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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 June 30, 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 Identification No.)
incorporation or organization)
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
<TABLE>
<CAPTION>
CLASS OUTSTANDING AS OF July 31, 2000
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<S> <C>
Common Stock 20,653,787
</TABLE>
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THE GOOD GUYS, INC.
INDEX
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION Page
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<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets -
June 30, 2000 and September 30, 1999 3
Consolidated Statements of Operations -
Three month and nine month periods ended June 30, 2000 and 1999 4
Consolidated Statements of Changes in Shareholders' Equity -
Nine month period ended June 30, 2000 5
Consolidated Statements of Cash Flows -
Nine month periods ended June 30, 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 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
</TABLE>
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THE GOOD GUYS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,718 $ 2,556
Accounts receivable, net 18,396 19,021
Merchandise inventories 134,454 110,276
Prepaid expenses 13,675 6,637
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Total current assets 169,243 138,490
PROPERTY AND EQUIPMENT, NET
Land -- 2,306
Leasehold improvements 73,590 73,298
Furniture, fixtures and equipment 75,712 72,686
Construction in progress 1,019 3,785
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Total property and equipment 150,321 152,075
Less accumulated depreciation and amortization 82,588 72,121
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Property and equipment, net 67,733 79,954
OTHER ASSETS 7,788 7,646
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Total Assets $ 244,764 $ 226,090
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 66,156 $ 36,571
Accrued expenses and other liabilities:
Accrued payroll 9,064 9,615
Sales taxes payable 3,381 4,936
Other 19,624 22,584
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Total current liabilities 98,225 73,706
REVOLVING CREDIT DEBT 53,674 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 -20,552,880 and
19,636,022 shares, respectively 20 20
Additional paid-in-capital 92,912 88,332
Retained earnings (deficit) (67) 7,528
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Total shareholders' equity 92,865 95,880
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Total Liabilities and Shareholders' Equity $ 244,764 $ 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 Nine Months Ended
June 30, June 30,
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 195,936 $ 210,451 $ 648,508 $ 723,649
Cost of sales 138,820 155,811 458,918 545,617
--------- --------- --------- ---------
Gross profit 57,116 54,640 189,590 178,032
Selling, general and administrative expense 58,636 61,566 192,955 189,299
--------- --------- --------- ---------
Income (loss) from operations (1,520) (6,926) (3,365) (11,267)
Interest expense, net 1,452 1,205 4,230 2,459
--------- --------- --------- ---------
Income (loss) before income taxes (2,972) (8,131) (7,595) (13,726)
Income tax expense (benefit) - - - -
--------- --------- --------- ---------
Net income (loss) $ (2,972) $ (8,131) $ (7,595) $ (13,726)
========= ========= ========= =========
Net income (loss) per common share
Basic $ (0.14) $ (0.54) $ (0.38) $ (0.94)
========= ========= ========= =========
Diluted $ (0.14) $ (0.54) $ (0.38) $ (0.94)
========= ========= ========= =========
Weighted average shares
Basic 20,557 15,103 20,184 14,620
========= ========= ========= =========
Diluted 20,557 15,103 20,184 14,620
========= ========= ========= =========
</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 NINE-MONTH PERIOD ENDED JUNE 30, 2000
(In thousands except share data)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Retained
-------------------------- Paid-in Earnings
Shares Amount Capital (Deficit) 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 283,938 - 1,377 1,377
Exercise of stock options
and warrants 531,725 - 2,718 2,718
Issuance of restricted
stock 101,195 - 485 485
Net loss for the nine-month period
ended June 30, 2000 (7,595) (7,595)
---------- ---------- ---------- ----------- ----------
Balance at June 30, 2000 20,552,880 $ 20 $ 92,912 $ (67) $ 92,865
========== ========== ========== =========== ==========
</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>
Nine Months Ended
June 30,
-----------------------
2000 1999
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<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (7,595) $(13,726)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 11,061 9,751
Gain on sale of land (1,025) --
Early retirement of assets -- 1,505
Non-cash stock based compensation -- 153
Changes in assets and liabilities:
Accounts receivable 625 3,093
Merchandise inventories (24,178) (625)
Prepaid expenses and other assets (7,180) (434)
Accounts payable 29,585 (28,031)
Accrued expenses and other liabilities (5,060) (6,557)
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Net cash provided by (used in) operating activities (3,767) (34,871)
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Cash Flows from Investing Activities:
Sale of land 3,208 --
Capital expenditures, net (1,029) (19,691)
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Net cash provided by (used in) investing activities 2,179 (19,691)
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Cash Flows from Financing Activities:
Net proceeds from issuance (repayment) of revolving credit (2,830) 55,708
Proceeds from issuance of common stock 4,580 5,979
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Net cash provided by (used in) financing activities 1,750 61,687
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Net increase (decrease) in cash and cash equivalents 162 7,125
Cash and cash equivalents at beginning of period 2,556 3,051
-------- --------
Cash and cash equivalents at end of the period $ 2,718 $ 10,176
======== ========
</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. The consolidated balance sheets at June 30, 2000 and 1999, and the
related consolidated statements of operations and cash flows for the
nine-month periods ended June 30, 2000 and 1999 have been prepared by
The Good Guys, Inc. (the "Company"), without audit. In the opinion of
management, the consolidated financial statements include all
adjustments (which include only normal recurring adjustments) necessary
to present fairly the financial position, results of operations and cash
flows as of June 30, 2000 and 1999, and for the nine-month periods then
ended. The balance sheet at September 30, 1999, presented herein, has
been derived from the audited balance sheet of the Company. Certain
information and disclosures normally included in the notes to the annual
financial statements prepared in accordance with generally accepted
accounting principles have been omitted from these interim financial
statements. Accordingly, these interim financial statements should be
read in conjunction with the financial statements and notes thereto
included 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 hedge 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.
4. In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements," which provides the SEC staff's views on selected
revenue recognition issues. The guidance in SAB 101 must be adopted
during the Company's fiscal year ended September 30, 2001. Management
does not believe that the adoption of the provisions of SAB 101 will
have a material impact on the Company's statement of operations
presentation, operating results or financial position.
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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 third quarter and first nine months ending June 30, 2000 were
$195.9 million and $648.5 million, compared to $210.5 million and $723.7 million
for the same periods last year. This represented a 7% and 10% decrease in sales
for the third quarter and the first nine months of the fiscal year primarily due
to the elimination of low-margin computers and home office products and the
de-emphasis of entry level offerings. However, for continuing categories, net
sales increased 4% for the third quarter and 1% for the first nine months of
fiscal 2000, compared to the same periods last year. Comparable store sales for
continuing categories increased 3% for the quarter and remained level for the
first nine months of fiscal 2000. These increases were primarily a result of the
new in-store structure and an enhanced advertising campaign introduced during
the third quarter. In March, the Company reorganized its in-store operations and
merchandise categories which are expected to reduce costs by approximately $9
million annually and improve the level of service at its 79 stores. During the
third quarter, the Company introduced an enhanced advertising campaign designed
to drive qualified customers to the Company's stores through expanded placement
as well as promotions and other incentives. By outsourcing its advertising
department to a retail agency and renegotiating rates with more than 30
newspapers, the Company increased the frequency and broadened the placement of
its print advertising within its existing budget. In addition, the Company
resumed television advertising in June and plans to periodically run television
ads for the remainder of the year.
For the third quarter and the first nine months of fiscal 2000, sales of
televisions and audio products along with new digital technologies, such as DVD,
DSS, digital cameras and internet devices showed strong growth while sales of
VCRs, telecommunications, personal/portables, camcorders and video games
decreased from year-ago figures. The sale of Premier Performance Guarantee
contracts increased to 6.1% and 5.9% of net sales for the third quarter and
first nine months of fiscal 2000, respectively, up from 4.7% and 4.6% for the
same periods last year.
The Company's gross profit as a percentage of net sales increased substantially
to 29.2% in both the third quarter and first nine months of fiscal 2000,
compared to 26.0% and 24.6% for the same periods last year. The increase in the
gross profit percentage in both periods reflects the Company's emphasis on
higher-margin digital and high-tech consumer entertainment electronics and
elimination of lower-margin computer and home office products from its offerings
and is also the result of increased extended warranty contract sales.
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Selling, general and administrative expense decreased by $2.9 million in the
third quarter but increased $3.7 million in the first nine months of fiscal
2000, compared to the corresponding periods in fiscal 1999. These expenses
represented 29.9% and 29.8% of net sales in the third quarter and first nine
months of fiscal 2000 compared to 29.3% and 26.2 % for the same periods last
year. The decrease in selling, general and administrative expenses for the third
quarter is primarily due to reduced staffing and selling expenses resulting from
the in-store restructuring that took place in March and the decreased
administrative compensation as a result of the elimination of the production
side of the advertising department. The increase in selling, general and
administrative expenses for the nine month period is primarily due to increased
advertising expenses, which are anticipated to remain above prior year levels.
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.
Interest expense increased $247,000 and $1.8 million in the third quarter and
first nine months of fiscal 2000 compared to the corresponding periods last
year. These increases were due to higher levels of borrowings and higher
interest rates in the third quarter and first nine months of the current fiscal
year.
As a result of the factors discussed above, the net losses for the third quarter
and the first nine months of fiscal 2000 were $2.97 million and $7.59 million
compared to net losses of $8.13 million and $13.72 million for the third quarter
and the first nine months of fiscal 1999. The net losses per share for the third
quarter and first nine months were $0.14 and $0.38 per share, compared to net
losses of $0.54 and $0.94 per share for the same periods last year. Earnings
before interest, taxes, depreciation and amortization (EBITDA) were $7.7 million
in the first nine months of fiscal 2000 contrasted to a loss of $1.5 million in
the first nine months of fiscal 1999. Although the Company in early July
announced that it anticipated a loss for fiscal 2000, as a result of a
combination of continued strong same store sales in the fourth quarter and
earnings that could be achieved from leased real estate transactions being
negotiated, the Company could reach breakeven for the year.
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 selling, general and administrative expenses by eliminating its
internal advertising production department, streamlining all corporate
functions, including operations, management information systems, finance, human
resources and merchandising, and restructuring the in-store operations.
In the current fiscal year, the Company is also committed to minimizing capital
expenditures, and has placed a moratorium on opening new stores or relocating
existing stores. Projected expenditures for fiscal 2000 also incorporate
increases in advertising and marketing by more than 20% from fiscal year 1999
levels.
Liquidity and Capital Resources
At June 30, 2000, the Company had cash and cash equivalents of $2.7 million. The
Company's working capital was $71.0 million at June 30, 2000 compared to $72.3
million at June 30, 1999. Net cash used in operating activities was $3.8 million
for the first nine months of fiscal 2000 compared to $34.9 million for the same
period last year. The increase in cash flows from operating activities for the
first nine months of fiscal 2000 was primarily due to an increase in accounts
payable balances and a decrease in the net loss for the first nine months of
fiscal 2000 partially offset by larger increases in inventories and prepaid
expenses.
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Net cash provided by investing activities was $2.2 million for the nine months
ended June 30, 2000, as compared to net cash used in investing activities of
$19.7 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 $1.0 million due to the
Company's decision not to open or remodel any stores in fiscal 2000 compared to
a $19.7 million increase in fixed assets for the first nine months of fiscal
2000 when the Company opened two new stores, relocated four stores and remodeled
two existing stores.
At June 30, 2000, the Company maintains a three-year $100 million revolving
credit facility with no operating covenants. The amount of borrowing allowed
under the credit agreement is based on a formula related to the Company's
inventory balances. At June 30, 2000, the Company had borrowings of $53.7
million outstanding under the revolving credit agreement and $22.8 million of
the credit line was reserved under a vendor financing agreement, leaving an
availability of $6.3 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,
the revolving credit facility, 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.
The Company is exposed to market risks, which include changes in interest rates.
The Company does not engage in financial transactions for trading or speculative
purposes. The interest payable on the Company's credit facility is based on
variable interest rates and therefore affected by changes in market interest
rates. If interest rates on existing variable debt rose 0.9% (10% from the
bank's reference rate) as of June 30, 2000, the Company's results from
operations and cash flows would not be materially affected.
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THE GOOD GUYS, INC.
PART II: OTHER INFORMATION
Item 1. 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.
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: August 14, 2000 By: /s/ Vance R. Schram
--------------------- --------------------------------------
Vance R. Schram
Chief Financial Officer
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
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<S> <C>
27.1 Financial Data Schedule
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