,099 $ 452,575 $ 513,199
Cost of sales 136,662 167,156 320,096 389,806
--------- --------- --------- ---------
Gross profit 53,702 51,943 132,479 123,393
Selling, general and administrative expense 62,884 59,475 134,313 127,733
--------- --------- --------- ---------
Income (loss) from operations (9,182) (7,532) (1,834) (4,340)
Interest expense, net 1,049 666 2,778 1,254
--------- --------- --------- ---------
Income (loss) before income taxes (10,231) (8,198) (4,612) (5,594)
Income tax expense (benefit) - (952) -
--------- --------- --------- ---------
Net income (loss) $ (10,231) $ (7,246) $ (4,612) $ (5,594)
========= ========= ========= =========
Net income (Loss) per common share
Basic $ (0.50) $ (0.50) $ (0.23) $ (0.39)
========= ========= ========= =========
Diluted $ (0.50) $ (0.50) $ (0.23) $ (0.39)
========= ========= ========= =========
Weighted average shares
Basic 20,300 14,508 19,998 14,378
========= ========= ========= =========
Diluted 20,300 14,508 19,998 14,378
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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THE GOOD GUYS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX-MONTH PERIOD ENDED MARCH 31, 2000
(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, 1999 19,636,022 $ 20 $ 88,332 $ 7,528 $ 95,880
Issuance of common stock
under employee
stock purchase plan 145,337 - 891 891
Exercise of stock options
and warrants 521,725 - 2,303 2,303
Issuance of restricted
stock 115,195 - 681 681
Net (loss) for the six-month period
ended March 31, 2000 (4,612) (4,612)
---------- ---- -------- --------- ---------
Balance at March 31, 2000 20,418,279 $ 20 $ 92,207 $ 2,916 $ 95,143
========== ==== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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THE GOOD GUYS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (4,612) $ (5,594)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 7,377 6,209
Gain on sale of land (1,025) --
Early retirement of assets -- 702
Changes in assets and liabilities:
Accounts receivable 702 469
Merchandise inventories (10,333) (12,524)
Prepaid expenses and other assets (6,673) 53
Accounts payable 21,974 (4,312)
Accrued expenses and other liabilities (4,943) (4,412)
-------- --------
Net cash provided by (used in) operating activities 2,467 (19,409)
-------- --------
Cash Flows from Investing Activities:
Sale of land 3,208 --
Capital expenditures, net (501) (11,147)
-------- --------
Net cash provided by (used in) investing activities 2,707 (11,147)
-------- --------
Cash Flows from Financing Activities:
Net proceeds from issuance (repayment) revolving credit debt (9,720) 29,305
Proceeds from issuance of common stock 3,875 1,324
-------- --------
Net cash provided by (used in) financing activities (5,845) 30,629
-------- --------
Net increase (decrease) in cash and cash equivalents (671) 73
Cash and cash equivalents at beginning of period 2,556 3,051
-------- --------
Cash and cash equivalents at end of the period $ 1,885 $ 3,124
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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THE GOOD GUYS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of presentation. 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 adjustments) necessary for a fair presentation of the
information contained therein. 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, 1999.
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 earnings
per share (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 had been converted into common stock. No potential
common shares were included in the computation of diluted per-share
amounts for the periods presented, during which a loss from operations was
recorded, as such potential shares would be anti-dilutive.
3. Statement of Financial Accounting Standards No. 133 (SFAS 133),
"Accounting for Derivative Instruments and Hedging Activities," defines
derivatives, requires all derivatives be carried at fair value, and
provides for hedging accounting when certain conditions are met. As
amended by SFAS No. 137, "Accounting for Derivative Instruments," SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. Although the Company has not fully assessed the
implications of this new statement, the Company does not believe adoption
of this statement will have a material impact on the Company's financial
statements.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
BUSINESS OUTLOOK AND RISK FACTORS
The trend analyses and other non-historical information contained in
Management's Discussion and Analysis of Financial Condition and Results of
Operations are "forward looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and are subject to the safe harbor provisions
of those Sections. Such forward looking statements include, without limitation,
statements concerning the Company's future net sales, net earnings and other
operating results. The Company's actual results could differ materially from
those discussed in the forward looking statements due to a number of factors,
including but not limited to increases in promotional activities of the
Company's competitors, changes in consumer buying attitudes, changes in vendor
support, changes in the Company's merchandise sales mix including discontinued
product categories, general economic conditions, costs and risks associated with
the Company's current restructuring program and other factors referred to in the
Company's fiscal 1999 Annual Report on Form 10-K under "Information Regarding
Forward Looking Statements".
RESULTS OF OPERATIONS
Net sales for the second quarter and first six months ending March 31, 2000 were
$190.4 million and $452.6 million, compared to $219.1 million and $513.2 million
for the same periods last year. This represented a 13% and 12% decrease in sales
for the second quarter and the first six months of the fiscal year. For
continuing categories, net sales decreased 1% for the second quarter and
remained level for the first six months of fiscal 2000 compared to the same
periods last year. Comparable store sales for continuing categories, decreased
1% for the quarter and first six months of fiscal 2000, respectively. This is
primarily due to the discontinuation of computer and home office products that
occurred in the fourth quarter of fiscal 1999. Sales for the month of March were
impacted by the disruption caused by the reorganization of the Company's
in-store operations including the relocation of certain merchandise categories.
The reorganization eliminated the stand-alone personal electronics department
and its entry level staff by redistributing most of the products into the audio,
video and mobile electronics departments which typically employ better trained
and more experienced salespeople. In addition, cashiers were added to aid with
transactions, department staffing and scheduling has been adjusted to better
reflect sales volume and in-store traffic and sales managers' compensation was
changed to a more commission-based structure. These changes are expected to
improve the effectiveness of the Company's sales force, enhance customer
service, increase earning potential for experienced sales counselors and reduce
costs by an additional $9 million annually.
For the second quarter and the first six months of fiscal 2000, sales of new
digital technologies, such as DVD, DSS, digital television, digital cameras and
internet devices showed strong growth but were offset by decreases in VCRs,
telecommunications, stereo systems, car audio, camcorders and video games. The
sale of Premier Performance Guarantee contracts increased to 6.1% and 5.9% of
sales during the second quarter and first six months of fiscal 2000, up
substantially from 4.7% and 4.5% for the same periods last year.
The Company's gross profit as a percentage of net sales increased substantially
to 28.2% in the second quarter and 29.3% in the first six months of fiscal 2000,
compared to 23.7% and 24.0% for the same periods last year. The increase in the
gross profit percentage in both periods primarily resulted
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from the discontinuation of the lower margin computer and home office products
and the Company's increased emphasis on higher-margin digital and high-tech
consumer entertainment electronics.
Selling, general and administrative expense increased by $3.4 million and $6.6
million in the second quarter and the first half of fiscal 2000, compared to the
corresponding periods in fiscal 1999. These expenses represented 33.0% and 29.7%
of net sales in the second quarter and first six months of fiscal 2000 compared
to 27.1% and 24.9 % for the same periods last year. The increase in selling,
general and administrative expenses for both the second quarter and six month
period is primarily due to increased advertising expenses, which are anticipated
to remain above prior year amounts. Higher sales associate commissions due to
increased gross margin dollars and higher occupancy costs associated with the
Company's Audio/Video Exposition stores that opened in fiscal 1999 also
contributed to the increase. Selling expenses were also negatively impacted in
the second quarter by the in-store reorganization, which eliminated
approximately 300 positions and resulted in one-time charge of approximately
250,000 for severance packages. During the second quarter, the Company also
eliminated the production side of the advertising department to leverage
external expertise and resources to strengthen its advertising and marketing
efforts and reduce costs, which also contributed to a one time charge of
approximately 115,000 for severance packages. These expenses were partially
offset by decreased general and administrative expenses primarily due to reduced
headcount.
Interest expense increased $383,000 and $1.5 million in the second quarter and
first six months of fiscal 2000 compared to the corresponding periods last year.
These increases were due to higher levels of borrowings in the second quarter
and first six months of the current fiscal year.
The Company's effective tax rate was 0.0% for the second quarter and the first
six months of fiscal 2000, compared to a benefit of 11.6% and a rate of 0.0% ,
for the same periods last year. The effective tax rate is based upon the
Company's best estimate of the effective tax rate expected to be applicable for
the full fiscal year.
As a result of the factors discussed above, the net loss in the second quarter
and the first half of fiscal 2000 was $10.2 million and $4.6 million compared to
net losses of $7.2 million and $5.6 million for the second quarter and the first
half of fiscal 1999. The net loss per share for the second quarter and first six
months was $0.50 and $0.23 per share, compared to a net loss of $0.50 and $0.39
per share for the same periods last year. Earnings before interest, taxes,
depreciation and amortization (EBITDA) increased to $5.5 million in the first
six months of fiscal 2000 from $3.0 million in the first six months of fiscal
1999.
As previously announced, the Company continues to implement its business
strategy for returning the Company to profitability. To improve the Company's
focus and profit margins, computers and home office products were eliminated
from the overall product mix in the fourth quarter of fiscal 1999. The Company
has reduced general and administrative expenses by eliminating its internal
advertising production department and streamlining all corporate functions,
including operations, management information systems, finance, human resources
and merchandising.
In the current fiscal year, the Company is also committed to minimizing capital
expenditures, and has placed a moratorium on opening new stores and remodeling
or relocating existing stores. Projected expenditures for fiscal 2000 also
incorporate increases in advertising and marketing by
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more than 20% from fiscal year 1999 levels.
The Company's financial goal is to report a pre-tax profit in the current fiscal
year that began October 1, 1999. However, the return to profitability is
contingent on many factors, including, but not limited to, the successful
implementation of its new business strategy, the development of consumer
acceptance of new technologies, consumer demand for existing technologies, the
presence or absence of new features on existing merchandise, continued vendor
support and economic conditions in the regions in which the Company's stores are
located.
Liquidity and Capital Resources
At March 31, 2000, the Company had cash and cash equivalents of $1.9 million.
The Company's working capital was $63.4 million at March 31, 2000 compared to
$53.3 million at March 31, 1999. Net cash provided by operating activities was
$2.5 million for the first six months of fiscal 2000 compared to net cash used
in operating activities of $19.4 million for the same period last year. The
increase in cash flows from operating activities for the first six months of
fiscal 2000 was primarily due to higher accounts payable and lower inventory
balances partially offset by increases in prepaid expenses.
Net cash provided by investing activities was $2.7 million for the six months
ended March 31, 2000, as compared to net cash used in investing activities of
$11.1 million for the same period last year. During the first three months of
fiscal 2000, the Company sold a parcel of land for $3.2 million. The net
increase in fixed assets was limited to approximately $501,000 due to the
Company's decision not to open or remodel any stores in fiscal 2000.
At March 31, 2000, the Company maintained a $100 million revolving credit
facility. The amount of borrowing allowed under the credit agreement is based on
a formula related to the Company's inventory balances. At March 31, 2000, the
Company had borrowings of $46.8 million outstanding under the revolving credit
agreement and $19.9 million of the credit line was reserved under a vendor
financing agreement, leaving a availability of $10.0 million based on current
inventory levels.
The Company expects to fund its working capital requirements for the next twelve
months with a combination of cash flows from operations, normal trade credit,
and other financing arrangements.
Quantitative and Qualitative Disclosures About Market Risk
The Company believes that because of competition among manufacturers and
technological changes in consumer electronics industry, inflation has not had a
material effect on net sales and cost of sales.
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THE GOOD GUYS, INC.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
On January 13, 1999, the Company was named as a defendant in an action entitled
Johnson v. Circuit City Stores, et al., filed in Contra Costa County Superior
Court. The primary allegation was that a number of consumer electronics
retailers sold computer hardware and software products that allegedly will not
properly process dates after December 31, 1999. Plaintiff claimed that the
actions of the defendants violate the prohibitions in the California Business
and Professions Code on unfair business practices and false and misleading
advertising, and seeks injunctive relief, restitution, and attorney's fees. The
Company settled this case in March, 2000 for an amount that was not material to
the financial condition, results of operations or liquidity of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders of the Company held on January 26, 2000,
15,441,526 shares were presented in person or by proxy. The matters voted upon
and the results of the voting are as follows:
1. The election of directors
<TABLE>
<CAPTION>
NOMINEE IN FAVOR WITHHELD
- ------- -------- --------
<S> <C> <C>
Ronald A. Unkefer 15,422,445 19,081
Stanley R. Baker 15,422,081 19,445
Russell M. Solomon 15,422,081 19,445
W. Howard Lester 15,421,876 19,650
John E. Martin 15,422,070 19,456
Horst H. Schulze 14,387,409 1,054,117
Gary M. Lawrence 15,422,445 19,081
Joseph P. Clayton 15,422,444 19,082
Joseph M. Schell 15,422,445 19,081
</TABLE>
2. The amendment to the Company's Employee Stock Purchase Plan to increase
the number of shares of Common Stock reserved for issuance under the plan
by 400,000: 14,656,801 votes in favor, 319,226 votes against and 465,499
abstentions.
3. The ratification of selection of Deloitte & Touche LLP as the independent
auditors of the Company; 15,418,104 votes in favor, 9,691 votes against
and 13,731 abstentions.
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Item 5. Other Events
In January 2000, the Company announced that Good Guys.Com, Inc. was being formed
by the Company outside investors and members of the Company's management and
Board of Directors to maximize opportunities for electronic commerce in the
consumer entertainment electronics industry and that the Company would own stock
and warrants in Good Guys.Com,Inc. in an amount which, upon exercise of the
warrants, would give it a 49.9% ownership interest.
Horst H. Schulze resigned as a Director of the Company, effective April 13,
2000.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27.1 Financial Data Schedule
b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
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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.
THE GOOD GUYS, INC.
Date: May , 2000 By: /s/ Vance R. Schram
--------------------------- -----------------------------
Vance R. Schram
Chief Financial Officer
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No.
- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,855
<SECURITIES> 0
<RECEIVABLES> 19,026
<ALLOWANCES> 707
<INVENTORY> 120,609
<CURRENT-ASSETS> 154,125
<PP&E> 149,800
<DEPRECIATION> 78,905
<TOTAL-ASSETS> 232,664
<CURRENT-LIABILITIES> 90,737
<BONDS> 46,784
0
0
<COMMON> 20
<OTHER-SE> 95,143
<TOTAL-LIABILITY-AND-EQUITY> 232,664
<SALES> 452,575
<TOTAL-REVENUES> 452,575
<CGS> 320,096
<TOTAL-COSTS> 320,096
<OTHER-EXPENSES> 134,313
<LOSS-PROVISION> 741
<INTEREST-EXPENSE> 2,778
<INCOME-PRETAX> (4,612)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,612)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,612)
<EPS-BASIC> (.23)
<EPS-DILUTED> (.23)
</TABLE>
