<PAGE> 1
EXHIBIT 13.1
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year ended September 30,
(AMOUNTS AND SHARES IN THOUSANDS,
EXCEPT PER SHARE AND OTHER DATA) 2000 1999 1998 1997 1996
-------------------------------- ---- ---- ---- ---- ----
(AS RESTATED)(1) (AS RESTATED)(1) (AS RESTATED)(1)
<S> <C> <C> <C> <C> <C>
SUMMARY OF EARNINGS
Net sales $ 860,543 $ 915,642 $ 928,382 $ 889,779 $ 925,714
Cost of sales (614,006) (692,745) (700,070) (666,815) (711,463)
--------- --------- --------- --------- ---------
Gross profit 246,537 222,897 228,312 222,964 214,251
Selling, general, and administrative expenses (258,637) (257,993) (241,007) (241,411) (220,032)
Store closure expenses - (54) (3,008) 314 (3,741)
Gain from property transactions 10,775 - - - -
--------- --------- --------- --------- ---------
Loss from operations (1,325) (35,150) (15,703) (18,133) (9,522)
Interest income 94 91 119 172 211
Interest expense (6,520) (4,828) (1,396) (930) (679)
--------- --------- --------- --------- ---------
Loss before income taxes (7,751) (39,887) (16,980) (18,891) (9,990)
Income tax (expense) benefit (9,577) - 5,167 7,237 3,771
--------- --------- --------- --------- ---------
Net loss $ (17,328) $ (39,887) $ (11,813) $ (11,654) $ (6,219)
========= ========= ========= ========= =========
Net loss per basic and diluted share $ (0.84) $ (2.58) $ (0.84) $ (0.86) $ (0.46)
Weighted average shares outstanding 20,560 15,484 14,012 13,626 13,576
FINANCIAL POSITION
Working capital $ 59,621 $ 61,858 $ 30,018 $ 53,892 $ 65,606
Total assets $ 220,116 $ 226,163 $ 250,948 $ 236,152 $ 246,015
Shareholders' equity $ 90,519 $ 92,954 $ 109,655 $ 118,632 $ 129,268
OTHER DATA
Number of stores at year end 79 79 77 76 75
Average sales per store (IN THOUSANDS) $ 10,894 $ 11,637 $ 12,219 $ 11,811 $ 13,024
Sales per selling square foot $ 851 $ 931 $ 1,065 $ 1,057 $ 1,213
Sales per gross square foot $ 533 $ 577 $ 665 $ 660 $ 756
Comparable stores sales increase (decrease)(2) 5% (4)% 3% (8)% (8)%
Inventory turns(3) 5.3 5.4 5.5 5.5 5.9
</TABLE>
(1) See Note 14 to the Consolidated Financial Statements.
(2) Comparison for fiscal 2000 excludes the discontinued product category of
Computer and Home Office.
(3) Based on average of beginning and ending inventories for each fiscal
year.
12 GOOD GUYS 2000 ANNUAL REPORT
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements made below and elsewhere in the Annual Report that are not historical
facts, including any statements about expectations for the five-month period
ending February 28, 2001, the 12-month period ending February 28, 2002, and
beyond, involve certain risks and uncertainties. Factors that could cause the
estimates and expectations to differ materially from management's projections,
estimates and expectations include, but are not limited to, the Company's
ability to successfully implement its restructuring program, 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 fiscal 2000
Annual Report on Form 10-K under "Information Regarding Forward-Looking
Statements" and in the Company's Consolidated Financial Statements, including
Notes thereto. The Consolidated Financial Statements and Notes to the
Consolidated Financial Statements should be read in conjunction with this
Management's Discussion and Analysis of the Financial Condition and Results of
Operations.
RESTATEMENT
Subsequent to the filing of its September 30,1999, financial statements, the
Company's management determined that certain errors had been made in accounting
for the accrual related to the closure of certain store locations in prior
years. These errors related to the timing for the recognition of expenses
related to the closure of stores and to the balance for prepaid rent and the
balance for the accrued property rental account. Additionally, the Company had
not established an allowance for sales returns. As a result, the Company's 1998
and 1999 financial statements have been restated from previously reported
amounts to correct the recording of these items. The effect of the restatement,
substantially all of which related to store lease exit costs, was to increase
the net loss in fiscal 1998 from $8.9 million to $11.8 million and to increase
the net loss in fiscal 1999 from $39.3 million to $39.9 million. The effect of
the restatement on fiscal years prior to 1998 resulted in an increase to the
1998 beginning retained earnings of $528,000. The effect of the restatement on
fiscal 2000 was not significant and is included in operating results for the
fourth quarter. The restatement has no effect on the Company's cash flow. See
Note 14 to the Consolidated Financial Statements for additional information. The
accompanying Management Discussion and Analysis gives effect to the restatement.
GENERAL
The following table sets forth, for the years indicated, the relative
percentages that certain income and expense items bear to net sales, and the
number of stores open at the end of each period:
<TABLE>
<CAPTION>
Year ended September 30,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Gross profit 28.6% 24.3% 24.6%
Selling, general and administrative expenses including depreciation and amortization 30.1% 28.2% 26.0%
Store closure expenses -- -- (0.3)%
Gain from property transactions 1.3% -- --
Loss before income taxes (0.9)% (4.4)% (1.8)%
Net loss (2.0)% (4.4)% (1.3)%
Number of stores open at end of period 79 79 77
</TABLE>
GOOD GUYS 2000 ANNUAL REPORT 13
<PAGE> 3
SALES AND GROSS PROFIT
The following table sets forth sales by product category:
<TABLE>
<CAPTION>
Year ended September 30,
2000 1999(*) 1998(*)
---- ------- -------
<S> <C> <C> <C>
Video 53% 45% 43%
Audio 18% 16% 16%
Computer and Home Office 0% 14% 17%
Mobile and Wireless 11% 9% 10%
Other
Accessories, repair service and Extended Service Protection 18% 16% 14%
-- -- --
Total Company 100% 100% 100%
</TABLE>
------------
(*) Certain reclassifications have been made to the 1999 and 1998 financial data
in order to conform to the current year's presentation.
Sales decreased 6 percent to $860.5 million in fiscal 2000 from $915.6 million
in fiscal 1999. The sales decrease in fiscal 2000 is a result of discontinuing
product lines for Computer and Home Office products in the fourth quarter of
fiscal 1999. Excluding sales from these discontinued product lines, sales of
continuing product lines increased by 5 percent or $40.2 million. The largest
sales increases occurred in product lines where consumers are responding to
advances in product technology, such as digital television, digital versatile
disc (DVD) players and digital cameras and camcorders. Sales declined for mature
technologies such as VCRs that have become low price, ubiquitous commodities.
Sales decreased 1 percent in fiscal 1999 to $915.6 million from $928.4 million
in fiscal 1998. The 1 percent sales decrease in fiscal 1999 resulted from a
comparable store sales decrease of 4 percent, offset in part by the opening of
two new stores in fiscal 1999. The sales decrease in 1999 was primarily
attributable to a discontinuation of Computer and Home Office products in the
fourth quarter of fiscal 1999 as the Company eliminated these product lines, and
to a decrease in sales of the video category, primarily VCRs. These sales
decreases were offset in part by increases in sales of DVD players, stereo
components and televisions.
Comparable store sales in the future may be affected by competition, the opening
of additional stores in existing markets, the absence or introduction of
significant new products in the consumer electronics industry, and general
economic conditions.
Gross profit margin increased to 28.6 percent of sales in fiscal 2000 compared
with 24.3 percent in fiscal 1999 and 24.6 percent in fiscal 1998. The lower
gross profit margin trend for fiscal 1999 and fiscal 1998, reflects sales of the
Computer and Home Office product line, primarily computers, which carried lower
gross margins than the Company's average, as well as a greater dependency on low
margin entry level merchandise. During the fourth quarter of fiscal 1999, sales
of Computer and Home Office products were discontinued and the Company refocused
on the market niche for products at the front end of the technology curve where
the profit margins are higher. The Company has also increased its profit margin
in fiscal 2000 by increasing sales of Extended Service Protection contracts and
by initiating cost control measures surrounding inventory.
Commission revenue from the sales of Extended Service Protection contracts were
8.1 percent, 7.3 percent and 7.8 percent of product sales for the fiscal years
ended 2000, 1999 and 1998, respectively.
14 GOOD GUYS 2000 ANNUAL REPORT
<PAGE> 4
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses, including depreciation and
amortization as a percentage of sales, were 30.1 percent in fiscal 2000 compared
to 28.2 percent in fiscal 1999, and 26.0 percent in fiscal 1998. The total
spending for selling, general and administrative expenses for fiscal 2000
increased by $644,000 or less than 1 percent from fiscal 1999; therefore, the
increase as a percent of sales in 2000 from fiscal 1999 was a result of the
decline in total store sales. In addition, expenses for fiscal 2000 reflect an
increase for net advertising expenses of $7.5 million in addition to costs for
reorganizing store operations, increased commissions based upon improved gross
margins and expenses related to Y2K. Expenses for fiscal 1999 reflect the
pre-operating expense for the opening of two new stores, expenses related to
Y2K, and expenses of $9.3 million incurred during the fourth quarter in order to
streamline the Company's cost structure. These fourth quarter charges in fiscal
1999 consisted primarily of severance payments, discontinued product line
charges, and one time bank charges. The increase as a percentage of sales in
fiscal 1999 from 1998 was partially the result of a decrease in sales and
partially the result of the expenses in the fourth quarter of fiscal 1999
discussed above.
STORE CLOSURE EXPENSES
Store closure expenses were $54,000 and $3.0 million in fiscal 1999 and fiscal
1998, respectively. During fiscal 1998, the Company entered into new lease
agreements to relocate five stores and convert them to its new Audio/Video
Exposition ("expo") concept. The Company opened one of these stores in each
quarter from the first quarter of fiscal 1999 through the first quarter of
fiscal 2000. Store closure expense was recorded when the new lease was signed
and reflects amounts reserved for future minimum lease payments and other cash
obligations.
GAIN FROM PROPERTY TRANSACTIONS
In the first quarter of fiscal 2000, the Company sold a parcel of land and
recorded a gain of approximately $1.0 million. In the fourth quarter of fiscal
2000, the Company entered into a lease amendment and termination agreement for
corporate office space in exchange for a $9.8 million termination payment from
its landlord and will relocate to more cost-effective space leased from a new
landlord in early 2001.
INTEREST EXPENSE
Net interest expense for fiscal years 2000, 1999, and 1998 was $6.5 million,
$4.8 million, and $1.4 million, respectively. The Company uses a revolving loan
to finance its inventory. Interest expense has increased in each fiscal year as
the average loan balance has increased from $20.8 million in fiscal 1998, to
$44.8 million in fiscal 1999 to $48.0 million in fiscal 2000. The weighted
average interest rates for fiscal years 2000, 1999 and 1998 were 9.2 percent,
8.0 percent and 8.4 percent, respectively. The Company entered into a borrowing
agreement in September 1999, which increased its borrowing capacity to $100
million.
NET LOSS
As a result of the factors discussed above, the loss before tax for fiscal 2000
was $7.8 million, which includes a one-time gain of $10.8 million associated
with property transactions, compared to a restated loss before tax of $39.9
million and $17.0 million for fiscal 1999 and fiscal 1998, respectively. The
loss before income taxes as a percentage of sales for fiscal years 2000, 1999
and 1998 was 0.9 percent, 4.4 percent, and 1.8 percent, respectively.
Income tax expense of $9.6 million in fiscal 2000 is comprised of $7.5 million
in non-cash charges to adjust the deferred tax asset valuation allowance
associated primarily with net operating loss carryforwards, and $2.1 million
related to a tax settlement with the IRS for years prior to fiscal 1998. The
deferred tax valuation allowance will not inhibit the Company's ability to
offset future taxable income by its federal and state operating loss
carryforwards of $74 million and $44 million, respectively. The Company's loss
carryforwards expire on various dates from 2003 to 2020. The effective income
tax rates for fiscal years 1999 and 1998 were 0 percent, and 36.6 percent
benefit, respectively.
As a result of the factors discussed above, the net loss for fiscal 2000 is
$17.3 million, compared to a restated net loss of $39.9 million and $11.8
million for fiscal 1999 and fiscal 1998, respectively. Net loss as a percentage
of sales for fiscal years 2000, 1999 and 1998 was 2.0 percent, 4.4 percent, and
1.3 percent, respectively.
GOOD GUYS 2000 ANNUAL REPORT 15
<PAGE> 5
LIQUIDITY AND CAPITAL RESOURCES
The Company's sales are primarily cash and credit card transactions, providing a
source of liquidity for the Company. The Company also uses private label credit
card programs administered and financed by financial services companies, which
allow the Company to expand store sales without the burden of additional
receivables. Working capital requirements are reduced by vendor credit terms.
The Company also uses lease financing to fund its capital requirements.
As of the end of fiscal 2000, the Company had working capital of $59.6 million,
compared to $61.9 million in fiscal 1999 and $30.0 million in fiscal 1998. In
fiscal 2000, net cash provided by operating activities was $11.2 million,
compared to net cash used by operating activities of $58.3 million in 1999 and
net cash provided by operating activities of $2.5 million in fiscal 1998. The
fiscal 2000 increase in net cash provided by operating activities was primarily
attributable to a decrease in the net loss (which includes gains from property
transactions) and an increase in accounts payable, partially offset by an
increase in merchandise inventories. The fiscal 1999 decrease in net cash
provided by operating activities was primarily attributable to an increase in
net loss and a decrease in accounts payable, partially offset by a decrease in
merchandise inventories and accounts receivable.
Cash utilized for capital expenditures was $1.8 million, $21.1 million and $21.0
million, in fiscal 2000, 1999 and 1998, respectively. The Company does not plan
any significant capital expenditures during the next year.
Cash provided by (used in) financing activities in fiscal 2000, 1999 and 1998
was ($8.0) million, $78.9 million and $2.6 million, respectively. In fiscal
2000, the Company raised $14.2 million in cash through private placements,
employee and non-employee stock issuances and used cash to repay $22.1 million
on its revolving credit debt. In fiscal 1999, the Company raised $22.4 million
in cash through private placements, employee and non-employee stock issuances
and increased cash by $56.5 million from its revolving credit debt. In fiscal
1998 the Company raised $4.0 million in cash through private placements,
employee and non-employee stock issuances and used $1.4 million in cash to
repurchase common stock.
Effective September 30, 1999, the Company entered into a three-year revolving
credit agreement. This agreement allows for borrowings of up to $100 million
based upon a formula related to the Company's inventory balances, and is secured
by the Company's assets. At September 30, 2000 and 1999, there was $34.4 million
and $56.5 million, respectively, outstanding under the line. At September 30,
1998, there was no borrowing outstanding under the prior credit facility. Based
upon inventory levels at September 30, 2000, available borrowing under this
facility was $15.8 million. The Company has classified borrowings under the
agreement as long-term because it has the intent and ability to keep its
borrowings outstanding greater than one year.
Maximum borrowings outstanding under credit facilities during fiscal 2000 were
$64.7 million compared to $64.3 million in fiscal 1999 and compared to $55.0
million in fiscal 1998. The weighted average borrowings outstanding under credit
facilities during fiscal years 2000, 1999 and 1998 were $48.0 million, $44.8
million and $20.8 million, respectively. In fiscal 2000, 1999 and 1998, the
weighted average interest rate for such borrowings were 9.2 percent, 8.0 percent
and 8.4 percent, respectively.
The Company continues to implement its strategy for returning to profitability
that was first outlined on July 26, 1999. In the fourth quarter of 1999, the
Company eliminated the Computer and Home Office category from the Company's
product mix. This improved the Company's gross profit margins and selling focus
in fiscal 2000 and going forward. To increase foot traffic and brand awareness,
the Company increased the marketing and advertising budget in fiscal 2000 by 20
percent over 1999 levels. Because the Company's market niche is the upscale
electronics consumer, product lines have been expanded to showcase leading-edge
consumer electronics. Additionally, the Company is committed to minimizing
selling, general and administrative expenses and has a moratorium on new stores,
relocations and significant remodeling of existing stores. The Company's ability
to return to profitability is contingent on many factors, including, but
16 GOOD GUYS 2000 ANNUAL REPORT
<PAGE> 6
not limited to, the successful implementation of the new business strategy,
consumer acceptance of new technologies, continued vendor support, and economic
conditions in the regions where the Company's stores are located.
The Company expects to be able to fund its working capital requirements with a
combination of anticipated cash flow from operations, normal trade credit,
existing financing agreements and other financing agreements.
CHANGE IN FISCAL YEAR
As reported in its Form 8-K filing with the Securities and Exchange Commission
on November 15, Good Guys has changed its fiscal year end from September 30 to
the last day of February for fiscal years ending after September 30, 2000. The
change was made to align Good Guys financial reporting with that of other
consumer electronics retailers, which will allow the investment and vendor
communities to draw more realistic comparisons between the company and its major
competitors. The Company will report on the five-month transitional period
ending February 28, 2001.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks, which include changes in U.S. interest
rates. The Company does not engage in financial transactions for trading or
speculative purposes. The interest due on the Company's line of credit is based
on variable interest rates and therefore affected by changes in market interest
rates. If interest rates on existing variable rate debt rose 98 basis points (a
10 percent change from the bank's reference rate as of September 30, 2000), the
Company's interest expense and payments would increase by approximately
$340,000.
Substantially all the Company's merchandise inventory purchases are domestically
sourced and denominated in U.S. dollars.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS
138, establishes standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Company was
required to adopt SFAS 133 on October 1, 2000. The Company does not currently
engage in any hedging activity or hold any derivative instruments and has no
immediate plans to do so in the future. The Company believes the adoption of
SFAS 133 will not have a significant impact on the Company's financial
statements.
The Emerging Issues Task Force issued Emerging Issues Task Force No. 00-14,
"Accounting for Certain Sales Incentives" ("EITF 00-14") in July 2000. EITF
00-14 addresses the recognition, measurement, and income statement
classification for sales incentives offered voluntarily by a vendor without
charge to customers that can be used in, or that are exercisable by a customer
as a result of, a single exchange transaction. The effective date for adoption
of EITF 00-14 is June 30, 2001. The effect of the adoption of the consensuses
should be reported as a cumulative effect of a change in accounting principle
under APB Opinion No. 20, "Accounting Changes," or prospectively to new sales
incentives offered on or after the effective date. During fiscal 2000 the
Company recorded $8.5 million of sales incentives in cost of sales. The Company
has prospectively changed its reporting classification of sales incentives as a
reduction of net sales effective October 1, 2000.
GOOD GUYS 2000 ANNUAL REPORT 17
<PAGE> 7
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
(Dollars in thousands, except share and per share data) 2000 1999
------------------------------------------------------- ---- ----
(As restated)(1)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,208 $ 2,556
Accounts receivable, less allowance for doubtful accounts of $1,483 and
$1,463, respectively 15,106 19,021
Merchandise inventories 121,458 110,276
Prepaid expenses 11,088 6,710
--------- ---------
Total current assets 154,860 138,563
PROPERTY AND EQUIPMENT:
Land -- 2,306
Leasehold improvements 73,629 73,298
Furniture, fixtures, and equipment 76,058 72,686
Construction in progress 1,269 3,785
--------- ---------
Total property and equipment 150,956 152,075
Less accumulated depreciation and amortization 86,148 72,121
--------- ---------
Property and equipment - net 64,808 79,954
--------- ---------
Other assets 448 7,646
--------- ---------
Total Assets $ 220,116 $ 226,163
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 57,395 $ 36,571
Accrued expenses and other liabilities:
Payroll 9,542 9,615
Sales taxes 5,751 4,936
Other 22,551 25,583
--------- ---------
Total current liabilities 95,239 76,705
Revolving credit debt 34,358 56,504
Commitments and Contingencies (Note 11)
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 22,763,194 and 19,636,022 shares respectively 23 20
Additional paid-in capital 103,222 88,332
Retained earnings (deficit) (12,726) 4,602
--------- ---------
Total shareholders' equity 90,519 92,954
--------- ---------
Total Liabilities and Shareholders' Equity $ 220,116 $ 226,163
========= =========
</TABLE>
----------
(1) See Note 14 to the Consolidated Financial Statements.
See notes to Consolidated Financial Statements.
18 GOOD GUYS 2000 ANNUAL REPORT
<PAGE> 8
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended September 30,
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999 1998
-------------------------------------------------------- ---- ---- ----
(AS RESTATED)(1) (AS RESTATED)(1)
<S> <C> <C> <C>
Net sales $ 860,543 $ 915,642 $ 928,382
Cost of sales (614,006) (692,745) (700,070)
--------- --------- ---------
Gross profit 246,537 222,897 228,312
Selling,general and administrative expenses (243,872) (243,870) (229,679)
Depreciation and amortization (14,765) (14,123) (11,328)
Store closure expenses -- (54) (3,008)
Gain from property transactions 10,775 -- --
--------- --------- ---------
Loss from operations (1,325) (35,150) (15,703)
Interest income 94 91 119
Interest expense (6,520) (4,828) (1,396)
--------- --------- ---------
Loss before income taxes (7,751) (39,887) (16,980)
Income tax (expense) benefit (9,577) -- 5,167
--------- --------- ---------
Net loss $ (17,328) $ (39,887) $ (11,813)
========= ========= =========
Net loss per basic and diluted share $ (0.84) $ (2.58) $ (0.84)
========= ========= =========
Weighted average shares outstanding 20,560 15,484 14,012
========= ========= =========
</TABLE>
(1) See Note 14 to the Consolidated Financial Statements.
See notes to Consolidated Financial Statements.
GOOD GUYS 2000 ANNUAL REPORT 19
<PAGE> 9
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Retained
----------------------------- Paid-In Earnings
(DOLLARS IN THOUSANDS) Shares Amount Capital (Deficit) Total
---------------------- ------ ------ ------- --------- -----
<S> <C> <C> <C> <C> <C>
Balance at September 30,1997 (AS RESTATED)(1) 13,810,310 $14 $ 62,316 $ 56,302 $ 118,632
Issuance of common stock under:
Employee Stock Purchase Plan 299,926 1,740 1,740
Profit Sharing Plan 196,300 1,447 1,447
Exercise of stock options including related
tax benefits 110,622 849 849
Issuance of restricted stock 29,360 181 181
Repurchase and retirement of common stock (196,300) (1,381) (1,381)
Net loss (AS RESTATED)(1) (11,813) (11,813)
---------- --- -------- --------- ---------
Balance at September 30,1998 (AS RESTATED)(1) 14,250,218 14 65,152 44,489 109,655
Issuance of common stock under
Employee Stock Purchase Plan 390,498 1 2,069 2,070
Common stock issued to a vendor in
exchange for services rendered 80,800 500 500
Exercise of stock options 53,912 275 275
Issuance of restricted stock 160,594 250 250
Proceeds from sale of common stock,net
of offering expenses 4,700,000 5 20,086 20,091
Net loss (AS RESTATED)(1) (39,887) (39,887)
---------- --- -------- --------- ---------
Balance at September 30,1999 (AS RESTATED)(1) 19,636,022 20 88,332 4,602 92,954
Issuance of common stock under
Employee Stock Purchase Plan 384,845 1,688 1,688
Exercise of stock options 623,485 1 3,186 3,187
Issuance of restricted stock 101,195 729 729
Proceeds from sale of common stock,net
of offering expenses 2,017,647 2 9,287 9,289
Net loss (17,328) (17,328)
---------- --- -------- --------- ---------
Balance at September 30,2000 22,763,194 $23 $103,222 $ (12,726) $ 90,519
========== === ======== ========= =========
</TABLE>
(1) See Note 14 to the Consolidated Financial Statements.
See notes to Consolidated Financial Statements.
20 GOOD GUYS 2000 ANNUAL REPORT
<PAGE> 10
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended September 30,
(DOLLARS IN THOUSANDS) 2000 1999 1998
---------------------- ---- ---- ----
(AS RESTATED)(1) (AS RESTATED)(1)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(17,328) $(39,887) $(11,813)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 14,765 14,123 11,328
Gain on sale of land (1,025) -- --
Store closure expense -- 54 3,008
Allowance for doubtful accounts 20 314 (47)
Deferred taxes 7,430 -- (4,568)
Issuance of common stock in exchange for services rendered -- 500 --
Restricted stock amortization 729 250 212
Change in:
Accounts receivable 3,895 7,318 (4,895)
Income taxes receivable -- -- 6,176
Merchandise inventories (11,182) 24,796 (17,304)
Prepaid expenses and other assets (4,610) (490) (85)
Accounts payable 20,824 (59,946) 21,000
Accrued expenses and other liabilities (2,290) (5,381) (528)
-------- -------- --------
Net cash provided by (used in) operating activities 11,228 (58,349) 2,484
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (1,802) (21,086) (21,008)
Sale of fixed assets 3,208 -- --
-------- -------- --------
Net cash provided by (used in) investing activities 1,406 (21,086) (21,008)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt -- 56,504 --
Net repayment of long-term debt (22,146) -- --
Issuance of common stock 14,164 22,436 4,005
Repurchase and retirement of common stock -- -- (1,381)
-------- -------- --------
Net cash provided by (used in) financing activities (7,982) 78,940 2,624
-------- -------- --------
Net increase (decrease) in cash 4,652 (495) (15,900)
Cash at beginning of period 2,556 3,051 18,951
-------- -------- --------
Cash at end of period $ 7,208 $ 2,556 $ 3,051
======= ======== ========
</TABLE>
(1) See Note 14 to the Consolidated Financial Statements.
See notes to Consolidated Financial Statements.
GOOD GUYS 2000 ANNUAL REPORT 21
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS: The Good Guys,Inc., through its wholly owned subsidiary (together,the
Company), is a retailer of consumer electronic products in
California, Nevada, Oregon and Washington. The Company's operations include 79
retail stores engaging only in activities related to the sale of consumer
electronics products throughout the Western United States and comprise only one
segment.
BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of The Good Guys, Inc. and its wholly owned subsidiary. All significant
intercompany transactions have been eliminated in consolidation.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS: Cash equivalents represent short-term, highly liquid
investments with original maturities of three months or less. Interest earned
from these investments is included in interest income.
MERCHANDISE INVENTORIES: Inventories are stated at the lower of cost
(first-in, first-out method) or market.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Depreciation
and amortization are computed using the straight line method based on estimated
useful lives of three to five years for furniture,fixtures and equipment, and
the lesser of the estimated useful lives of assets or the remaining lease terms
for leasehold improvements. Whenever events or changes in circumstances have
indicated that the carrying amount of its assets might not be recoverable, the
Company, using its best estimates based on reasonable and supportable
assumptions and projections, has reviewed the carrying value of long-lived
assets for impairment. If the undiscounted future cash flows of long-lived
assets are less than the carrying amount,the carrying value of the long-lived
asset is reduced to fair value and an impairment loss is recognized.
ADVERTISING: Advertising costs are charged to expense when incurred. Advertising
costs for fiscal year ended 2000, 1999, and 1998 were $54.1 million, $46.0
million, and $54.1 million, respectively.
VENDOR REBATES AND PROMOTIONS: The Company receives rebates of certain
promotional costs from its merchants and suppliers. Agreements are made with
each individual supplier, and income is earned as cooperative advertising is
placed and is recorded as a reduction of advertising expenses. The uncollected
amounts of vendor rebate and promotional income remaining in accounts receivable
at September 30, 2000 and 1999 were approximately $7.9 million and $13.8
million, respectively.
STORE PRE-OPENING AND CLOSING COSTS: Store pre-opening costs are expensed as
incurred. Store closing costs may include the cost of writing down store assets
to their estimated fair value, less costs of disposal. Additionally, a liability
is recorded for the net present value of any remaining operating lease
obligations after the expected closing date, net of estimated sublease income,
if any, at the time a commitment to close a store is made.
EMPLOYEE STOCK OPTION PLANS: The Company accounts for its stock option grants
using the intrinsic value method in accordance with APB No. 25, "Accounting for
Stock Issued to Employees" and its related interpretations. Because the Company
has granted its stock options to its employees at their fair market value at the
date of grant, under APB No. 25, no compensation expense is required to be
recognized in the financial statements.
22 GOOD GUYS 2000 ANNUAL REPORT
<PAGE> 12
INSURANCE RISK RETENTION: The Company retains certain risks for workers'
compensation, general liability and employee medical programs and accrues
estimated liabilities on an undiscounted basis for known claims and claims
incurred but not reported.
REVENUE RECOGNITION: The Company recognizes revenue at the point of sale, net of
a provision for merchandise returns which are estimated based upon historical
trends and customer habits. The effect of the returns is not significant to the
Company's operating results.
EXTENDED SERVICE PROTECTION CONTRACTS: The Company sells extended service
contracts (formally, "Premier Performance Guarantee contracts") on behalf of an
unrelated company (the "Warrantor") that markets this product for merchandise
sold by the Company. Commission revenue is recognized at the time of sale. The
Company acts solely as an agent for the Warrantor and has no liability to the
customer under the extended service contract nor any other material obligation
to the customer or the Warrantor. Merchandise presented to the Company for
servicing under extended service contracts is repaired by the Company on behalf
of the Warrantor.
INCOME TAXES: The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under
this standard, deferred income taxes reflect the tax effects, based on current
tax law, of temporary differences between the amounts of assets and liabilities
recognized for financial reporting and income tax purposes. A valuation
allowance is recorded when it is deemed more likely than not that a deferred tax
asset will not be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying values of cash and cash
equivalents, accounts receivable, accounts payable, and revolving credit debt
approximate their estimated fair values.
NET LOSS PER COMMON SHARE: Net loss per share was computed based on the weighted
average number of shares of common stock outstanding during the year. Since the
Company has reported net losses for each of the three fiscal years in the period
ended September 30, 2000, the potentially dilutive effect of stock options and
warrants of 1.4 million, 115,000 and 151,000 to purchase shares of the Company's
common stock in the fiscal years ended September 30, 2000, 1999 and 1998,
respectively, has been excluded from the calculation of net loss per share.
COMPREHENSIVE INCOME: Comprehensive income consists of net income or loss for
the current period and other comprehensive income (incomes, expenses, gains and
losses that currently bypass the income statement and are reported directly as a
separate component of equity). The Company does not have any items of other
comprehensive income for the fiscal years ended September 30, 2000, 1999, and
1998. Therefore, total comprehensive loss is the same as net loss for those
periods.
NEW ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133, as amended by SFAS 138, establishes standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities.
SFAS 133 requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Company is required to adopt SFAS 133 on October 1, 2000. The
Company does not currently engage in any hedging activity or hold any derivative
instruments and has no immediate plans to do so in the future. The Company
believes the adoption of SFAS 133 will not have a significant impact on the
Company's financial statements.
The Emerging Issues Task Force issued Emerging Issues Task Force No. 00-14,
"Accounting for Certain Sales Incentives" ("EITF 00-14") in July 2000. EITF
00-14 addresses the recognition, measurement, and income statement
classification for sales incentives offered voluntarily by a vendor without
charge to customers that can be used in, or that are exercisable by a customer
as a result of, a single exchange transaction. The effective date for adoption
of EITF 00-14 is June 30, 2001. The effect of the adoption of the consensuses
should be reported as a cumulative effect of a change in accounting principle
under APB Opinion No. 20, "Accounting Changes," or prospectively to new sales
incentives offered on or after the effective date. During fiscal 2000 the
Company recorded $8.5 million of sales incentives in cost of sales. The Company
has prospectively changed its reporting classification of sales incentives as a
reduction of net sales effective October 1, 2000.
GOOD GUYS 2000 ANNUAL REPORT 23
<PAGE> 13
NOTE 2: BORROWING ARRANGEMENTS
Effective September 30, 1999, the Company entered into a new revolving credit
agreement with its lenders, which expires on September 30, 2002. The new
agreement allows borrowings up to $100 million based upon a formula related to
the Company's inventory balances, and is secured by substantially all of the
Company's assets. The agreement requires maintenance of certain non-financial
loan covenants. The interest rate varies based on the type of obligation
incurred by the Company but approximates the prime rate plus 0.25 percent. At
September 30, 2000, the Company intends to keep its borrowings under the
revolving credit agreement outstanding greater than one year. As a result, such
amounts have been classified as long-term on the accompanying balance sheet. The
outstanding balance at September 30, 2000 was $34.4 million at an interest rate
of 9.75 percent per annum.
Based upon inventory levels at September 30, 2000, available borrowing under
this facility was $15.8 million.
Interest paid for the current and previous facilities was $5.7 million, $5.1
million and $1.7 million, for the fiscal years ended September 30, 2000, 1999
and 1998, respectively.
NOTE 3: GAIN ON PROPERTY TRANSACTIONS
In the first quarter of fiscal 2000, the Company sold a parcel of land and
recorded a gain of approximately $1.0 million. In the fourth quarter of fiscal
2000, the Company entered into a lease amendment and termination agreement for
its corporate office space in exchange for a $9.8 million termination payment
from its landlord and will relocate to more cost-effective space leased from a
new landlord in early 2001.
NOTE 4: INCOME TAXES
Income tax (expense) benefit consists of the following:
<TABLE>
<CAPTION>
Year ended September 30,
(Dollars in thousands) 2000 1999 1998
---------------------- ---- ---- ----
<S> <C> <C> <C>
Currently Payable (Receivable):
Federal $ 2,147 $-- $ (972)
State -- -- 373
------- --- -------
Total currently payable 2,147 -- (599)
Deferred 7,430 -- (4,568)
------- --- -------
Total $ 9,577 $-- $(5,167)
======= === =======
</TABLE>
For the years ended September 30, 2000, 1999 and 1998, the Company paid no
income taxes.
The provisions for income taxes as reported are different from the tax
provisions computed by applying the statutory federal income tax rate. The
differences are reconciled as follows:
<TABLE>
<CAPTION>
Year ended September 30,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Federal income tax at the statutory rate (35.0)% (35.0)% (35.0)%
State franchise tax, less federal tax effect 20.2 -- (1.2)
Other - net (0.2) 0.2 0.4
Change in valuation allowance 138.6 34.8 6.0
----- --- -----
Total 123.6% 0.0% (29.8)%
===== === =====
</TABLE>
24 GOOD GUYS 2000 ANNUAL REPORT
<PAGE> 14
Significant components of the Company's net deferred tax assets as of September
30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
September 30,
(Dollars in thousands) 2000 1999
---------------------- ---- ----
<S> <C> <C>
Current
Vacation accruals $ 749 $ 729
Prepaid expenses (1,887) (1,157)
Reserves 1,153 1,961
Inventory capitalization (741) (1,505)
Other 402 334
-------- --------
Current assets (liabilities) - net (324) 362
Noncurrent
Depreciation 392 123
Net operating loss 29,084 22,574
Other 426 634
Valuation allowance (29,578) (16,263)
-------- --------
Noncurrent assets - net 324 7,068
-------- --------
Total $ -- $ 7,430
======== ========
</TABLE>
As of September 30, 2000, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $73.6 million and net operating
loss carryforwards for state tax purposes of approximately $43.3 million, which
expire at various dates from 2003 to 2020.
These loss carryforwards translate into a combined tax benefit of $29.1 million
that can be used to offset future taxes payable. Using its best estimates, the
Company has established a valuation allowance of approximately $29.6 million at
September 30, 2000, due to the uncertainty of realizing future tax benefits.
NOTE 5: LEASES
The Company's stores, distribution and administration facilities and certain
equipment are leased under operating leases. The leases have remaining initial
terms inclusive of renewal options, of one to 45 years and generally provide for
rent increases based on the consumer price index. Certain store leases require
additional lease payments based on the achievement of specified store sales.
The Company subleases a portion of one of its stores to a company whose Chairman
is also a member of the Company's Board of Directors. The lease expires on July
31, 2003 and provides for additional rent increases based on the consumer price
index. Under the terms of the sublease agreement, the income received for each
of the years ended September 30, 2000, 1999 and 1998 was $326,077, $318,938, and
$318,938, respectively.
The future minimum annual payments for leases having noncancelable terms in
excess of one year, net of sublease income, at September 30, 2000, are as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Real Property Equipment
---------------------- ------------- ---------
<S> <C> <C>
2001 $ 38,820 $ 8,831
2002 36,812 4,566
2003 36,009 940
2004 35,548 350
2005 33,687 279
Later years through 2019 166,008 306
-------- --------
Total $346,884 $ 15,272
======== ========
</TABLE>
GOOD GUYS 2000 ANNUAL REPORT 25
<PAGE> 15
Lease expense for the years ended September 30, 2000, 1999 and 1998 was $52.6
million, $51.5 million, and $47.1 million, respectively.
NOTE 6: STORE CLOSURE EXPENSES
Store closure expenses were $54,000 and $3.0 million in fiscal 1999 and fiscal
1998, respectively. During fiscal 1998, the Company entered into new lease
agreements to relocate five stores and convert them to its new Audio/Video
Exposition ("expo") concept. The Company opened one of these stores in each
quarter from the first quarter of fiscal 1999 through the first quarter of
fiscal 2000. Store closure expense was recorded when the new lease was signed
and reflects amounts reserved for future minimum lease payments and other cash
obligations. The following schedule summarizes information related to closed
store reserves:
<TABLE>
<CAPTION>
(dollars in thousands) Accrued
Beginning Lease Exit Cash Other Ending
Fiscal Year Balance Charges Payments Adjustments Balance
---------- --------- ---------- -------- ----------- -------
<S> <C> <C> <C> <C> <C>
2000 $ 3,480 $ -- $(1,479) $ -- $ 2,001
1999 $ 5,039 $ 908 $(1,613) $ (854) $ 3,480
1998 $ 2,496 $ 3,124 $ (465) $ (116) $ 5,039
</TABLE>
NOTE 7: DEFERRED PAY AND PROFIT SHARING PLAN
The Company has a Deferred Pay Plan to which its employees may contribute a
portion of their annual salaries and a Profit Sharing Plan that covers
substantially all of the Company's employees. The Profit Sharing Plan was
amended for fiscal years 1999 and 1998 such that the Company matched an
employee's contributions to the Deferred Pay Plan that were invested in the
Company's common stock. The Company matched such contributions up to 6 percent
of the employee's annual salary. The Company's contributions for fiscal years
1999 and 1998 were $754,000 and $566,000, respectively. Effective October 1,
1999, contributions to the Profit Sharing Plan are at the discretion of the
Board of Directors. There were no contributions to the Profit Sharing Plan for
fiscal year 2000.
NOTE 8: EMPLOYEE STOCK PLANS
The Company's 1985 Stock Option Plan ("1985 Plan") and 1994 Stock Incentive Plan
("1994 Plan") authorize the issuance of incentive stock options and
non-qualified stock options covering up to 3,515,000 shares of common stock.
Although the 1985 Plan expired in 1995 and no further options may be granted
under it, options granted prior to its expiration remain outstanding. Options
granted under both Plans are exercisable at prices equal to the fair market
value of the stock on the date of grant. Options granted under the plans prior
to August 1999 vest ratably over four years. Options granted under the 1994 Plan
in August 1999 and thereafter, vest at the end of one year in the case of
options granted to directors and ratably over three years for options granted to
employees. All options under the Plans have a maximum term of ten years, except
those issued to 10 percent shareholders, which have a term of five years. During
fiscal 2000, non-qualified options covering 1,125,000 shares were granted
outside the 1994 Plan at exercises prices equal to the fair market value of the
stock on the date of grant, having terms ranging from three to ten years and
vesting over three years (with the exception of an option for 25,000 shares that
vests at the end of one year).
26 GOOD GUYS 2000 ANNUAL REPORT
<PAGE> 16
The following is a summary of stock option activity for the years ended
September 30, 2000, 1999, and 1998.
<TABLE>
<CAPTION>
Weighted
Average
Number Exercise
of Shares Price
--------- -----
<S> <C> <C>
Balance at September 30, 1997 1,454,448 $ 9.48
Granted Weighted (average fair value of $2.58) 314,750 7.51
Exercised (110,622) 7.52
Canceled (160,374) 9.17
--------- --------
Balance at September 30, 1998 1,498,202 $ 9.25
Granted (average fair value of $3.02) 2,149,240 5.30
Exercised (53,912) 5.09
Canceled (1,823,823) 8.30
--------- --------
Balance at September 30, 1999 1,769,707 $ 5.55
Granted (average fair value of $2.64) 1,398,950 3.91
Exercised (623,485) 5.11
Canceled (300,309) 5.87
--------- --------
Balance at September 30, 2000 2,244,863 $ 4.59
========= ========
</TABLE>
At September 30, 2000, options for 581,016 shares were exercisable at a weighted
average exercise price of $5.84 and 282,556 shares were available for additional
option grants. In November 1998, options to purchase 1,341,365 shares of common
stock were re-priced from a weighted average exercise price of $9.22 to a
weighted average exercise price of $5.09, which was equal to fair market value
at the date of re-pricing.
The following table summarizes information about stock options at September
30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- -----------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number of Life Exercise Number of Exercise
Exercise Prices Shares (Years) Price Shares Price
--------------- ------ ------- ----- ------ -----
<S> <C> <C> <C> <C> <C>
$2.87-$3.74 204,000 9.6 $ 2.94 2,500 $ 3.00
$3.75 1,000,000 2.9 $ 3.75 -- $ --
$3.76-$5.08 83,750 9.4 $ 4.04 1,500 $ 4.06
$5.09-$5.10 378,498 5.5 $ 5.09 267,353 $ 5.09
$5.11-$6.00 451,615 8.6 $ 5.89 231,788 $ 5.86
$6.01-$20.50 127,000 5.1 $ 8.04 77,875 $ 8.50
------------ --------- --- -------- ------- ------
$2.87-$20.50 2,244,863 8.6 $ 4.59 581,016 $ 5.84
============ ========= === ======== ======= ======
</TABLE>
The Company established an Employee Stock Purchase Plan ("ESPP") in February
1986, which permits employees to purchase the Company's common stock under terms
specified by this ESPP. The ESPP is a statutory Employee Stock Purchase Plan
under Section 423 of the Internal Revenue Code. Common stock issued under the
ESPP during fiscal 2000 and 1999 totaled 384,845 and 390,498
shares, respectively, at a weighted average price of $4.15 and $5.30,
respectively. At September 30, 2000, 290,402 shares were reserved for future
issuance under the ESPP.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), requires the disclosure of pro forma net earnings and
earnings per share as if the Company had adopted the fair value method prior to
fiscal 1995. Under SFAS 123, the fair value of stock-based awards to employees
is calculated through
GOOD GUYS 2000 ANNUAL REPORT 27
<PAGE> 17
the use of options pricing models, even though such models were developed to
estimate the fair value of freely tradable, fully transferable options without
vesting restrictions, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions, including future stock
price volatility and expected time to exercise, which greatly affect the
calculated value.
The Company's calculations are based on a single-option valuation approach and
forfeitures are recognized as they occur. The impact of outstanding unvested
stock options granted prior to 1996 has been excluded from the pro forma
calculation and accordingly, the pro forma adjustments presented are not
indicative of future period pro forma adjustments. The Company's calculations
were made using the Black-Scholes option pricing model, with the following
weighted average assumptions: expected option life, five years; stock volatility
of, 75 percent in fiscal 2000, and 60 percent in fiscal 1999 and 50 percent in
fiscal 1998; risk-free interest rates of, 6 percent in fiscal 2000 and 5.75
percent in fiscal 1999 and 1998; and no dividends during the expected term. Had
compensation cost been recognized in accordance with SFAS 123, the pro forma net
loss would have been $18.3 million or $0.89 per share in fiscal 2000, $44.0
million or $2.84 per share in fiscal 1999 and $12.8 million or $0.91 per share
in fiscal 1998.
NOTE 9: COMMON STOCK
In August 2000, the Company issued, in a private placement, 2.0 million shares
of common stock and received $9.3 million in net proceeds. Additionally, the
Company issued warrants for the purchase of 1.0 million shares. The warrants
were issued with an exercise price of $4.64, representing the fair market value
of the common stock at the date of issuance. The warrants are exercisable over
the period of three years from the date of issuance.
In June 1999, the Company issued 1.45 million shares of common stock to its
current Chairman and Chief Executive Officer and received $4.7 million in cash.
Additionally, the Company issued warrants to him for the purchase of 1.435
million shares. The warrants were issued with an exercise price of $3.396,
representing 105 percent of the fair market value of the common stock at the
date of issuance. The warrants become exercisable over a period of one to three
years from the date of issuance and expire five years from the date they are
first exercisable.
In August 1999, the Company issued 3.25 million shares of common stock in a
private placement of its common stock in exchange for $15.4 million in net
proceeds. As part of the private placement, the Company issued warrants totaling
1.785 million shares. The warrants were issued with an exercise price of $6.125,
which was in excess of the fair market value of the common stock at the date of
issuance and are exercisable during the three-year period following the date of
issuance.
RESTRICTED STOCK ISSUANCE: The Company has issued restricted stock to directors,
officers and certain key employees as part of the Company's compensation
program. All shares awarded entitle the recipient to full rights of a
shareholder, are restricted as to disposition and are subject to forfeiture
under certain circumstances. The market value of these shares at the date of
grant is amortized to expense ratable over the vesting period of one year.
Shares issued during fiscal 2000, 1999, and 1998 were 101,195, 160,594 and
29,360, respectively. During fiscal 2000, 1999 and 1998, compensation expense of
$729,000, $250,000 and $181,000, respectively, was recognized on the
amortization of restricted stock, leaving unamortized compensation expense of
$66,000, $341,000 and $0, respectively, at each year-end.
NON-EMPLOYEE STOCK ISSUANCES: In fiscal 1999, the Company issued 80,800 shares
of common stock and warrants for 40,400 common shares at an exercise price of
$6.125 per share with a combined fair market value of $500,000 to a vendor in
exchange for $500,000 of advertising services provided. These advertising
expenses have been included in selling, general and administrative expenses for
fiscal 1999 in the accompanying statements of operations.
28 GOOD GUYS 2000 ANNUAL REPORT
<PAGE> 18
NOTE 10: REPURCHASE AND RETIREMENT OF STOCK
In January 1996 and September 1997, the Company's Board of Directors authorized
the purchase of up to 1,000,000 shares of the Company's common stock on the open
market or in private transactions. For the year ended September 30, 1998, the
Company had repurchased 196,300 shares for $1.4 million. The Company did not
repurchase shares in fiscal 2000 or fiscal 1999.
NOTE 11: LEGAL PROCEEDINGS
The Company is involved in various legal proceedings arising during the normal
course of business. Management believes that the ultimate outcome of these
proceedings, individually and in the aggregate, will not have a material impact
on the financial position or results of operations of the Company.
NOTE 12: RELATED PARTY
During fiscal 2000, the Company and a group of private equity investors formed a
company, goodguys.com, to sell consumer electronic products through the
Internet. In exchange for a trademark license and product supply agreement, the
Company received common stock for 20 percent of goodguys.com and a warrant for
an additional 29.9 percent exercisable only upon a change in control or other
liquidation event, as defined. The Company did not make a cash investment in
goodguys.com. goodguys.com commenced Internet operations in October 2000. The
Company accounts for their investment under the equity method of accounting.
NOTE 13: QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years ended September 30, 2000 and 1999 are
summarized in the following table. The Company's interim financial information
for all quarterly periods during fiscal 1999 have been restated for errors
related to the timing for the recognition of expenses related to the closure of
stores and to the balance for prepaid rent and accrued property rental accounts,
and to record an allowance for sales returns.
<TABLE>
<CAPTION>
December 31, March 31, June 30, Sept. 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 2000 2000 2000
------------------------------------------------ ---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 262,212 $ 190,364 $ 195,936 $ 212,031
Gross profit 78,778 53,702 57,116 56,941
Net income (loss) 5,619 (10,231) (2,972) (9,744)
Net income (loss) per: basic share $ 0.29 $ (0.50) $ (0.14) $ (0.45)
diluted share $ 0.27 $ (0.50) $ (0.14) $ (0.45)
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31, June 30, Sept. 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1999 1999 1999
------------------------------------------------ ---- ---- ---- ----
(AS PREVIOUSLY (AS PREVIOUSLY (AS PREVIOUSLY (AS PREVIOUSLY
REPORTED) REPORTED) REPORTED) REPORTED)
<S> <C> <C> <C> <C>
Net sales $ 294,098 $ 219,099 $ 210,451 $ 191,858
Gross profit 71,450 51,943 54,640 44,839
Net income (loss) 1,652 (7,246) (8,131) (25,588)
Net income (loss) per basic and diluted share $ 0.12 $ (0.50) $ (0.54) $ (1.42)
</TABLE>
<TABLE>
<CAPTION>
(AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED)
<S> <C> <C> <C> <C>
Net sales $ 294,098 $ 219,099 $ 210,451 $ 191,994
Gross profit 71,450 51,943 54,640 44,864
Net income (loss) 1,331 (7,480) (8,196) (25,542)
Net income (loss) per basic and diluted share $ 0.09 $ (0.52) $ (0.54) $ (1.42)
</TABLE>
GOOD GUYS 2000 ANNUAL REPORT 29
<PAGE> 19
NOTE 14: RESTATEMENT
Subsequent to the filing of its September 30,1999 financial statements, the
Company's management determined that certain errors had been made in accounting
for the accrual related to the closure of certain store locations in prior
years. These errors related to the timing for the recognition of expenses
related to the closure of stores and to the balance for prepaid rent and the
balance for the accrued property rental account. Additionally, the Company had
not established an allowance for sales returns. As a result, the Company's 1998
and 1999 financial statements have been restated from previously reported
amounts to correct the recording of these items. The effect of the
restatement,substantially all of which related to store lease exit costs, was
to increase the net loss in fiscal 1998 from $8.9 million to $11.8 million and
to increase the net loss in fiscal 1999 from $39.3 million to $39.9 million. The
effect of the restatement on fiscal years prior to 1998 resulted in an increase
to the 1998 beginning retained earnings of $528,000. The effect of the
restatement on fiscal 2000 was not significant and is included in operating
results for the fourth quarter. The restatement has no effect on the Company's
cash flow. A summary of the significant effects of the restatement is as
follows:
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
September 30,
(Dollars in thousands) 1999
---------------------- -------------------------------
(AS PREVIOUSLY
REPORTED) (AS RESTATED)
<S> <C> <C>
Prepaid expenses $ 6,637 $ 6,710
Total assets $226,090 $226,163
Other accrued expenses $ 22,584 $ 25,583
Retained earnings $ 7,528 $ 4,602
Total shareholders' equity $ 95,880 $ 92,954
</TABLE>
STATEMENT OF OPERATIONS:
<TABLE>
<CAPTION>
Year ended September 30,
(Dollars in thousands except per share) 1999 1998
--------------------------------------- ---------------------------------- ---------------------------------
(AS PREVIOUSLY (AS PREVIOUSLY
REPORTED) (AS RESTATED) REPORTED) (AS RESTATED)
<S> <C> <C> <C> <C>
Net sales $ 915,508 $ 915,642 $ 928,490 $ 928,382
Cost of sales $ 692,636 $ 692,745 $ 700,158 $ 700,070
Selling,general and administrative expense $ 257,448 $ 257,993 $ 241,155 $ 241,007
Store closure expense $ 54 $ 3,008
Net loss $ (39,313) $ (39,887) $ (8,933) $ (11,813)
Net loss per basic and diluted share $ (2.54) $ (2.58) $ (0.64) $ (0.84)
</TABLE>
30 GOOD GUYS 2000 ANNUAL REPORT
<PAGE> 20
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
The Good Guys, Inc.
Brisbane, California
We have audited the accompanying consolidated balance sheets of The Good Guys,
Inc. and subsidiary as of September 30, 2000 and 1999, and the related
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended September 30, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The Good Guys, Inc. and subsidiary
at September 30, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 2000 in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 14 to the consolidated financial statements, the
accompanying fiscal 1999 and 1998 consolidated financial statements have been
restated.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
San Francisco, California
December 5, 2000
GOOD GUYS 2000 ANNUAL REPORT 31
<PAGE> 21
CORPORATE INFORMATION
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<S> <C>
ANNUAL MEETING
January 31, 2001
11:00 a.m.
OFFICERS Ritz-Carlton Hotel
600 Stockton Street
RONALD A. UNKEFER San Francisco, California
Founder, Chairman and Chief Executive Officer
KENNETH R. WELLER INDEPENDENT AUDITORS
President Deloitte & Touche LLP
50 Fremont Street
GEORGE J. HECHTMAN San Francisco, CA 94105
Vice President, Administration
TRANSFER AGENT
CATHY A. STAUFFER ChaseMellon Shareholders Services, LLC
Vice President, Merchandising 85 Challenger Road
Ridgefield, NJ 07660
ROBERT A. STOFFREGEN (800) 356-2017
Vice President, Finance www.chasemellon.com
Chief Financial Officer
DIRECTORS FORM 10-K
RONALD A. UNKEFER A copy of the Company's Form 10-K Annual Report filed
Chairman and Chief Executive Officer of the Company with the Securities and Exchange Commission may be
obtained without charge by writing to Good Guys
Investor Relations at the address noted below.
KENNETH R. WELLER
President of the Company QUARTERLY REPORT
Shareholders can obtain a faxed copy of recent quarterly finan-
STANLEY R. BAKER cial press releases by calling Good Guys Investor Relations at
Director (650) 615-6018 or writing to:
JOSEPH P. CLAYTON Good Guys Investor Relations
President and CEO, North America 7000 Marina Boulevard
Global Crossing Ltd. Brisbane,CA 94005-1840
[email protected]
GARY M. LAWRENCE
Managing Partner COMMON STOCK
Akin, Gump, Strauss, Hauer & Feld LLP The Good Guys, Inc. common stock is traded on the NASDAQ
National Market under the symbol GGUY.
W. HOWARD LESTER
Chairman and Chief Executive Officer The following table sets forth the quarterly high and low sales prices
Williams-Sonoma, Inc. for the Company's common stock as quoted for fiscal 1999 and 2000.
</TABLE>
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JOHN E. MARTIN Fiscal Quarter Ended High Low
Chairman -------------------- ------- -------
Culinary Adventures, Inc. December 31, 1998 6 13/16 2 11/16
March 31, 1999 7 2 3/4
JOSEPH M. SCHELL June 30, 1999 8 3/16 2 29/32
Chairman, Global Technology Division September 30, 1999 8 5/16 4 5/8
Merrill Lynch December 31, 1999 11 5 1/4
March 31, 2000 10 1/4 3 5/8
RUSSELL M. SOLOMON June 30, 2000 4 1/2 2 1/16
Founder and Chairman September 30, 2000 8 2 15/16
MTS, Inc. (Tower Records)
</TABLE>
As of December 15,2000,there were 3,310 shareholders of
record, excluding shareholders whose stock is held in
nominee or street name by brokers.
32 GOOD GUYS 2000 ANNUAL REPORT
