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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended February 28, 2002
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number 0-14134
GOOD GUYS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2366177
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1600 Harbor Bay Parkway, Alameda, California 94502-1840
(Address of principal executive offices)
Registrant's telephone number, including area code: (510) 747-6000
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $ 88,472,043 as of April 30, 2002.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
On April 30, 2002, there were 26,409,060 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement to be filed with Securities and
Exchange Commission relating to the
Company's 2002 Annual Meeting of Shareholders.
(Part III of Form 10-K)
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PART I.
ITEM 1. BUSINESS.
GENERAL
Good Guys, Inc. was incorporated in California in 1976. On March 4, 1992, the
Company changed its state of incorporation from California to Delaware by
merging into a wholly owned Delaware subsidiary formed for that purpose. In
September 1995, Good Guys, Inc. transferred substantially all of its assets and
liabilities to Good Guys California, Inc., its wholly owned operating
subsidiary. Unless the context otherwise requires, the terms "Company" or "Good
Guys" refers to Good Guys, Inc., together with its operating subsidiary.
The Company is a leading specialty retailer of higher-end consumer entertainment
electronics products. Until the decision discussed below under "Recent
Developments and Restructuring" was made to close eight unprofitable stores, the
Company operated 79 stores in California, Washington, Oregon and Nevada.
Following these closures, the Company will operate 71 stores: In California, 19
stores are located in the San Francisco Bay area, 27 in the Greater Los
Angeles/Orange County Metropolitan Area, 3 in Sacramento, 7 in San Diego, and
one each in Bakersfield, Fresno, Modesto and Stockton. In Washington, Oregon and
Nevada, the Company operates six stores, three stores and two stores,
respectively.
RECENT DEVELOPMENTS AND RESTRUCTURING
CHANGE IN FISCAL YEAR - The Company 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 the Company's financial reporting with that of
other consumer electronics retailers and to allow the investment and vendor
communities to draw more realistic comparisons between the Company and its major
competitors. As used elsewhere in this Annual Report on Form 10-K, fiscal 2002
refers to the year ended February 28, 2002, fiscal 2001 refers to the five-month
period ended February 28, 2001, fiscal 2000 refers to the year ended September
30, 2000, fiscal 1999 refers to the year ended September 30, 1999 and fiscal
2003 refers to the year ending February 28, 2003. This report is for the fiscal
year ended February 28, 2002.
IMPLEMENTATION OF TURNAROUND STRATEGY
In fiscal 2002, the Company commenced its implementation of a strategy for
turnaround that included the following measures to improve Company performance
and overall liquidity:
PRIVATE PLACEMENT - In March 2002, the Company issued, in a private placement,
2.8 million restricted shares of common stock at $2.00 per share and received
approximately $5.1 million in net proceeds, the purpose of which was to fund
store closures leaving working capital from operations unencumbered. The
purchasers of those shares included Chairman and Chief Executive Officer,
Kenneth R. Weller, and Chief Operating Officer, Peter G. Hanelt. The purchasers
also received warrants to purchase an additional 280,000 shares of common stock
at a price of $3.00 per share.
BANK BORROWINGS - On May 22, 2002, the Company and its lenders entered into an
amendment to the Company's $100 million credit facility that extends the
expiration date of the facility from September 30, 2002 to May 31, 2006.
Available borrowings under the agreement are limited to certain levels of
eligible accounts receivable and inventories, but may be increased from October
1 to December 20 of each year to meet seasonal needs. The Company is also
required to comply with a minimum earnings before interest, taxation,
depreciation and amortization covenant, a capital lease covenant and reporting
requirements, as defined in the agreement. The borrowings are secured by
substantially all of the Company's assets.
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CLOSURE OF UNPROFITABLE STORES - During January 2002, the Board of Directors
approved a plan to close eight unprofitable stores, and the Company recorded a
store closure and impairment expense of $15.1 million associated with this plan.
These costs include direct costs to terminate lease agreements, or the future
obligated lease payments, net of estimated sublease income, and the difference
between the carrying values and estimated recoverable values of long-lived
assets. The store closure expense also includes a $3.3 million write-off of the
book value of fixed assets related to the eight stores identified for closure.
As of May 17, 2002, the Company had closed four stores, with an additional three
stores expected to be closed by the end of June 2002, and with the remaining
store expected to be closed during fiscal 2003. With respect to these stores,
the Company has entered into lease termination agreements for five of the stores
and is currently negotiating either the termination of the lease or the
sub-lease of each of the remaining stores.
RESTRUCTURING AND COST SAVINGS PROGRAM - The Company has implemented a business
restructuring and cost savings program that will have a substantial impact
during fiscal 2003 and future years. Cost savings include:
- - Relocation of Corporate Office to Alameda
- - Reduction of over 10% in store and corporate head count to right size
the organization
- - 10% reduction in Executive Officer compensation
- - Restructured 3 service centers and consolidated to a single location to
eliminate duplication and restructured the compensation plan for
service technicians
- - Reduced the distribution center from 3 shifts, 7 days a week to a
single shift, 5 days a week
- - Reduced home delivery to 5 from 7 days a week
- - Negotiation of rent reductions on certain store leases
- - Relocation of Marketing Division from Dallas to Alameda to better
integrate marketing, merchandise and store operations, consolidation of
locations and facilitation of other initiatives affecting marketing and
advertising costs
- - Reduction in equipment lease costs
STRENGTHENED MANAGEMENT TEAM - Since December 2001, the Company has re-aligned
its management team including:
- - Kenneth R. Weller, who was serving as President of the Company, was
also named Chairman and Chief Executive Officer
- - Peter G. Hanelt was appointed Chief Operating Officer and Treasurer.
Mr. Hanelt has over 25 years of experience in finance and executive
management, specifically as it relates to turnaround strategies
- - Cathy A. Stauffer was promoted to Executive Vice President of
Merchandising and Advertising
- - The Company established the positions of Vice President of Sales,
Northern Division and Vice President of Sales, Southern Division
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IMPROVED LOGISTICS AND VENDOR SUPPORT - The Company has focused on merchandise
and vendor support and has strengthened key vendor relationships, in particular
with Sony and Mitsubishi, the Company's two largest vendors. Results to date
include the following:
- - Reduction in freight costs due to the initiation of the direct ship
program to local markets from the two key vendors, streamlining the
process and expediting deliveries to the Company and the Company's home
delivery centers
- - Sony identified the Company as a strategic relationship and is actively
working with the Company through on-site personnel to promote product
sales and supply chain logistics
- - Enhanced procedures to reduce overall merchandise inventory.
Merchandise inventory has decreased $18.8 million or 15.6% to $102.1
million at February 28, 2002 compared to $120.9 million at February 28,
2001, providing significant cost savings and working capital for other
operational needs
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This report may contain "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act.
Forward-looking statements are identified by words such as "believe,"
"anticipate," "expect," "intend," "plan," "will" and other similar expressions.
In addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking
statements. These forward-looking statements reflect the Company's current
expectations and are based upon currently available data. There are a variety of
factors and risks that could cause actual results experienced to differ
materially from the anticipated results or other expectations expressed in the
forward-looking statements, including, but not limited to, those set forth below
under "Risk Factors."
RISK FACTORS
OPERATING LOSSES - The Company experienced operating losses of $40.0 million,
$17.3 million, and $39.9 million for fiscal 2002, 2000 and 1999, respectively.
Operating results for fiscal 2002 included a $15.1 million store closure expense
and a $3.0 million impairment of asset expense. For fiscal 2001, the Company
reported net income of $1.3 million. Accumulated deficit at February 28, 2002
was $51.4 million. The Company's ability to generate positive operating cash
flow is dependent on its ability to improve sales and gross margin, convert its
inventory to cash and effectively manage its operating costs.
Although the Company believes it will be able to successfully implement its
turnaround strategy and return to profitability in fiscal 2003, there can be no
assurance that it will be able to do so. Failure to return to profitability
could have a material adverse effect on the Company's relationships with its
vendors and lenders.
NEGATIVE SAME STORE SALES - For fiscal 2002, comparable store sales declined
7.1% from the 12-month prior period. Continued negative same store sales will
result in lower sales and gross profit than budgeted and could delay the
Company's planned return to profitability. Should sales continue to decrease for
an extended period of time, the Company might have to close additional stores or
make additional reductions in operating expenses to meet its obligations. The
Company has experienced positive same store sales for fiscal 2003 to date
DEPENDENCE ON KEY PERSONNEL - The Company's success depends upon the active
involvement of senior management personnel, particularly Kenneth R. Weller,
Chairman, Chief Executive Officer and President, Cathy A. Stauffer, Executive
Vice President, Merchandising and Advertising, and Peter G. Hanelt, Chief
Operating Officer and Treasurer. The loss of the full-time services of Kenneth
R. Weller, Cathy A. Stauffer
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or Peter G. Hanelt or other members of senior management could have a material
adverse effect on the Company's results of operations and financial condition.
RISKS ASSOCIATED WITH COMPETITION - The retail consumer electronics industry is
highly competitive. The Company competes against a diverse group of retailers,
including several national and regional large format merchandisers and
superstores, such as Circuit City and Best Buy. Those competitors sell, among
other products, audio and video consumer electronics products similar to those
the Company sells. Certain of these competitors have substantially greater
financial resources than those of the Company. A number of different competitive
factors could have a material adverse effect on the Company's results of
operations and financial condition, including, but not limited to:
- - Increased operational efficiencies of competitors;
- - Competitive pricing strategies;
- - Expansion by existing competitors;
- - Entry by new competitors into markets in which the Company is currently
operating; or
- - Adoption by existing competitors of innovative store formats or retail
sales methods.
SEASONAL AND QUARTERLY FLUCTUATIONS IN SALES - Like many retailers, seasonal
shopping patterns affect the Company's business. Effective October 1, 2000, the
Company changed its fiscal year to end on the last day of February. In the new
fiscal year, the fourth fiscal calendar quarter includes the December holiday
shopping period, which has historically contributed, and is expected to continue
to contribute, a substantial portion of the Company's operating income for the
entire fiscal year. As a result, any factors negatively affecting the Company
during the fourth calendar quarter of any year could have a material adverse
effect on results of operations for the entire year. More generally, the
Company's quarterly results of operations also may fluctuate based upon such
factors as:
- - Competition;
- - General, regional and national economic conditions;
- - Consumer trends;
- - Changes in the Company's product mix;
- - Timing of promotional events;
- - New product introductions; and
- - The Company's ability to execute its business strategy effectively.
CHANGES IN CONSUMER DEMAND AND PREFERENCES - The Company's success depend on its
ability to anticipate and respond in a timely manner to consumer demand and
preferences regarding audio and video consumer products and changes in such
demand and preferences. Consumer spending patterns, particularly discretionary
spending for products such as those the Company offers, are affected by, among
other things, prevailing economic conditions. In addition, the Company depends
on the periodic introduction and availability of new products and technologies
that generate wide consumer interest and stimulate the demand for audio and
video consumer electronics products. It is possible that these products or other
new products
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will never achieve widespread consumer acceptance. Furthermore, the
introduction, or expected introduction, of new products or technologies may
depress sales of existing products and technologies. Significant deviations from
the projected demand for products the Company sells would have a materially
adverse effect on its results of operations and financial condition, either from
lost sales or from lower margins if the Company should need to mark down excess
inventory to stimulate sales.
POTENTIAL NEGATIVE EFFECT ON SALES OF ADDITIONAL TERRORIST ATTACKS - The
September 11th terrorist attacks caused substantial economic damage to the
United States. In addition to the actual damage, many consumers were reluctant
to purchase products such as the large ticket items the Company sells. While
consumer sentiment has rebounded since September 11th, additional attacks on
U.S. citizens or property could have a substantial negative impact on the
Company's sales.
DEPENDENCE ON SUPPLIERS - The success of the Company's business and growth
strategy depends to a significant degree upon its maintaining a good
relationship with its suppliers, particularly brand-name suppliers of audio and
video equipment such as Sony, Mitsubishi and JVC. The loss of any of these key
vendors or the Company's failure to establish and maintain relationships with
these or other vendors could have a material adverse effect on its results of
operations and financial condition.
ANY CHANGE IN VENDOR CREDIT TERMS - The Company relies on credit from vendors to
purchase its products. As of February 28, 2002, the Company had $53.9 million in
accounts payable and $102.1 million in merchandise inventories. A substantial
change in the credit terms from vendors or in vendors' willingness to extend
credit to the Company would reduce the Company's ability to obtain the
higher-end merchandise that it sells.
INVENTORY PURCHASED FROM FOREIGN VENDORS - The Company purchases a significant
portion of its inventory from overseas vendors, particularly vendors
headquartered in Japan. Although substantially all the Company's merchandise
inventory purchases are domestically sourced and denominated in U.S. Dollars,
changes in trade regulations, currency fluctuations or other factors may
increase the cost of items purchased from foreign vendors or create shortages of
such items, which could, in turn, have a material adverse effect on the
Company's results of operations and financial condition. Conversely, significant
reductions in the cost of such items in U.S. dollars may cause a significant
reduction in retail price levels of those products and may limit or eliminate
the ability to successfully differentiate the Company from other competitors,
thereby resulting in an adverse effect on the Company's sales, profit margin or
competitive position.
NEED TO SUCCESSFULLY CLOSE CERTAIN STORES - The Company is currently in the
process of closing eight unprofitable stores. Any failure to successfully
implement the store-closing program, including the satisfactory negotiation of
the termination of certain leases, could result in an adverse effect on the
Company's ability to return to profitability.
SHARES ELIGIBLE FOR FUTURE SALE - As of February 28, 2002, the Company had
outstanding stock options and warrants to purchase an aggregate of 7,483,292
shares of common stock at exercise prices ranging from $1.55 to $20.38, of which
options and warrants to purchase 5,690,795 shares are exercisable now. As of
February 28, 2002, the Company had 30,000 outstanding restricted shares. The
sale of restricted shares and the sale of shares covered by such options or
warrants by the holders thereof, pursuant to existing registration statements or
registration statements filed upon exercise of registration rights given them or
pursuant to exemptions from registration, could have an adverse effect on the
market price for the common stock.
BUSINESS STRATEGY
The Company's goal is to be the leading specialty retailer of higher-end
entertainment electronics products in each of its markets. The cornerstones of
its business strategy include:
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MERCHANDISING - The Company's merchandising strategy is to provide shoppers with
a differentiated selection of brand name entertainment electronics, with an
emphasis on more fully featured, digital and high-tech products. The Company
frequently hosts new product introductions. Merchandise is offered at
competitive prices and backed by a low price guarantee.
MARKETING - The Company aggressively uses newspaper, direct mail and broadcast
advertising to build name recognition, to position itself in its markets and to
increase store traffic. Stores are designed to be exciting and easy to shop and
are located in high-visibility and high-traffic commercial areas.
DIFFERENTIATED CUSTOMER SERVICE - The Company believes that superior service is
an important factor in overall customer satisfaction, and that the Company
differentiates itself from other consumer electronics retailers by providing
excellent service to its shoppers. The Company believes that friendly and
knowledgeable product specialists are critical to satisfying customers
interested in more fully featured, middle to high-end consumer electronics
products. The Company's objective is to generate long-term repeat business from
its customers.
EXPANSION - The Company currently does not plan to open new stores or relocate
any of its existing stores in fiscal 2003. However, when the Company does
re-institute an expansion program, successful expansion will depend on, among
other things, the Company's ability to continue to locate suitable store sites
and to hire and train skilled personnel. It will also depend on the Company's
ability to open new stores quickly, to achieve economies of scale in advertising
and distribution and to gain market share from established competitors.
MERCHANDISING
The Company offers its customers a broad range of high-quality consumer
electronics products supplied primarily by manufacturers of nationally known
brands. The following table shows the approximate percentage of sales for each
major product category for fiscal 2002, 2001, 2000 and 1999, respectively.
Historical percentages may not be indicative of percentages in future years.
FIVE MONTHS ENDED YEARS ENDED YEARS ENDED
February 28 & 29, February 28, September 30,
------------------------ ------------------ ------------------
2001 2000 2002 2001 2000 1999
Video 56% 53% 58% 56% 53% 45%
Audio 19% 19% 15% 16% 18% 16%
Computer and home office 14%
Mobile and wireless 10% 10% 11% 12% 11% 9%
Other:
Accessories, repair service and
extended service plans 15% 18% 16% 16% 18% 16%
--- --- --- --- --- ---
Total company 100% 100% 100% 100% 100% 100%
=== === === === === ===
For fiscal 2002, the Company's three leading suppliers for video products were,
in alphabetical order, JVC, Mitsubishi, and Sony; for audio products were, in
alphabetical order, Denon, Sony and Yamaha; and for mobile and wireless products
were, in alphabetical order, Alpine, Kenwood and Sony.
During fiscal 2002, the Company's ten largest suppliers accounted for
approximately 70% of the merchandise purchased by the Company. Two of the
Company's suppliers, Sony and Mitsubishi accounted for more than 20% of the
merchandise mix.
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With the increasing growth and adoption of digital technologies, consumer
entertainment electronics retailers are poised to capitalize on the introduction
and acceptance of digital and high-tech products and the resulting convergence
of entertainment devices. The Company is working closely with strategic vendors
to be among the first to introduce such products, which include hi-definition
televisions, satellite radio, DVD recorders, wireless Internet devices and
integrated hard disc recorders. Sales of digital products currently account for
more than 60 percent of the Company's total product sales.
MARKETING AND ADVERTISING
The Company aggressively uses newspaper, direct mail and broadcast advertising
to build name recognition, position the Company in its markets and generate
store traffic. The Company's advertisements promote the Company as an
entertainment electronics specialist and emphasize extensive selection,
competitive pricing and superior customer service from knowledgeable product
specialists.
To support its marketing strategy, the Company promotes its merchandise through
an advertising program that emphasizes the print media (consisting of newspaper
advertising, catalogs and other customer mailings) and, to a lesser extent,
radio and television. The Company's primary advertising vehicle is a weekly,
four-color newspaper insert that highlights specific products and their prices
and specific financing plans, many times in connection with specific promotions.
The Company targets the bulk of these advertisements to run on Sundays in order
to drive "impulse" weekend purchases. These ads emphasize the Company's more
fully featured and higher-end entertainment electronics products and also
include some special values to draw attention. In addition, the Company has an
active customer database, which is used for targeted mailings of catalogs and
other promotional advertisements and materials. The Company believes that its
direct mail activities leverage and complement its general media advertising
campaigns.
The Company plans and directs all advertising. The advertisements are produced
by outside vendors in order to control costs and give maximum flexibility. The
Company increased its advertising and marketing spending in fiscal 2002 by
approximately 9.3% over the prior 12-month period in order to promote an
integrated branding and marketing campaign. This campaign was designed to convey
the Company's commitment to providing early adopters, tech-savvy consumers and
middle and upper income customers with a distinctive selection of consumer
entertainment electronics
CUSTOMER SERVICE
The Company believes that knowledgeable and friendly product specialists are
critical to providing superior customer service. As of February 28, 2002, the
Company had 1,802 trained part-time and full-time product specialists.
All product specialists attend a full-time, in-house initial training program.
The Company's training program is continually updated and is designed to develop
good sales practices and techniques and to provide specialists with the
knowledge base to explain and demonstrate to shoppers the use and operation of
store merchandise. This training enables specialists to better understand
customer needs and to help them select products that meet those needs.
The Company's satisfaction guarantee policy provides that a product generally
may be returned within 30 days of purchase for a full refund or an exchange for
another product. When purchasing a product from the Company, customers may elect
to purchase an Extended Service Protection plan under which a third party
provides extended service coverage beyond the period covered by the
manufacturer's warranty.
All merchandise purchased from the Company and in need of repair may be returned
to any of the Company's stores for service. Such merchandise is sent to either a
Company-operated or an independent factory
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authorized repair facility and is returned to the store after repair. The
Company has a regional service facility in Southern California and also utilizes
the service network of a third party provider. The Company also operates car
audio and car cellular phone installation facilities at most store locations.
The majority of the Company's sales are made through credit cards. The Company
currently honors MasterCard, VISA, American Express and various other credit
cards, as well as the Company's "Preferred Customer Card" issued by an
independent third party. Because of the relatively high cost of many of the
consumer electronics products sold by the Company, its business could be
affected by consumer credit availability.
STORE OPERATIONS
The Company's stores range in size from approximately 9,000 to 38,000 square
feet. The Company's stores are predominantly located in high visibility, high
traffic commercial areas and are open seven days a week, including most
holidays.
The Company has developed store formats which emphasize mid-to-upscale products.
Stores are also designed to be exciting and easy places to shop. Each store has
displays designed to showcase a full spectrum of the Company's products to
customers entering the store. These displays allow customers to make extensive
side-by-side product comparisons. The Company's new stores have substantially
larger selling space, providing customers with an uncluttered presentation of
the latest technology and featuring multiple demonstration rooms dedicated to
home theater and mobile electronics products.
The Company operates: Original Concept, Generation 21, and EXPO store formats.
- - ORIGINAL CONCEPT - The original concept stores sell the full range of
the Company's merchandise, such as television, video and audio
components, mobile audio and video, cameras and camcorders, personal
electronics and related accessories. The original concept stores
typically range from 15,000 to 20,000 square feet. The Company
currently has 37 original concept stores.
- - GENERATION 21 - In fiscal 1995, the Company introduced its first
Generation 21 stores. These store formats are large and brighter than
the original concept stores and feature more interactive displays,
easily accessible merchandise and vibrant graphics. The Generation 21
stores typically range in size from 20,000 to 25,000 square feet. The
Company currently has 25 Generation 21 stores.
- - EXPO - In November 1996, the Company introduced its EXPO store design.
The EXPO store format provides greater merchandise flexibility and
connectivity between existing categories of product, featuring hands-on
demonstrations of product interactivity throughout the store and a
central area for customers to meet with product specialists to design
entertainment solutions for their homes. The EXPO stores typically
range from 25,000 to 38,000 square feet. The Company currently has 17
EXPO stores.
The Company jointly operates five locations with Tower Records which are
promoted as WOW! stores. These include two Generation 21 and 3 EXPO store
formats. These stores offer the exact same entertainment electronics assortments
as other Company locations as well as a full range of music, video, DVD and
books offered by Tower Records. The Company occupies approximately 30,000 square
feet in each of the WOW! Stores. Approved store closures for fiscal 2003 relate
to 8 Generation 21 stores.
Each store generally has one store manager, two sales managers and one
operations manager. In addition, some store locations have a floating store
manager. The store manager oversees the entire store's operations and managers
the sales managers: the sales managers supervise the product specialists.
Product specialists are specialized by product category. Product specialists
handle all aspects of the customer interface, including
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providing customers with the information necessary to determine the best product
for their specific need, tendering the invoice, processing the payment and
bringing the goods from the stockroom to the customer. Cashiers also are
available at many locations to assist product specialists with transactions.
Store operations are overseen by a senior management team, which holds frequent
meetings with the store managers and conduct regular store visits. Merchandising
and store operation policies for all stores are established by senior
management.
DISTRIBUTION
The Company operates a 460,000 square foot operations center in Hayward,
California. Deliveries are generally made to each store from three to seven days
a week depending on the season, location of stores, and store sales volumes.
Quantities are determined by the Company's automated replenishment system. The
Company believes that this frequency and method of delivery maximizes
availability of merchandise at the stores while minimizing store level and
overall inventories.
MANAGEMENT INFORMATION SYSTEMS
The Company's management information system is a distributed, online network of
computers that links all stores, delivery locations, service center, credit
providers, the distribution facility and the corporate offices into a fully
integrated system. Each store has its own system, which allows store management
to track sales and inventory at the product, customer or product specialist
level. The Company's point of sale system allows the capture of sales data and
customer information and allows the tracking of merchandising trends and
inventory levels on a daily basis. In-store product information kiosks have also
been introduced at all locations. These kiosks are used by both product
specialists and customers to access product information through a private web
portal.
COMPETITION
The business of the Company is highly competitive. The Company competes
primarily with other specialty stores, independent electronics and appliance
stores, department stores, mass merchandisers, discount stores and catalog
showrooms. To some extent, the Company also competes with drugstores,
supermarkets and others that make incidental sales of electronics products.
Competitors of the Company include Circuit City, Best Buy, Sears, Walmart,
Target, Radio Shack and many regional and local electronics chains and
independent stores.
The Company's strategy is to compete by being a value-added retailer, offering a
broad selection of top national brand name merchandise sold at competitive
prices by a friendly, knowledgeable and motivated team of specialists. Many of
the products the Company sells are not available at the large national chains.
SEASONALITY
The Company has changed its fiscal year to end on the last day of February. In
the new fiscal year, the fourth fiscal calendar quarter includes the December
holiday shopping period, which has historically contributed, and is expected to
continue to contribute, a substantial portion of the Company's operating income
for the entire fiscal year. As is the case with many other retailers, the
Company's sales are higher during the quarter which includes the December
holiday season than during other periods of the year, and have previously been
between 30% to 33% of the Company's annual sales.
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EMPLOYEES
At February 28, 2002, the Company employed approximately 3,343 persons, of whom
498 were salaried employees, 948 were hourly non-selling associates, 218 were
hourly distribution, service and home deliver employees and 1,679 were
salespeople on commission against a minimum guarantee. At February 28, 2002,
approximately 190 of its employees were employed in the Company's executive
offices; the balance was employed in its stores, distribution center, home
delivery center and service center. There are no collective bargaining
agreements covering any of the Company's employees. The Company has never
experienced a strike or work stoppage and management believes that relations
with its employees are excellent.
ITEM 2. PROPERTIES.
Upon completion of the approved closure of 8 stores, the Company will operate 71
stores: In California, 19 are located in the San Francisco Bay area, 27 in the
Greater Los Angeles/Orange County Metropolitan Area, 3 in Sacramento, 7 in San
Diego, and one each in Bakersfield, Fresno, Modesto and Stockton. In addition,
the Company operates six stores in Washington, three stores in Oregon and two
stores in Nevada. All of the stores are leased under leases that have expiration
dates in years ranging from 2002 to 2018.
The Company's distribution center is located in a 460,000 square foot facility
in Hayward, California under a lease, the term of which expires (assuming that
lease options are exercised) in 2011.
On March 2, 2001, the Company relocated its executive offices from approximately
35,000 square feet in Brisbane, California, to more economical space occupying
approximately 31,000 square feet in Alameda, California, at 1600 Harbor Bay
Parkway, Alameda, California.
ITEM 3. 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 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of fiscal 2002.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY.
The executive officers of the Company and their respective ages and positions
with the Company for the period ended February 28, 2002, are as follows:
NAME AGE POSITION
---- --- --------
Kenneth R. Weller 53 Chairman, Chief Executive Officer and President
Cathy A. Stauffer 42 Executive Vice President, Merchandising and Advertising
Peter G. Hanelt 57 Chief Operating Officer and Treasurer
George J. Hechtman 51 Vice President of Sales, Northern Division
David A. Carter 41 Vice President, Finance, Acting Chief Financial Officer and
Secretary
Jeff G. Linden 41 Vice President of Logistics and Service
Babak Ghaznavi 39 Vice President of Sales, Southern Division
John J. De Luca 56 Vice President and Chief Information Officer
All executive officers are elected by and serve at the discretion of the Board
of Directors.
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Kenneth R. Weller was appointed Chairman and Chief Executive Officer in December
2001. Mr. Weller began his career in 1982 as a sales associate at the Company's
Concord store, rising to the position of Vice President of Sales in 1986 after
holding various store management positions. In 1993, Mr. Weller left the Company
and joined Best Buy as Senior Vice President of sales. Mr. Weller returned to
the Company as President in August 2000.
Cathy A. Stauffer is Executive Vice President, Merchandising and Advertising.
During her more than 20 years with the Company, she has served as a corporate
officer in three different capacities, overseeing merchandising, marketing and
quality. Ms. Stauffer joined the Company in 1977 and held various positions in
advertising and marketing before being named Vice President of Marketing in 1988
where she served until 1993. Ms. Stauffer returned to the Company in 1998 as a
consultant and was named Vice President of Quality later that year. She was
appointed Vice President of Merchandising in 1999 and to her current position in
December 2001. Ms. Stauffer is also a member of the board of directors.
Peter G. Hanelt joined the Company in December 2001 as Chief Operating Officer
and was also made Treasurer in April 2002. Mr. Hanelt has more than 25 years of
experience in finance and executive management and has served as Chief Operating
Officer and Chief Financial Officer for numerous retail and consumer goods
companies, including Esprit De Corp., Natural Wonders, Post Tool, Inc. and
Manetti-Farrow, Inc. He began his career in 1975 as an accountant with Deloitte
& Touche.
George J. Hechtman was appointed Vice President of Sales, Northern Division in
February 2002. Mr. Hechtman joined the Company in April 2000 as Vice President
of Administration. Prior to joining the Company, Mr. Hechtman served as Senior
Vice President of Stores Operations for Office Max and Vice President of
Merchandising and Franchise Operations for BizMart. A 25-year veteran of retail
operations and consumer product merchandising, Mr. Hechtman as held various
positions in consumer electronic merchandising at Circuit City, Montgomery Ward
and Pacific Stereo.
David A. Carter became Vice President, Finance and Acting Chief Financial
Officer in January 2002 and Secretary in April 2002. Mr. Carter has over 14
years of financial experience at retailers including Mervyn's and Starbucks. Mr.
Carter joined the Company as Director of Financial Planning and Analysis. Prior
to joining the Company, Mr. Carter served as Chief Financial Officer for a
58-store coffee bar retail chain acquired by Starbucks.
Jeff G. Linden was named Vice President of Logistics and Service in August 2001.
Mr. Linden joined the Company in February 2000 as Director of Distribution and
Logistics and later expanded his responsibilities to include home delivery and
service. A 15-year retail veteran, Mr. Linden served as Director of Distribution
for Cost Plus World Markets from 1997 to 2000 and spent eight years with Macy's
in a variety of roles including distribution, merchandising and store
management. Mr. Linden has also managed distribution for a regional hard goods
retailer and held numerous positions in logistics and store management in the
restaurant industry.
Babak Ghaznavi was appointed Vice President of Sales, Southern Division in
January 2002 and is responsible for Southern California and Nevada. Mr. Ghaznavi
joined the Company in 1992 after holding various store management positions at
Circuit City. While at the Company, Mr. Ghaznavi has served as a store manager,
regional manager and, most recently, Director of Company Operations.
John J. De Luca joined the Company in August 2001 as Vice President and Chief
Information Officer. Prior to joining the Company, he served as President and
CEO of a Minneapolis-based consulting and management firm where he advised
various companies on the development and alignment of their information
technology architectures and business strategies. From 1994 to 1999, Mr. De Luca
held various executive positions with EDS' Bank Service Division where he was
responsible for business development, customer relationship management, product
management, product development and data center services. Previously he served
as
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Director of MIS and Chief Information Officer for a major California bank and as
General Manager for an IT services company that provided a variety of
outsourcing services for banks, healthcare organizations and telecommunications
companies.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.
The Company's common stock is traded on the NASDAQ National Market under the
symbol GGUY. The following table sets forth the quarterly high and low sales
prices for the Company's common stock as quoted for the period:
FISCAL PERIOD ENDED HIGH LOW
------------------- ---- ---
Quarter ended March 31, 2000 10-1/4 3-5/8
Quarter ended June 30, 2000 4-1/2 2-1/6
Quarter ended September 30, 2000 8 2-15/16
Quarter ended December 31, 2000 7-11/16 2-3/4
Two months ended February 28, 2001 6-1/16 2-15/16
Quarter ended May 31, 2001 5-8/16 4
Quarter ended August 30, 2001 4-12/16 3
Quarter ended November 30, 2001 3-14/16 2-5/16
Quarter ended February 28, 2002 4-12/16 1-1/16
As of April 30, 2002, there were 3,306 stockholders of record excluding
stockholders whose stock is held in nominee or street name by brokers.
-14-
ITEM 6. SELECTED FINANCIAL DATA
FIVE MONTHS ENDED YEAR ENDED YEAR ENDED
February 28 & 29, February 28, February 28,
-------------------------- ------------- --------------
(Amounts and shares in thousands, 2001 2000 2002 2001
Except per share and other data)
SUMMARY OF EARNINGS
Net sales $ 414,978 $ 391,558 $ 819,661 $ 873,903
Cost of sales (298,412) (274,356) (584,202) (628,003)
--------- --------- --------- ---------
Gross profit 116,566 117,202 235,459 245,900
Selling, general, and
administrative expenses (112,849) (114,677) (252,682) (247,060)
Store closure and
impairment expenses (18,135)
Gain from property
transactions 1,025
--------- --------- --------- ---------
Income (loss) from operations 3,717 3,550 (35,358) (1,160)
Interest income 90 36 41 85
Interest expense (2,488) (2,440) (4,700) (6,504)
--------- --------- --------- ---------
Income (loss) before
income taxes 1,319 1,146 (40,017) (7,579)
Income tax (expense) benefit (9,579)
--------- --------- --------- ---------
Net income (loss) loss $ 1,319 $ 1,146 $ (40,017) $ (17,158)
========= ========= ========= =========
Net income (loss) per share :
Basic $ 0.06 $ 0.06 $ (1.72) $ (0.79)
Diluted $ 0.06 $ 0.05 $ (1.72) $ (0.79)
Weighted average shares
outstanding:
Basic 22,937 19,920 23,321 21,809
Diluted 23,763 21,345 23,321 21,809
FINANCIAL POSITION
Working capital $ 80,935 $ 58,557 $ 27,925 $ 80,935
Total assets $ 226,927 $ 230,901 $ 186,416 $ 226,927
Revolving Credit Debt $ 50,161 $ 40,000 $ 23,231 $ 50,161
Shareholders' equity $ 92,780 $ 97,877 $ 54,015 $ 92,780
OTHER DATA
Number of stores at year end 79 79 79 79
Average sales per store
(In thousands) $ 5,253 $ 4,956 $ 10,375 $ 11,062
Sales per selling square foot $ 410 $ 387 $ 810 $ 863
Sales per gross square foot $ 256 $ 242 $ 506 $ 536
Comparable stores sales
increase (decrease) 6.0% 1.0% (6.2)% 2.9%
Annualized Inventory turns * 5.9 5.8 5.2 5.3
YEARS ENDED
September 30,
-----------------------------------------------------------
(Amounts and shares in thousands, 2000 1999 1998 1997
Except per share and other data)
SUMMARY OF EARNINGS
Net sales $ 850,512 $ 915,642 $ 928,382 $ 889,779
Cost of sales (603,975) (692,745) (700,070) (666,815)
--------- --------- --------- ---------
Gross profit 246,537 222,897 228,312 222,964
Selling, general, and
administrative expenses (258,637) (257,993) (241,007) (241,411)
Store closure and
impairment expenses (54) (3,008) 314
Gain from property
transactions 10,775
--------- --------- --------- ---------
Income (loss) from operations (1,325) (35,150) (15,703) (18,133)
Interest income 94 91 119 172
Interest expense (6,520) (4,828) (1,396) (930)
--------- --------- --------- ---------
Income (loss) before
income taxes (7,751) (39,887) (16,980) (18,891)
Income tax (expense) benefit (9,577) 5,167 7,237
--------- --------- --------- ---------
Net income (loss) loss $ (17,328) $ (39,887) $ (11,813) $ (11,654)
========= ========= ========= =========
Net income (loss) per share :
Basic $ (0. 84) $ (2.58) $ (0.84) $ (0.86)
Diluted $ (0. 84) $ (2.58) $ (0.84) $ (0.86)
Weighted average shares
outstanding:
Basic 20,560 15,484 14,012 13,626
Diluted 20,560 15,484 14,012 13,626
FINANCIAL POSITION
Working capital $ 59,621 $ 61,858 $ 30,018 $ 53,892
Total assets $ 224,889 $ 229,340 $ 250,948 $ 236,152
Revolving Credit Debt $ 34,358 $ 56,504
Shareholders' equity $ 90,519 $ 92,954 $ 109,655 $ 118,632
OTHER DATA
Number of stores at year end 79 79 77 76
Average sales per store
(In thousands) $ 10,894 $ 11,637 $ 12,219 $ 11,811
Sales per selling square foot $ 841 $ 931 $ 1,065 $ 1,057
Sales per gross square foot $ 526 $ 577 $ 665 $ 660
Comparable stores sales
increase (decrease) 5.0% (4.0)% 3.0% (8.0)%
Annualized Inventory turns * 5.3 5.4 5.5 5.5
* BASED ON AVERAGE OF BEGINNING AND ENDING INVENTORIES FOR EACH FISCAL YEAR.
-15-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Statements made below and elsewhere in this Annual Report on Form 10-K that are
not historical facts 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 this 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 Management's Discussion and
Analysis of the Financial Condition and Results of Operations.
CHANGE IN FISCAL YEAR
The Company 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 the Company's financial reporting with that of other consumer
electronics retailers and to allow the investment and vendor communities to draw
more realistic comparisons between the Company and its major competitors.
GENERAL
The following table sets forth for the periods 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:
FIVE MONTHS ENDED YEARS ENDED YEARS ENDED
February 28 & 29, February 28, September 30,
-------------------- ------------------ ---------------
2001 2000 2002 2001 2000 1999
Gross profit 28.1% 29.9% 28.7% 28.1% 29.0% 24.3%
Selling, general and administrative* 27.2% 29.3% 30.8% 28.3% 30.4% 28.2%
Store closure and impairment expenses 2.2%
Gain from property transactions 0.3% 1.3%
Income (loss) before income taxes 0.3% 0.3% (4.9)% (0.9)% (0.9)% (4.4)%
Net income (loss) 0.3% 0.3% (4.9)% (2.0)% (2.0)% (4.4)%
Number of stores open at end of period 79 79 79 79 79 79
* Including Depreciation and amortization
-16-
The following table sets forth sales by product category:
FIVE MONTHS ENDED YEARS ENDED YEARS ENDED
February 28 & 29, February 28, September 30,
------------------- --------------------- ---------------------
2001 2000 2002 2001 2000 1999
Video 56% 53% 58% 56% 53% 45%
Audio 19% 19% 15% 16% 18% 16%
Computer and home office 14%
Mobile and wireless 10% 10% 11% 12% 11% 9%
Other:
Accessories, repair service and
extended service plans 15% 18% 16% 16% 18% 16%
--- --- --- --- --- ---
Total company 100% 100% 100% 100% 100% 100%
=== === === === === ===
NET SALES
Net sales for fiscal 2002 were $819.7 million, a decrease of $54.2 million or
6.2% from the prior 12 months sales of $873.9 million. The sales decline was
attributed to several factors including a national recession, a weaker economy
in Northern California and the Pacific Northwest relative to the national
economy, the effects of the September 11 terrorist attack and the lack of
availability of certain products during key periods during the year. As a result
of these weaker sales, particularly in the Pacific Northwest, the Company
initiated a store-closing program (see "Store Closure Expenses") which
ultimately resulted in the identification of eight stores to be closed. All
product categories had negative comparable sales except for Television, which
benefited from the continuing strength in HD-upgradeable and HD-ready products
and the increasing shift to digital technology.
Net sales for fiscal 2001 were $415.0 million, an increase of $23.4 million or
6.0% from the five-month comparable prior net sales of $391.6 million. The
increase was primarily attributable to sustained sales growth from the
prosperous economic region of Northern California, where comparable store sales
increased by 12.0%. Growth in product sales during this period was led by the
video department where digital technologies have increased demand for
television, photo, digital satellite services and digital versatile disc ("DVD")
players. In addition, the mobile and wireless category enjoyed steady sales
increases, based upon strong sales from mobile audio and cellular wireless. The
introduction of new accessory and furniture products provided steady growth in
all categories, while mature technologies have become low price, ubiquitous
commodities declined with Video/VHS players down 16% and Audio/Stereo systems
down 14%. Sales for Extended Service Protection plans ("ESP") were flat and
declined as a percentage of product sales from the year-ago period of 8.0% to
the current 7.4%.
Net sales for fiscal 2000 decreased 7.1% to $850.5 million from $915.6 million
for fiscal 1999. The decrease resulted primarily from the discontinuation of
computer and home office products and de-emphasis of loss leaders in the fourth
quarter of 1999 and, as discussed in Note 1 of the Consolidated Financial
Statements, the reduction of the previously issued amount for fiscal 2000 net
sales by $10.0 million to give effect to a change in accounting for sales
incentives. Excluding sales from these discontinued product lines and the change
in accounting for sales incentives, sales of continuing product categories
increased by 5% or $40.2 million. The largest sales increases occurred in
product lines where consumers were responding to advances in product technology,
such as digital television, DVD players and digital cameras. Sales declined for
VCRs and other mature technologies.
-17-
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
Gross profit margin for fiscal 2002 was 28.7% of sales compared to 28.1% for the
prior 12-month period. The improvement was primarily due to the company's focus
on more fully featured, higher-end products that offer a higher gross profit
margins, lower promotional expenses, reduced distribution costs, and favorable
shrinkage results.
Gross profit margin for fiscal 2001 decreased to 28.1% of sales compared with
29.9% for the five-month comparable prior period. The decline was primarily due
to a more competitive promotional environment, which included sales rebates, and
credit card financing discounts during the holiday selling season; stronger
sales of video products, which carry slightly lower margins than audio products;
and the Company's successful efforts to increase comparable sales. There was
also a decline in ESP sales commissions as a percentage of product sales and an
increase in distribution costs.
In fiscal 2000, gross profit margin increased to 29.0% of sales compared with
24.3% in fiscal 1999. The lower gross profit margin trend for fiscal 1999
reflects sales of the Computer & 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 & 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 also increased its profit margin in fiscal 2000 by increasing sales of
ESP contracts and by initiating cost control measures surrounding inventory.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For fiscal 2002, selling, general, and administrative expenses including
depreciation and amortization, as a percentage of sales was 30.8% compared to
28.3% for prior 12-month period. This increase in SG&A is primarily the result
of a 6.2% sales decline as well as higher professional fees pertaining to
strategic marketing, finance, and merchandising initiatives as well as a one
time charge pertaining to the conversion of a new extended warranty provider.
For fiscal 2001, selling, general and administrative expenses including
depreciation and amortization, as a percentage of sales, were 27.2% compared to
the five month comparable prior period of 29.3%, and were 30.4% in fiscal 2000
compared to 28.2% in fiscal 1999. Total spending for fiscal 2001 decreased by
$1.8 million from the 5-month comparable prior period. The decrease is primarily
attributed to: (1) restructuring of sales incentive programs which lowered
commission expense, and (2) reductions in overhead costs for compensation,
professional fees and rent on the corporate office.
The total spending for selling, general and administrative expenses for fiscal
2000 increased by $0.6 million or less than 1% from fiscal 1999; therefore, the
increase as a percent of sales in fiscal 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.
-18-
STORE CLOSURE AND IMPAIRMENT EXPENSES
During January 2002, the Board of Directors approved a plan to close eight
unprofitable stores, and the Company recorded a store closure and impairment
expense of $15.1 million associated with this plan. These costs include direct
costs to terminate lease agreements, or the future obligated lease payments, net
of estimated sublease income, and the difference between the carrying values and
estimated recoverable values of long-lived assets. The store closure and
impairment expense also includes a $3.3 million write-off of the book value of
fixed assets related to the eight stores identified for closure.
As of May 17, 2002, the Company had closed four stores, with an additional three
stores expected to be closed by the end of June 2002, and with the remaining
store expected to be closed during fiscal 2003. With respect to these stores,
the Company has entered into lease termination agreements for five of the stores
and is currently negotiating either the termination of the lease or the
sub-lease of each of the remaining stores.
No store closure expenses were recorded in fiscal 2001 and 2000. Store closure
expenses were $54,000 in fiscal 1999. During fiscal 1998, the Company entered
into new lease agreements to relocate five stores and convert them to its new
EXPO format. The Company opened one of these stores in each quarter from the
first quarter of fiscal 1999 through the first quarter of fiscal 2000.
IMPAIRMENT OF ASSETS
During fiscal 2002, the Company also identified an additional 10 stores with a
history of operating and cash flow losses combined with projected continuing
losses in the foreseeable future. The Company's projections indicated that the
carrying values of the long-lived assets associated with these stores would not
be recoverable through future cash flows. Accordingly, an impairment charge of
$3.0 million was recorded to write such assets down to their estimated fair
values based on discounted future projected cash flows. No impairment of assets
charge was recorded for fiscal 2001, 2000 and 1999.
GAIN FROM PROPERTY TRANSACTIONS
In December 1999, the Company sold a parcel of land with a book value of $2.2
million, received cash proceeds of $3.2 million and recorded a gain of
approximately $1.0 million. In August 2000, the Company entered into a lease
amendment and termination agreement for its corporate office space, with no book
value in exchange for $9.8 million cash from its landlord and relocated to more
cost-effective space leased from a new landlord in March 2001. Costs associated
with the relocation were expensed as incurred.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company recorded a provision for doubtful accounts of $4.9 million, and
deductions of $0.3 million, during fiscal 2002 that increased its allowance from
$1.2 million at February 28, 2001 to $5.8 million at February 28, 2002. The
allowance includes amounts for uncollectable vendor rebate and promotional
allowance receivables, service repair receivables and for other receivables. The
increase was partially attributable to an increase in service repair receivables
resulting from the transition to a new third party warrantor for extended
service contracts. The Company also increased its provision for vendor rebates
and promotional allowances in the fourth quarter based on an evaluation of
historical collection experience and an increased aging of vendor receivables.
INTEREST EXPENSE
For fiscal 2002, net interest expense was $4.7 million compared to $6.5 million
for the prior 12-month period. Interest expense for fiscal 2002 decreased
primarily due to lower interest rates and, secondarily, a lower revolving loan
base due to lower inventory level as a result of better supply chain management.
-19-
For fiscal 2001, net interest expense was $2.5 million compared to $2.4 million
for the five-month comparable prior period, and for fiscal 2000 and 1999,
interest expense was $6.5 million and $4.8 million, respectively. The Company
uses a revolving loan to finance its inventory. Interest expense increased in
each of those fiscal years as the average loan balance increased. The weighted
average interest rates for fiscal 2002, 2001, 2000 and 1999 were 6.8%, 9.8%,
9.2% and 8.0%, respectively. The Company entered into a borrowing agreement in
September 1999, which increased its borrowing capacity to $100 million.
NET INCOME (LOSS)
Net loss for fiscal 2002 was $40.0 million compared to a $17.2 million loss for
the prior 12-month period. As discussed above, the increase in the net loss is
primarily attributable to the effect of store closure and impairment expenses of
$18.1 million and a 6.2% reduction in comparable store sales.
As a result of the factors discussed above, net income for fiscal 2001 was $1.3
million compared to $1.1 million for the five-month comparable prior period. The
five-month comparable prior period included a gain of $1.0 million for the sale
of land. Income before income taxes as a percentage of sales for fiscal 2001 and
for the five-month comparable prior period were both 0.3%.
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 loss before tax of $39.9 million for
fiscal 1999. The loss before income taxes as a percentage of sales for fiscal
years 2000 and 1999 was 0.9% and 4.4%, respectively.
There was no income tax expense for fiscal 2002, 2001 and 1999. Income tax
expense of $9.6 million in fiscal 2000 is comprised of $7.5 million in non-cash
charges to adjust fiscal 1999 deferred tax asset valuation allowance associated
with the carry-forward of income tax benefits generated from fiscal 1999 and
fiscal 1998 losses, 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 carry-forwards of $82.6 million and $42.6 million,
respectively. The Company's loss carry-forwards expire on various dates from
2003 to 2022. The effective income tax rates for fiscal 2002, 2001, 2002 and
1999 were all 0%. The zero tax rate for fiscal 2001 reflects the utilization of
operating loss carryforwards and fiscal 1999 is due to the Company providing a
valuation allowance on its deferred income tax benefit generated from fiscal
1999 and fiscal 1998 losses.
As a result of the factors discussed above, the net income for fiscal 2001 was
$1.3 million and net loss for fiscal 2002, 2000 and 1999 was $40.0 million,
$17.3 million and $39.9 million, respectively. Net income as a percentage of
sales for fiscal 2001 was 0.3%, and net loss as a percentage of sales for fiscal
2002, 2000 and 1999 was 4.9%, 2.0%, and 4.4%, respectively.
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 influenced by the levels of vendor
credit terms. The Company also uses lease financing to fund its capital
requirements.
On May 22, 2002, the Company and its lenders entered into an amendment to the
Company's $100 million credit facility that extends the expiration date of the
facility from September 30, 2002 to May 31, 2006. Available borrowings under the
agreement are limited to certain levels of eligible accounts receivable and
inventories, but may be increased from October 1 to December 20 of each year to
meet seasonal needs. The
-20-
Company is also required to comply with a minimum earnings before interest,
taxation, depreciation and amortization covenant, a capital lease covenant and
reporting requirements, as defined in the agreement. The borrowings are secured
by substantially all of the Company's assets.
At February 28, 2002 and 2001, there were $23.2 million and $50.1 million,
respectively and at September 30, 2000, there was $34.4 million, outstanding
under the line. With the amended credit facility, 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 the credit facility during fiscal 2002,
2001, 2000 and 1999 were $68.4 million, $62.7 million, $64.7 million and $64.3
million, respectively. The weighted average borrowings during the same periods
were $39.5 million, $40.3 million, $48.0 million and $44.8 million,
respectively. Weighted average interest rates for fiscal 2002, 2001, 2000 and
1999 were 6.8%, 9.8%, and 9.2% and 8.0%, respectively.
At the end of fiscal 2002, 2001, 2000 and 1999, the Company had working capital
of $27.9 million, $80.9 million, $59.6 million and $61.9 million, respectively.
The decline in working capital reflects the Company's accrued liabilities for
store closures and improvements in supply chain management, which decreased
inventories while increasing payables.
During fiscal 2002, net cash provided by operating activities was $31.6 million
compared to net cash used by operating activities of $12.6 million for the
12-month prior period. The increase in cash from operating activities compared
to the 12-month prior period is primarily the result of a decrease in inventory
and an increase in accounts payable.
During fiscal 2001, net cash used by operating activities was $15.8 million
compared to net cash provided by operating activities of $8.1 million for the
five-month comparable prior period. The decrease in cash from operating
activities compared to the five month comparable prior period is primarily the
result of a decline in accounts payable as the Company accelerated vendor
payments to take advantage of improved vendor terms, and to a lesser extent, the
Company accelerated payment to major vendors in preparation of its corporate
headquarters move during March 2001, and to avoid disruption in deliveries
during the move.
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. The
fiscal 2000 increase in net cash provided by operating activities of $11.2
million 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 of $58.3 million 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.
During fiscal 2002, cash used in investing activities representing capital
expenditures was $6.9 million compared to $4.3 million for the 12-month prior
period. Cash used in investing activities representing capital expenditures was
$2.6 million, $1.8 million and $21.1 million in fiscal 2001, 2000 and 1999,
respectively. During fiscal 1999, the Company opened two new EXPO stores. The
Company does not plan to open or extensively remodel any stores in fiscal 2003.
During fiscal 2002, cash used in financing activities was $25.9 million compared
to cash provided by financing activities of $22.0 million for the prior 12-month
period. The decrease in cash from financing activities as compared to the prior
12-month period is primarily the result of repayments made to reduce long-term
debt and a decrease in cash raised through a private placement.
-21-
During fiscal 2001, cash provided from financing activities was $16.6 million
compared to cash used by investing activities of $12.8 million for the
five-month comparable prior period. Cash used in financing activities in fiscal
2000 and 1999 was $8.0 million and $78.9 million, respectively. In fiscal 2000,
the Company raised $14.2 million in cash through private placements, employee
and non-employee stock issuance 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 issuance and
increased cash by $56.5 million from its revolving credit debt.
The Company continues to implement its strategy for returning to profitability
through a focused set of management initiatives executed in the fourth quarter
of fiscal 2002 and the first quarter of fiscal 2003. Completed initiatives
include the closure of unprofitable stores, the renegotiation of store leases at
select locations, the retirement of expensive operating leases, the completion
of an equity private placement, the negotiation of an extension of the
expiration date of its $100 million credit facility to May 31, 2003, new
operating schedules for distribution services, improved supply chain management
and ongoing efforts to reduce costs.
In the fourth quarter of 1999, the Company eliminated the Computer & 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 its marketing and
advertising budget in fiscal 2000 by 20% 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. The return to
profitability is contingent on many factors, including, but 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.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following table provides summary information concerning the Company's future
contractual obligations and commitments as of February 28, 2002.
Payments Due by Fiscal Year
-----------------------------------------------------------------------------------
(Dollars in thousands) 2003 2004 2005 2006 2007 Thereafter Total
-----------------------------------------------------------------------------------
Operating Leases $41,665 $37,428 $35,743 $33,151 $28,687 $115,680 $292,354
Revolving Credit Debt 23,231 23,231
-----------------------------------------------------------------------------------
Total Contractual Obligations $41,665 $37,428 $35,743 $33,151 $51,918 $115,680 $315,585
OPERATING LEASES - The Company's stores, distribution center, administrative
facilities and certain equipment are leased under operating leases. The leases
have remaining initial terms inclusive of renewal options of one to 15 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.
REVOLVING CREDIT DEBT - The Company's revolving line of credit, which provides
for up to $100 million of borrowings, expires on May 31, 2006. Any outstanding
borrowings are contractually due on that date.
-22-
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's accounting policies are more fully described in Note 1 of Notes to
Consolidated Financial Statements. As disclosed in Note 1, the preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions about future events that affect the amounts reported in the
financial statements and accompanying notes. Future events and their effects
cannot be determined with absolute certainty. The estimates and assumptions are
evaluated on an on-going basis and are based on historical experience and other
factors that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates, and such differences may be material to
the financial statements.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of the consolidated
financial statements.
STORE CLOSURE ACCRUAL - In estimating the costs associated with closing a store
the Company must make assumptions regarding, among other things, lease
termination costs, the amount of time before the location can be subleased (if
at all) and the amount of sublease income. To the extent that any of the
assumptions prove incorrect, the Company will either increase or decrease the
store closure accrual.
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE - The Company's accounts receivable
consist primarily of amounts receivable from vendors for rebates and promotional
allowances, from warrantors for repairs of merchandise, from banks for credit
card sales and for other receivables. Amounts due from banks have historically
been collectable. Collection of amounts receivable from warrantors and vendor
programs generally depend on detailed documentation that may be disputed. The
Company has established an allowance for doubtful accounts based on historical
collection experience or other information indicating that amounts might not be
collectable.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews long-lived tangible and
intangible assets for impairment whenever events or changes in circumstances
indicate that their carrying values may not be recoverable. Using its best
estimates based on reasonable and supportable assumptions and projections, the
Company records an impairment loss to write the assets down to their estimated
fair value if the carrying values of such assets exceed their related expected
future cash flows.
NEW ACCOUNTING PRONOUNCEMENTS
In fiscal 2002, the Company adopted SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, ("SFAS 133") which established accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS 133
requires that an entity recognize all derivative instruments as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Company has no derivative instruments, and therefore adoption
of SFAS 133 had no impact on the Company's financial statements.
The Company adopted Emerging Issues Task Force No. 00-14, Accounting for Certain
Sales Incentives ("EITF 00-14"), which 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. In
accordance with EITF 00-14, the Company now records sales incentives as a
reduction of net sales. Sales incentives of $10 million for fiscal 2000 have
been reclassified from cost of sales to conform with this change. There were no
sales incentive costs in fiscal 1999.
In June 2001, SFAS 141, Business Combinations, and SFAS 142, Goodwill and Other
Intangible Assets, were issued. SFAS 141 requires that all business combinations
be accounted for using the purchase method of accounting and addresses the
initial recognition and measurement of goodwill and other intangible assets
-23-
acquired in a business combination. The adoption of SFAS 141 had no impact on
the Company's financial statements. SFAS 142, provides that intangible assets
with finite useful lives be amortized and that goodwill and intangible assets
with indefinite lives not be amortized, but rather be tested at least annually
for impairment. The Company will adopt SFAS 142 in the first quarter of fiscal
2003. The adoption of SFAS 142 is not expected to have a material impact on the
Company's financial position or results of operations.
In August 2001, SFAS 143, Accounting for Asset Retirement Obligations, and SFAS
144, Accounting for the Impairment or Disposal of Long-Lived Assets, were
issued. SFAS 143 addresses the accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs and is effective for the Company beginning in fiscal
2004. SFAS 144 establishes accounting and reporting standards for the impairment
of long-lived assets to be disposed of, and is effective for the Company
beginning fiscal 2003. The Company does not expect the adoption of SFAS 143 or
SFAS 144 to have a material impact on the Company's financial position or
results of operations.
ITEM 7A. 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 increased by a 10%
change from the bank's reference rate as of February 28, 2002, the Company's
interest expense and payments would increase by approximately $288,000.
Substantially all the Company's merchandise inventory purchases are denominated
in U.S. dollars. Accordingly, the Company has no significant foreign currency
exchange rate risks.
-24-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Good Guys, Inc.
Alameda, California
We have audited the accompanying consolidated balance sheets of Good Guys, Inc.
and subsidiary as of February 28, 2002, February 28, 2001 and September 30,
2000, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the fiscal year ended February 28, 2002, the
five-month period ended February 28, 2001 and each of the two fiscal years in
the period ended September 30, 2000. Our audits also included the financial
statement schedule listed in Item 14(a)(2). These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule 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 Good Guys, Inc. and subsidiary at
February 28, 2002, February 28, 2001 and September 30, 2000, and the results of
their operations and their cash flows for the fiscal year ended February 28,
2002, the five-month period ended February 28, 2001 and each of the two years in
the period ended September 30, 2000 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
San Francisco, California
May 17, 2002 (May 22, 2002 as to
the second paragraph of Note 4)
-25-
CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, SEPTEMBER 30,
---------------------------- -------------
(Dollars in thousands, except share data) 2002 2001 2000
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 4,108 $ 5,329 $ 7,208
Accounts receivable (less allowance for doubtful
accounts of $5,803, $1,206 and $1,483, respectively) 24,145 28,853 19,879
Merchandise inventories 102,109 120,928 121,458
Prepaid expenses 6,733 9,811 11,088
--------- --------- ---------
Total current assets 137,095 164,921 159,633
--------- --------- ---------
PROPERTY AND EQUIPMENT:
Leasehold improvements 64,436 71,746 73,629
Furniture, fixtures and equipment 72,245 76,596 76,058
Construction in progress 3,435 3,187 1,269
--------- --------- ---------
Total property and equipment at cost 140,116 151,529 150,956
Less accumulated depreciation and amortization 91,357 89,982 86,148
--------- --------- ---------
Property and equipment, net 48,759 61,547 64,808
--------- --------- ---------
OTHER ASSETS 562 459 448
--------- --------- ---------
TOTAL ASSETS $ 186,416 $ 226,927 $ 224,889
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 53,863 $ 43,430 $ 62,168
Accrued expenses and other liabilities:
Payroll 10,930 8,352 9,542
Sales taxes 4,609 4,465 5,751
Store closure 12,904 1,330 2,001
Extended service plan 5,789 557
Other 21,075 25,852 20,550
--------- --------- ---------
Total current liabilities 109,170 83,986 100,012
--------- --------- ---------
REVOLVING CREDIT DEBT 23,231 50,161 34,358
--------- --------- ---------
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 23,449,608
23,077,802 and 22,763,194 shares respectively 23 23 23
Additional paid-in capital 105,416 104,164 103,222
Accumulated deficit (51,424) (11,407) (12,726)
--------- --------- ---------
Total shareholders' equity 54,015 92,780 90,519
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 186,416 $ 226,927 $ 224,889
========= ========= =========
See notes to consolidated financial statements.
-26-
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR FIVE MONTHS
Ended Ended Years Ended
February 28, February 28, September 30,
----------- ----------- ----------------------------
2002 2001 2000 1999
Net sales $ 819,661 $ 414,978 $ 850,512 $ 915,642
Cost of sales (584,202) (298,412) (603,975) (692,745)
--------- --------- --------- ---------
Gross profit 235,459 116,566 246,537 222,897
Selling, general and administrative (239,524) (106,972) (243,872) (243,870)
Depreciation and amortization (13,158) (5,877) (14,765) (14,123)
Store closure and impairment of asset expenses (18,135) (54)
Gain from property transactions 10,775
--------- --------- --------- ---------
Income (loss) from operations (35,358) 3,717 (1,325) (35,150)
Interest income 41 90 94 91
Interest expense (4,700) (2,488) (6,520) (4,828)
--------- --------- --------- ---------
Income (loss) before income taxes (40,017) 1,319 (7,751) (39,887)
Income tax expense (9,577)
--------- --------- --------- ---------
Net income (loss) $ (40,017) $ 1,319 $ (17,328) $ (39,887)
========= ========= ========= =========
Net income (loss) per share
Basic $ (1.72) $ 0.06 $ (0.84) $ (2.58)
========= ========= ========= =========
Diluted $ (1.72) $ 0.06 $ (0.84) $ (2.58)
========= ========= ========= =========
Weighted average shares
Basic 23,321 22,937 20,560 15,484
========= ========= ========= =========
Diluted 23,321 23,763 20,560 15,484
========= ========= ========= =========
See notes to consolidated financial statements.
-27-
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock ADDITIONAL ACCUMULATED
----------------------------- Paid-In Earnings
(Dollars in thousands, except share data) Shares Amount Capital (Deficit) Total
Balance at September 30, 1999 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
Issuance of common stock under
Employee Stock Purchase Plan 253,629 715 715
Exercise of stock options 7,250 37 37
Issuance of restricted stock 53,729 190 190
Net income 1,319 1,319
---------- -------- -------- -------- -------
BALANCE AT FEBRUARY 28, 2001 23,077,802 23 104,164 (11,407) 92,780
Issuance of common stock under
Employee Stock Purchase Plan 365,880 1,043 1,043
Exercise of stock options 667 2 2
Issuance of restricted stock 5,259 207 207
Net loss (40,017) (40,017)
---------- -------- -------- -------- -------
BALANCE AT FEBRUARY 28, 2002 23,449,608 $ 23 $105,416 $(51,424) $54,015
=========== ======== ======== ======== =======
See notes to consolidated financial statements.
-28-
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIVE MONTHS
Year Ended Ended Years Ended
February 28, February 28, September 30,
------------ ------------- -------------------------
(Dollars in thousands) 2002 2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(40,017) $ 1,319 $(17,328) $(39,887)
Adjustments to reconcile net income (loss) to
net cash provided by (used in)
operating activities:
Depreciation and amortization 13,158 5,877 14,765 14,123
Gain on sale of land (1,025)
Provision for store closure and asset impairment 18,135 (671) (1,284) 54
Allowance for doubtful accounts 4,597 (277) 20 314
Deferred taxes 7,430
Issuance of common stock in
exchange for services rendered 500
Restricted stock issuance 207 190 729 250
Changes in assets and liabilities:
Accounts receivable 111 (8,697) 2,300 4,141
Merchandise inventories 18,819 530 (11,182) 24,796
Prepaid expenses and other assets 2,975 1,266 (4,610) (490)
Accounts payable 10,433 (18,738) 22,419 (56,769)
Accrued expenses and other liabilities 3,187 3,383 (1,006) (5,381)
-------- -------- -------- --------
Net cash provided by (used in) operating activities 31,605 (15,818) 11,228 (58,349)
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (6,942) (2,616) (1,802) (21,086)
Proceeds from sale of fixed assets 3,208
-------- -------- -------- --------
Net cash provided by (used in) investing activities (6,942) (2,616) 1,406 (21,086)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 15,803 56,504
Repayment of long-term debt (26,930) (22,146)
Issuance of common stock 1,046 752 14,164 22,436
-------- -------- -------- --------
Net cash provided by (used in) financing activities (25,884) 16,555 (7,982) 78,940
-------- -------- -------- --------
Increase (decrease) in cash and equivalents (1,221) (1,879) 4,652 (495)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 5,329 7,208 2,556 3,051
-------- -------- -------- --------
CASH AND EQUIVALENTS, END OF PERIOD $ 4,108 $ 5,329 $ 7,208 $ 2,556
======== ======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION -
Interest paid 5,461 2,279 5,782 5,100
Taxes paid 252
See notes to consolidated financial statements.
-29-
GOOD GUYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - Good Guys, Inc., through its wholly owned subsidiary (the
"Company"), is a retailer of consumer electronic products in California,
Nevada, Oregon and Washington. The Company's operations include 79 retail
stores (8 of which will be closed during fiscal 2003, See Note 2) engaging
only in activities related to the sale of consumer electronics products
throughout the Western United States and comprise only one operating
segment.
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of Good Guys, Inc. and its wholly owned subsidiary. All
significant intercompany transactions have been eliminated in
consolidation.
FISCAL YEAR - The Company changed its fiscal year-end from September 30 to
the last day of February for fiscal years ending after September 30, 2000.
Fiscal 2002 refers to the year ended February 28, 2002, fiscal 2001 refers
to the five-month period ended February 28, 2001, fiscal 2000 refers to
the year ended September 30, 2000 and fiscal 1999 refers to the year ended
September 30, 1999.
USE OF ESTIMATES - The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America, 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 consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates
REVENUE RECOGNITION - The Company recognizes revenue for retail stores at
the point of sale in the store and for home delivery sales when the
merchandise is delivered to the customer. Sales are net of estimated
returns, which are estimated based upon historical trends and customer
habits. The effect of returns is not significant to the Company's
operating results.
EXTENDED SERVICE PLAN CONTRACTS - The Company sells extended service
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 neither 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.
MERCHANDISING AND ADVERTISING costs are expensed as incurred.
Merchandising and advertising costs for fiscal 2002, 2001, 2000 and 1999
were $58.0 million, $28.0 million, $54.1 million and $46.0 million,
respectively.
STORE OPENING COSTS consist primarily of labor, advertising and store
supplies, and are expensed as incurred.
STOCK BASED COMPENSATION - The Company accounts for its employee
stock-based compensation using the intrinsic value method in accordance
with Accounting Principle Board Opinion 25, "Accounting for Stock Issued
to Employees" ("APB 25") and its related interpretations and with the
disclosure requirements of Statement of Financial Accounting Standard
("SFAS") 123, Accounting for Stock Based
-30-
Compensation, ("SFAS 123"). Because the Company has granted its stock
options to its employees at fair market value at the date of grant, under
APB 25, no compensation expense is required to be recognized in the
consolidated financial statements.
INCOME TAXES - The Company accounts for income taxes in accordance with
SFAS 109, "Accounting for Income Taxes", which requires the use of the
asset and liability method of accounting for deferred income taxes.
Deferred income taxes are recorded based on the differences between the
financial statements and tax basis of assets and liabilities. A valuation
allowance is recorded when it is deemed more likely than not that a
deferred tax asset will not be realized.
NET INCOME (LOSS) PER SHARE has been computed in accordance with SFAS 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 (loss) by the weighted average
number 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.
COMPREHENSIVE INCOME - Comprehensive income equates to net income (loss)
for all periods presented.
CASH EQUIVALENTS represent short-term, highly liquid investments with
original maturities of 90 days or less. Interest earned from these
investments is included in interest income.
MERCHANDISE INVENTORIES are stated at the lower of cost (first-in,
first-out method) or market. In fiscal 2002, the Company's 10 largest
suppliers accounted for approximately 70% of the merchandise purchased by
the Company. Two of the Company's suppliers accounted for more than 20% of
its merchandise purchases.
ACCOUNTS RECEIVABLE consists primarily of amounts receivable from vendors
for rebates and promotional allowances, from warrantors for repairs of
merchandise, from banks for credit card sales and for other receivables.
The Company has established an allowance for doubtful accounts based on
historical collection experience or other information indicating that
amounts might not be collectable.
PROPERTY AND EQUIPMENT is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives, which range from
three to five years for furniture, fixtures and equipment. Leasehold
Improvements are amortized on a straight-line basis over the lesser of the
lease term or estimated useful life.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews long-lived tangible
and intangible assets for impairment whenever events or changes in
circumstances indicate that their carrying values may not be recoverable.
Using its best estimates based on reasonable and supportable assumptions
and projections, the Company records an impairment loss to write the
assets down to their estimated fair value if the carrying values of such
assets exceed their related expected future cash flows.
STORE CLOSURE ACCRUAL - The Company accrues the estimated costs associated
with closing a store during the period in which the store is identified
and approved by management under a plan of termination, which includes the
method of disposition and the expected date of completion. These costs
include direct costs to terminate a lease or future lease obligations, net
of expected sublease income, and the difference between the carrying
values and estimated recoverable values of long-lived assets. Severance
and other employee-related costs are recorded in the period in which the
closure and related severance packages are communicated to the affected
employees. Losses on the liquidation of inventories are recorded in cost
of sales when the inventories are sold or otherwise disposed of.
-31-
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying value of cash and cash
equivalents, accounts receivable, accounts payable, and revolving credit
debt approximate their estimated fair values.
RECLASSIFICATION - Certain prior period balances have been reclassified to
conform to current year presentation.
NEW ACCOUNTING PRONOUNCEMENTS - In fiscal 2002, the Company adopted SFAS
133, Accounting for Derivative Instruments and Hedging Activities, ("SFAS
133") which established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS 133 requires that an entity
recognize all derivative instruments as either assets or liabilities in
the statement of financial position and measure those instruments at fair
value. The Company has no derivative instruments, and therefore adoption
of SFAS 133 had no impact on the Company's financial statements.
The Company adopted Emerging Issues Task Force No. 00-14, Accounting for
Certain Sales Incentives ("EITF 00-14"), which 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. In accordance with EITF 00-14, the Company now
records sales incentives as a reduction of net sales. Sales incentives of
$10 million for fiscal 2000 have been reclassified from cost of sales to
net sales to conform with this change. There were no sales incentive costs
in fiscal 1999.
In June 2001, SFAS 141, Business Combinations, and SFAS 142, Goodwill and
Other Intangible Assets, were issued. SFAS 141 requires that all business
combinations be accounted for using the purchase method of accounting and
addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination. The adoption of SFAS
141 had no impact on the Company's financial statements. SFAS 142,
provides that intangible assets with finite useful lives be amortized and
that goodwill and intangible assets with indefinite lives not be
amortized, but rather be tested at least annually for impairment. The
Company will adopt SFAS 142 in the first quarter of fiscal 2003. The
adoption of SFAS 142 is not expected to have a material impact on the
Company's financial position or results of operations.
In August 2001, SFAS 143, Accounting for Asset Retirement Obligations, and
SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
were issued. SFAS 143 addresses the accounting and reporting for
obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs and is effective for the Company
beginning in fiscal 2004. SFAS 144 establishes accounting and reporting
standards for the impairment of long-lived assets to be disposed of, and
is effective for the Company beginning fiscal 2003. The Company does not
expect the adoption of SFAS 143 or SFAS 144 to have a material impact on
the Company's financial position or results of operations.
2. PROVISION FOR STORE CLOSURE AND ASSET IMPAIRMENT
During January 2002, the Board of Directors approved a plan to close eight
unprofitable stores, and the Company recorded a store closure and
impairment expense of $15.1 million associated with this plan. These costs
include direct costs to terminate lease agreements, or the future
obligated lease payments, net of estimated sublease income, and the
difference between the carrying values and estimated
-32-
recoverable values of long-lived assets. The store closure and impairment
expense also includes a $3.3 million write-off of the book value of fixed
assets related to the eight stores identified for closure.
As of May 17, 2002, the Company had closed four stores, with an additional
three stores expected to be closed by the end of June 2002, and with the
remaining store expected to be closed during fiscal 2003. With respect to
these stores, the Company has entered into lease termination agreements
for five of the stores and is currently negotiating either the termination
of the lease or the sub-lease of each of the remaining stores.
During fiscal 1998, the Company recorded store closure accruals relating
to the relocation of five stores. The following schedule summarizes
information related to store closure accruals:
STORE
Beginning Closure Cash Other Ending
Fiscal Period Ending Balance Provision Payments Adjustments Balance
------------- -------------- ------------- ------------- ------------
(Dollars in Thousands)
2002 $ 1,330 $ 12,430 $ (856) $ 12,904
2001 2,001 (413) ($258) 1,330
2000 3,285 (1,284) 2,001
1999 $ 4,657 $ 54 $ (1,746) $320 $ 3,285
During fiscal 2002, the Company also identified an additional 10 stores
with a history of operating and cash flow losses combined with projected
continuing losses in the foreseeable future. The Company's projections
indicated that the carrying values of the long-lived assets associated
with these stores would not be recoverable through future cash flows.
Accordingly, an impairment charge of $3.0 million was recorded to write
such assets down to their estimated fair values based on discounted future
projected cash flows.
3. GAIN ON PROPERTY TRANSACTIONS
In December 1999, the Company sold a parcel of land with a book value of
$2.2 million, received cash proceeds of $3.2 million and recorded a gain
of approximately $1.0 million. In August 2000, the Company entered into a
lease amendment and termination agreement for its corporate office space,
with no book value, in exchange for $9.8 million cash from its landlord
and relocated to space leased from a new landlord in March 2001. Costs
associated with the relocation were expensed as incurred.
4. BORROWING ARRANGEMENTS
As of February 28, 2002, the Company had a revolving line of credit
agreement under which maximum borrowings available were $100 million.
Available borrowings were limited to certain levels of eligible
inventories, as defined, and were approximately $32.2 million and
outstanding borrowings were $23.2 million at February 28, 2002. Interest
was payable monthly and approximated the prime rate plus 0.5% (4.70% at
February 28, 2002) and the borrowings were secured by substantially all of
the Company's assets.
On May 22, 2002, the Company and its lenders entered into an amendment to
the Company's $100 million credit facility that extends the expiration
date of the facility from September 30, 2002 to May 31, 2006. Available
borrowings under the agreement are limited to certain levels of eligible
accounts receivable and inventories, but may be increased from October 1
to December 20 of each year to meet seasonal needs. The Company is also
required to comply with a minimum earnings before interest, taxation,
depreciation and amortization covenant, a capital lease covenant and
reporting requirements, as defined in the agreement. The borrowings are
secured by substantially all of the Company's assets.
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5. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
FEBRUARY 28, FEBRUARY 28, SEPTEMBER 30,
----------- ----------- -------------
(Dollars in thousands) 2002 2001 2000
Vendor programs $ 17,831 $ 21,235 $ 13,209
Warranty and service repairs 6,059 1,265 2,412
Credit cards 1,612 863 1,198
Related parties - goodguys.com 204 179
Other 4,242 6,517 4,543
-------- -------- --------
29,948 30,059 21,362
Less allowance for doubtful accounts (5,803) (1,206) (1,483)
-------- -------- --------
Total accounts receivable $ 24,145 $ 28,853 $ 19,879
======== ======== ========
6. INCOME TAXES
For fiscal 2002, 2001, and 1999, the Company had no income tax expense. In
fiscal 2000, income tax expense was $9.6 million and consisted of $2.1
million of current federal taxes and $7.5 million of deferred tax. 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:
FIVE MONTHS
Year Ended Ended Years Ended
February 28, February 28, September 30,
-------------- ------------- -------------------------
2002 2001 2000 1999
Federal income tax at the statutory rate (35.0)% 35.0% (35.0)% (35.0)%
State franchise tax,
Less federal tax effect 20.2
Other, net (0.3) 0.3 (0.2) 0.2
Change in valuation allowance 35.3 (35.3) 138.6 34.8
----- ----- ----- -----
Total 0.0% 0.0% 123.6% 0.0%
===== ===== ===== =====
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Significant components of the Company's net deferred tax assets as of
February 28, 2002, 2001 and September 30, 2000 were as follows:
FEBRUARY 28, FEBRUARY 28, SEPTEMBER 30,
------------ ------------ -------------
(Dollars in thousands) 2002 2001 2000
Current:
Vacation accruals $ 945 $ 830 $ 749
Prepaid expenses (1,995) (1,887)
Bad debt, store closure and other accruals 8,878 1,190 1,153
Inventory capitalization 936 (688) (741)
Other (405) 83 402
-------- -------- --------
Current assets, net 10,354 (580) (324)
-------- -------- --------
Noncurrent:
Depreciation 7,329 392 392
Net operating loss 31,706 28,516 29,084
Other 743 481 426
Valuation allowance (50,132) (28,809) (29,578)
-------- -------- --------
Noncurrent assets, net (10,354) 580 324
-------- -------- --------
Total $ -- $ -- $ --
======== ======== ========
As of February 28, 2002, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $82.6 million and net
operating loss carryforwards for state tax purposes of approximately $42.6
million, which expire at various dates from 2003 to 2022.
These loss carryforwards represent a combined tax benefit of $31.7 million
that can be used to offset future taxes payable. Using its best estimates,
the Company has established a valuation allowance of approximately $50.1
million at February 28, 2002, due to the uncertainty of realizing future
tax benefits from its deferred tax assets.
7. 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 15 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
sublease expires on July 31, 2003 and provides for additional rent
increases based on the consumer price index. Sublease income for fiscal
2002, 2001, 2000, and 1999 was $365,514, $210,766, $326,077 and $318,938,
respectively.
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The future minimum annual payments for leases having non-cancelable terms
in excess of one year, net of sublease income, at February 28, 2002, are
as follows:
REAL
(Dollars in thousands) Property Equipment
----------- ----------
2003 $ 36,527 $ 5,138
2004 35,919 1,509
2005 35,113 630
2006 32,606 545
2007 28,451 236
Thereafter 115,680
--------- -------
Total $ 284,296 $ 8,058
========== =======
Lease expense for fiscal 2002, 2001, 2000 and 1999 was $51.1 million,
$21.9 million $52.6 million, and $51.5 million, respectively.
8. DEFERRED PAY AND PROFIT SHARING PLANS
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 in fiscal 1999, such that the Company matched an employee's
contributions to the Deferred Pay Plan with the Company's common stock.
The Company matched such contributions up to 6% of the employee's annual
salary. The Company's contributions for fiscal year 1999 were $754,000.
Effective October 1, 1999, contributions to the Profit Sharing Plan are at
the discretion of the Board of Directors. There have been no discretionary
contributions to the Profit Sharing Plan since fiscal 1999. In May 2001,
the Profit Sharing and Deferred Pay Plans were consolidated into a single
deferred pay plan.
9. STOCK OPTIONS
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 4,215,000 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% shareholders, which have a term of five years. At February
28, 2002, 347,082 options remained available for the grant of shares under
the 1994 Plan.
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The following is a summary of stock option activity under the 1985 and
1994 Plans:
WEIGHTED
Average
Number Exercise
of Shares Price
---------- ---------
Balance at September 30, 1998 1,487,562 $9.25
Granted (average fair value of $3.02) 2,482,834 5.30
Exercised (53,912) 5.09
Canceled (2,006,786) 8.30
---------- -----
Balance at September 30, 1999 1,909,698 5.55
Granted (average fair value of $2.64) 387,145 3.91
Exercised (603,485) 5.11
Canceled (302,909) 5.87
---------- -----
Balance at September 30, 2000 1,390,449 4.59
Granted (average fair value of $3.56) 279,979 5.42
Exercised (5,750) 5.09
Canceled (152,654) 5.93
---------- -----
Balance at February 28, 2001 1,512,024 5.63
Granted (average fair value of $1.54) 679,050 2.68
Exercised (667) 2.88
Canceled (166,838) 4.12
---------- -----
Balance at February 28, 2002 2,023,569 $4.44
========== =====
The following table summarizes information about stock options at February
28, 2002.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ----------------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Range of Number Life Exercise Number Exercise
Exercise Prices Shares (Years) Price Shares Price
--------- ----------- --------- ------------- ------------
$1.55 - $4.05 931,314 9.2 $ 2.84 165,146 $ 3.29
$4.06 - $6.56 909,900 8.4 5.37 752,737 5.37
$6.57 - $9.13 166,355 8.0 7.25 105,521 7.35
$13.74 - $16.99 8,000 1.9 13.19 8,000 13.19
$17.00 - $20.38 8,000 2.8 17.44 8,000 17.44
--------- ---- ------ --------- ------
$1.55 - $20.38 2,023,569 8.2 $ 4.44 1,039,404 $ 5.39
========= ==== ====== ========= ======
During fiscal 2001 and 2000, options for 75,000 and 1,125,000 shares,
respectively, were granted outside the 1994 Plan with exercise prices
equal to the fair market value of the stock on the date of grant, terms
ranging from three to 10 years and vesting over three years (with the
exception of an option for 25,000 shares that vests at the end of one
year). At February 28, 2002, 1,200,000 options granted outside the 1994
Plan with a weighted average exercise price of $3.83 per share were
outstanding, of which, options for 391,668 shares were exercisable at a
weighted average exercise price of $3.84 per share.
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
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stock issued under the ESPP during fiscal 2002, 2001, 2000 and 1999
totaled 365,880, 253,629, 384,845 and 390,498 shares, respectively, at a
weighted average price of $2.85, $2.82, $4.15 and $5.30 per share,
respectively. At February 28, 2002, 536,384 shares were reserved for
issuance under the ESPP.
SFAS 123 requires the disclosure of pro forma net earnings and earnings
per share as if the Company had adopted the fair value method. Under SFAS
123, the fair value of stock-based awards to employees is calculated
through the use of option 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 Company's calculations
were made using the Black-Scholes option pricing model, with the following
weighted average assumptions: expected option life, 5 years; stock
volatility of, 75% in fiscal 2002, 2001 and 2000, and 60% in fiscal 1999;
risk-free interest rates of, 4% in fiscal 2002, 6% in fiscal 2001 and 2000
and 5.75% in fiscal 1999; and no dividends during the expected term. Had
compensation cost been recognized in accordance with SFAS 123, the pro
forma net income for fiscal 2001 would have been $1.0 million or $0.04 per
share, and in fiscal 2002, 2000 and 1999, the pro forma net loss would
have been $40.4 million, or $1.73 per share, $18.3 million or $0.89 per
share, and $44.0 million or $2.84 per share.
10. COMMON STOCK
In March 2002, the Company issued, in a private placement, 2.8 million
shares of common stock and received approximately $5.1 million in net
proceeds. The purchasers of those shares included the Chief Executive
Officer and the Chief Operating Officer. Additionally, the Company issued
warrants for the purchase of 280,000 shares of common stock at a price of
$3.00 per share, which was in excess of the fair market value of the
Company's common stock at date of issuance. The warrants are exercisable
over the period of five years from the date of issuance.
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 purchasers of the common shares received warrants for
the purchase of 1.0 million shares of common stock. 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
for a period of three years from the date of issuance.
In August 1999, the Company issued, in a private placement, 3.3 million
shares of common stock and received $15.4 million in net proceeds.
Additionally, the purchasers of the common stock received warrants for the
purchase of 1.8 million shares of common stock. The warrants were issued
with an exercise price of $6.13, 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.
In June 1999, the Company issued 1.45 million shares of common stock to
its former Chairman and Chief Executive Officer and received $4.7 million
in cash. Additionally, the purchasers of the common stock received
warrants to purchase of 1.4 million shares of common stock. The warrants
were issued with an exercise price of $3.40, 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.
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At February 28, 2002, warrants on 4,259,723 shares were exercisable with a
weighted average exercise price of $4.86 per share.
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 over the vesting
period of one year.
Shares issued during fiscal 2002, 2001, 2000, and 1999, were 30,000,
57,729, 101,195, 160,594, respectively. During fiscal 2002, 2001, 2000,
and 1999, compensation expense of $78,270, $190,000, $729,000, and
$250,000, respectively, was recognized, leaving unamortized compensation
expense of $43,531, $113,000, $66,000, and $341,000, respectively, at the
end of each fiscal period.
Non-employee stock issuance: 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.
These advertising expenses have been included in selling, general and
administrative expenses for fiscal 1999 in the accompanying statements of
operations.
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.
12. RELATED PARTY
During fiscal 2000, the Company and a group of private equity investors,
which at that time included the then Chairman and certain Directors of the
Company, formed a separate company, goodguys.com, inc., 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% of goodguys.com and a warrant for an additional 29.9% exercisable
only upon a change in control of goodguys.com or other liquidation event,
as defined in the agreement. The Company did not make any cash investment
in goodguys.com., which commenced Internet operations in October 2000. At
February 28, 2002, two current directors of the Company owned less than 2%
of the outstanding common stock of goodguys.com in the aggregate.
The Company supplies merchandise to goodguys.com under a royalty and
service agreement. Other agreements outline goodguys.com's rights
associated with use of the trade name. For fiscal 2002 and 2001, the
Company recorded product sales of $10.1 million and $1.9 million, and in
fiscal 2002, the Company recorded royalty income of $415,125 and accrued
expense reimbursements of $133,200. At February 28, 2002 and 2001, the
Company had $204,063 and $179,000 in trade receivables from goodguys.com.
The Company accounts for its investment under the equity method of
accounting.
13. NET INCOME (LOSS) PER SHARE:
Basic earnings per share is calculated based upon the weighted average
number of common shares outstanding. Diluted earnings per share assume the
exercise of all options, which are dilutive, whether exercisable or not.
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 fiscal 2002,
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2000 and 1999, the potentially dilutive effect of outstanding stock
options and warrants to purchase a total of 7,483,292 shares, 6,815,172
shares and 5,200,599 shares of the Company's common stock at the end of
fiscal 2002, 2000 and 1999, respectively, has been excluded from the
calculation of net loss per share.
The following is a reconciliation of the weighted average number of shares
(in thousands) used in the Company's basic and diluted per share
computations for fiscal 2001:
Five Months
Ended
February 28,
--------------
2001
Basic shares 22,937
Effect of dilutive stock warrants 574
Effect of dilutive stock options 252
------
Diluted shares 23,763
======
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data are summarized in the following table. As
discussed in Note 1 to these financial statements, previously issued
financial statements have been reclassified to conform with the change in
accounting classification for sales incentives.
QUARTERS ENDED
---------------------------------------------------------------
(Dollars in thousands, May 31, August 31, November 30, February 28,
except per share amounts) 2001 2001 2001 2002
Net sales $ 171,541 $ 190,943 $ 197,978 $ 259,199
Gross profit 48,671 56,805 55,947 74,036
Net income (loss) (10,084) (4,539) (8,084) (17,310)
Net income (loss) per:
Basic share $ (0.44) $ (0.22) $ (0.35) $ (0.74)
Diluted share $ (0.44) $ (0.22) $ (0.35) $ (0.74)
Quarters Ended TWO MONTHS
-------------------------------------------------- Ended
(Dollars in thousands, June 30, September 30, December 31, February 28,
except per share amounts) 2000 2000 2000 2001
Net sales $ 195,121 $ 208,175 $282,157 $ 132,821
Gross profit 57,116 56,941 78,781 37,785
Net income (loss) (2,972) (9,744) 5,802 (4,483)
Net income (loss) per:
Basic share $ (0.14) $ (0.45) $ 0.25 $ (0.19)
Diluted share $ (0.14) $ (0.45) $ 0.25 $ (0.19)
-40-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to directors of the Company required to be furnished
pursuant to this item is incorporated by reference from portions of the
Company's definitive Proxy Statement for its annual meeting of stockholders to
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after February 28, 2002 (the "Proxy Statement") under the
caption "Election of Directors." Certain information relating to executive
officers of the Company is set forth in Item 4A of Part I of this Form 10-K
under the caption "Executive Officers of Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference from portions of the Proxy Statement under the
captions "Compensation of Directors and Executive Officers" and "Certain
Relationships and Related Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference from portions of the Proxy Statement under the
captions "Certain Stockholders" and "Compensation of Directors and Executive
Officers."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference from portions of the Proxy Statement under the caption
"Compensation of Directors and Executive Officers" and "Certain Relationships
and Related Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements.
Included in Part II of this report:
Independent Auditors' Report
Consolidated balance sheets as of February 28, 2002 and 2001,
and September 30, 2000.
Consolidated statements of operations for the fiscal year
ended February 28, 2002, the five-month period ended February
28, 2001 and each of the two fiscal years in the period ended
September 30, 2000.
Consolidated statements of shareholders' equity for the fiscal
year ended February 28, 2002, the five-month period ended
February 28, 2001 and each of the two fiscal years in the
period ended September 30, 2000.
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Consolidated statements of cash flows for the fiscal year
ended February 28, 2002, the five-month period ended February
28, 2001 and each of the two fiscal years in the period ended
September 30, 2000.
Notes to consolidated financial statements
(2) Financial Statement Schedules:
Schedule II Valuation and Qualifying Accounts
All other schedules are omitted because they are not required or are not
applicable, or the information is included in the financial statements.
(b) Reports on Form 8-K.
Form 8-K Report filed in January 2002, reporting under Item 5 the decision
to close certain unprofitable stores.
Exhibits.
3.1 Restated Certificate of Incorporation. (Exhibit 3.1 to the
Company's Form 8-K Report for March 4, 1992; incorporated
herein by reference.)
3.2 Bylaws. (Exhibit 3.2 to the Company's Form 8-K Report for
March 4, 1992; incorporated herein by reference.)
10.1 1985 Stock Option Plan, as amended.* (Exhibit 10.1 to the
Company's Form 10-K Annual Report for the fiscal year ended
September 30, 1998; incorporated herein by reference.)
10.2 Form of Nonqualified Stock Option Agreements.* (Exhibit 4.3 to
the Company's Registration Statement on Form S-8 as filed on
January 28, 1991, registration number 33-38749; incorporated
herein by reference.)
10.3 Employee Stock Purchase Plan as amended.*
10.4 Amended and Restated 1994 Stock Incentive Plan.*
10.5 Assignment and Assumption Agreement dated September 26, 1995,
by and between The Good Guys, Inc. and The Good Guys -
California, Inc. (Exhibit 10.18 to the Company's Form 10-K
Annual Report for the fiscal year ended September 30, 1995;
incorporated herein by reference.)
10.6 Form of Operating Agreement, for WOW! Stores between MTS,
Inc., dba Tower Records/ Book/Video, and The Good Guys, Inc.,
used in connection with all existing WOW! stores. (Exhibit
10.20 to the Company's Form 10-K Annual Report for the fiscal
year ended September 30, 1995; incorporated herein by
reference.)
* Compensatory plan or arrangement.
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10.7 Loan and Security Agreement by an among Good Guys-California,
Inc. and Bank of America and GE Capital, dated as of September
30, 1999. (Exhibit 10.9 to the Company's Form 10-K for the
fiscal year ended September 30, 1999; incorporated herein by
reference.)
10.8 Stock Purchase Agreement, dated June 1, 1999, between Ronald
A. Unkefer and the Company. (Exhibit 10.15 to the Company's
Report on Form 10-Q for the quarter ended June 30, 1999;
incorporated herein by reference.)
10.9 Employment Agreement dated June 2, 1999, between Ronald. A.
Unkefer and the Company. (Exhibit 10.16 to the Company's
Report on Form 10-Q for the quarter ended June 30, 1999;
incorporated herein by reference.)
10.10 Stock Purchase Agreement dated as of August 19, 1999, together
with the forms of Warrant to Purchase Shares of Common Stock
and Registration Rights Agreement executed in connection with
private placement. (Exhibit 10.18 to the Company's Report on
Form 8-K for August 20, 1999; incorporated herein by
reference).
10.11 Executive Employment Agreement with Kenneth R. Weller, dated
August 15, 2000.* (Exhibit 10.14 to the Company's Report on
Form 8-K filed on August 29, 2000; incorporated herein by
reference.)
10.12 Stock and Warrant Subscription Agreement, dated as of August
15, 2000, between The Good Guys, Inc. and Kenneth R. Weller.
(Exhibit 10.15 to the Company's Report on Form 8-K filed on
August 29, 2000; incorporated herein by reference.)
10.13 Stock Purchase Agreement, dated as of August 15, 2000, between
The Good Guys, Inc. and the persons listed on Schedule A
thereto. (Exhibit 10.16 to the Company's Report on Form 8-K
filed on August 29, 2000; incorporated herein by reference.)
10.14 Registration Rights Agreement dated as of August 16, 2000,
between The Good Guys, Inc. and the persons listed on Schedule
A thereto. (Exhibit 10.17 to the Company's Report on Form 8-K
filed on August 29, 2000; incorporated herein by reference.)
10.15 Form of Warrant to Purchase Shares of Common Stock of The Good
Guys to be issued pursuant to the Stock Purchase Agreement,
dated as of August 16, 2000, between The Good Guys and the
persons listed on Schedule A thereto. (Exhibit 10.18 to the
Company's Report on Form 8-K filed on August 29, 2000;
incorporated herein by reference.)
10.16 Letter agreement between George J. Hechtman and the Company,
dated April 12, 2000.* (Exhibit 10.17 to the Company's Report
on Form 10-K filed for its fiscal year ended September 30,
2000; incorporated herein by reference.)
10.17 Letter agreement between Robert A. Stoffregen and the Company,
dated September 29, 2000.* (Exhibit 10.18 to the Company's
Report on Form 10-K filed for its fiscal year ended September
30, 2000; incorporated herein by reference.)
*Compensatory plan or arrangement.
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10.18 Option Agreement between George Hechtman and the Company,
dated April 26, 2000.* (Exhibit 10.19 to the Company's Report
on Form 10-K filed for its fiscal year ended September 30,
2000; incorporated herein by reference.)
10.19 Option Agreement between Robert A. Stoffregen and the Company,
dated October 6, 2000.* (Exhibit 10.20 to the Company's Report
on Form 10-K filed for its fiscal year ended September 30,
2000; incorporated herein by reference.)
10.20 Stock Purchase Agreement dated as of March 7, 2002, together
with the forms of warrant and Registration Rights Agreement
executed in connection with a private placement of the
Company's common stock.
10.21 Lease Agreement for Corporate Office, dated December 29, 2000,
by an between Good Guys, Inc. and LNR Harbor Ban, LLC.
(Exhibit 10.22 to the Company's Transitional Report on Form
10-K filed for the five month period ended February 28, 2001;
incorporated herein by reference.)
10.22 Services, licensing, domain name, and stock subscription and
warrant agreements, date January 2000, entered into between
The Good Guys-California, Inc. and goodguys.com. (Exhibit
10.23 to the Company's Transitional Report on Form 10-K filed
for the five month period ended February 28, 2001;
incorporated herein by reference.)
10.23 Letter Agreement between Jeff Linden and the Company, dated
August 3, 2001.*
10.24 Letter Agreement between Peter Hanelt and the Company, dated
December 20, 2001.*
10.25 Letter Agreement between John J. De Luca and the Company,
dated August 3, 2001.*
10.26 Letter Agreement between Cathy A. Stauffer and the Company,
dated September 6, 2001.*
10.27 Letter Agreement between David Carter and the Company, dated
June 1, 2001.*
10.28 First Amendment to Loan and Security Agreement by and among
Good Guys California, Inc., Bank of America and GE Capital,
dated as of August 16, 2001.
10.29 Letter Agreement by and among Good Guys California, Inc., Bank
of America and GE Capital, dated as of March 27, 2002,
amending the Loan and Security Agreement among such parties,
dated as of September 30, 1999.
10.30 Letter Agreement by and among Good Guys California, Inc., Bank
of America and GE Capital, dated as of May 15, 2002, amending
the Loan and Security Agreement among such parties, dated as
of September 30, 1999.
10.31 Second Amendment to Loan and Security Agreement by and among
Good Guys California, Inc., Bank of America and GE Capital,
dated as of May 22, 2002.
21.1 List of Subsidiaries
23.1 Independent Auditors' Consent.
*Compensatory plan or arrangement.
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24.1 Power of Attorney.
*Compensatory plan or arrangement.
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SCHEDULE II
GOOD GUYS, INC. & SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
- -----------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
Additions
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions Period
Period Ended September 30, 1999:
Allowance for doubtful accounts $1,149 $ 400 $ 86 $1,463
Period Ended September 30, 2000:
Allowance for doubtful accounts $1,463 $ 488 $ 468 $1,483
Period Ended February 28, 2001:
Allowance for doubtful accounts $1,483 $ 53 $ 330 $1,206
Period Ended February 28, 2002;
Allowance for doubtful accounts $1,206 $4,910 $ 313 $5,803
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: May 28th, 2002 GOOD GUYS, INC.
By: /s/ KENNETH R. WELLER
-----------------------------------------
Kenneth R. Weller
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ KENNETH R. WELLER Chairman and Chief Executive Officer May 28, 2002
- ----------------------------------------------- (Principal Executive Officer)
(Kenneth R. Weller)
/s/ DAVID A. CARTER Acting Chief Financial Officer May 28, 2002
- ----------------------------------------------- (Principal Financial and Accounting Officer)
(David Carter))
/s/ CATHY A. STAUFFER* Director May 28, 2002
- -----------------------------------------------
(Cathy Stauffer)
/s/ RUSSELL M. SOLOMON* Director May 28, 2002
- -----------------------------------------------
(Russell M. Solomon)
/s/ JOHN E. MARTIN* Director May 28, 2002
- -----------------------------------------------
(John E. Martin)
/s/ JOSEPH P. CLAYTON* Director May 28, 2002
- -----------------------------------------------
(Joseph P. Clayton)
*By /s/ DAVID A. CARTER May 28, 2002
- -----------------------------------------------
David A. Carter, Attorney-in-Fact
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EXHIBIT INDEX
3.1 Restated Certificate of Incorporation. (Exhibit 3.1 to the
Company's Form 8-K Report for March 4, 1992; incorporated
herein by reference.)
3.2 Bylaws. (Exhibit 3.2 to the Company's Form 8-K Report for
March 4, 1992; incorporated herein by reference.)
10.1 1985 Stock Option Plan, as amended.* (Exhibit 10.1 to the
Company's Form 10-K Annual Report for the fiscal year ended
September 30, 1998; incorporated herein by reference.)
10.2 Form of Nonqualified Stock Option Agreements.* (Exhibit 4.3 to
the Company's Registration Statement on Form S-8 as filed on
January 28, 1991, registration number 33-38749; incorporated
herein by reference.)
10.3 Employee Stock Purchase Plan, as amended.*
10.4 Amended and Restated 1994 Stock Incentive Plan.*
10.5 Assignment and Assumption Agreement, dated September 26, 1995,
by and between The Good Guys, Inc. and The Good Guys -
California, Inc. (Exhibit 10.18 to the Company's Form 10-K
Annual Report for the fiscal year ended September 30, 1995;
incorporated herein by reference.)
10.6 Form of Operating Agreement, for WOW! Stores between MTS,
Inc., dba Tower Records/Book/Video, and The Good Guys, Inc.,
used in connection with all existing WOW! stores. (Exhibit
10.20 to the Company's Form 10-K Annual Report for the fiscal
year ended September 30, 1995; incorporated herein by
reference.)
10.7 Loan and Security Agreement by and among Good Guys-California,
Inc. and Bank of America and GE Capital, dated as of September
30, 1999. (Exhibit 10.9 to the Company's Form 10-K for the
fiscal year ended September 30, 1999; incorporated herein by
reference.)
10.8 Stock Purchase Agreement, dated June 1, 1999, between Ronald
A. Unkefer and the Company. (Exhibit 10.15 to the Company's
Report on Form 10-Q for the quarter ended June 30, 1999;
incorporated herein by reference.)
10.9 Employment Agreement dated June 2, 1999, between Ronald A.
Unkefer and the Company. *(Exhibit 10.16 to the Company's
Report on Form 10-Q for the quarter ended June 30, 1999;
incorporated herein by reference)*
10.10 Stock Purchase Agreement dated as of August 19, 1999, together
with the forms of Warrant to Purchase Shares of Common Stock
and Registration Rights Agreement executed in connection with
private placement. (Exhibit 10.18 to the Company's Report on
Form 8-K for August 20, 1999; incorporated herein by
reference).
10.11 Executive Employment Agreement with Kenneth R. Weller, dated
August 15, 2000. * (Exhibit 10.14 to the Company's Report on
Form 8-K filed on August 29, 2000; incorporated herein by
reference.)
10.12 Stock and Warrant Subscription Agreement, dated as of August
15, 2000, between The Good Guys, Inc. and Kenneth R. Weller.
(Exhibit 10.15 to the Company's Report on Form 8-K filed on
August 29, 2000; incorporated herein by reference.)
*Compensatory plan or arrangement.
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10.13 Stock Purchase Agreement, dated as of August 15, 2000, between
The Good Guys, Inc. and the persons listed on Schedule A
thereto. (Exhibit 10.16 to the Company's Report on Form 8-K
filed on August 29, 2000; incorporated herein by reference.)
10.14 Registration Rights Agreement dated as of August 16, 2000,
between The Good Guys, Inc. and the persons listed on Schedule
A thereto. (Exhibit 10.17 to the Company's Report on Form 8-K
filed on August 29, 2000; incorporated herein by reference.)
10.15 Form of Warrant to Purchase Shares of Common Stock of The Good
Guys to be issued pursuant to the Stock Purchase Agreement,
dated as of August 16, 2000, between The Good Guys and the
persons listed on Schedule A thereto. (Exhibit 10.18 to the
Company's Report on Form 8-K filed on August 29, 2000;
incorporated herein by reference.)
10.16 Letter agreement between George J. Hechtman and the Company,
dated April 12, 2000.* (Exhibit 10.17 to the Company's Report
on Form 10-K filed for its fiscal year ended September 30,
2000; incorporated herein by reference.)
10.17 Letter agreement between Robert A. Stoffregen and the Company,
dated September 29, 2000.* (Exhibit 10.18 to the Company's
Report on Form 10-K filed for its fiscal year ended September
30, 2000; incorporated herein by reference.)
10.18 Option Agreement between George Hechtman and the Company,
dated April 26, 2000.* (Exhibit 10.19 to the Company's Report
on Form 10-K filed for its fiscal year ended September 30,
2000; incorporated herein by reference.)
10.19 Option Agreement between Robert A. Stoffregen and the Company,
dated October 6, 2000.* (Exhibit 10.20 to the Company's Report
on Form 10-K filed for its fiscal year ended September 30,
2000; incorporated herein by reference.)
10.20 Stock Purchase Agreement dated as of March 7, 2002, together
with the forms of warrant and Registration Rights Agreement
executed in connection with a private placement of the
Company's common stock.
10.21 Lease Agreement for Corporate Office, dated December 29, 2000,
by an between Good Guys, Inc. and LNR Harbor Ban, LLC.
(Exhibit 10.22 to the Company's Transitional Report on Form
10-K filed for the five month period ended February 28, 2001;
incorporated herein by reference.)
10.22 Services, licensing, domain name, and stock subscription and
warrant agreements, date January 2000, entered into between
The Good Guys-California, Inc. and goodguys.com. (Exhibit
10.23 to the Company's Transitional Report on Form 10-K filed
for the five month period ended February 28, 2001;
incorporated herein by reference.)
10.23 Letter Agreement between Jeff Linden and the Company, dated
August 3, 2001. *
10.24 Letter Agreement between Peter Hanelt and the Company, dated
December 20, 2001. *
10.25 Letter Agreement between John J. De Luca and the Company,
dated August 3, 2001. *
10.26 Letter Agreement between Cathy A. Stauffer and the Company,
dated September 6, 2001. *
*Compensatory plan or arrangement.
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10.27 Letter Agreement between David Carter and the Company, dated
June 1, 2001. *
10.28 First Amendment to Loan and Security Agreement by and among
Good Guys California, Inc., Bank of America and GE Capital,
dated as of August 16, 2001.
10.29 Letter Agreement by and among Good Guys California, Inc., Bank
of America and GE Capital, dated as of March 27, 2002,
amending the Loan and Security Agreement among such parties,
dated as of September 30, 1999.
10.30 Letter Agreement by and among Good Guys California, Inc., Bank
of America and GE Capital, dated as of May 15, 2002, amending
the Loan and Security Agreement among such parties, dated as
of September 30, 1999.
10.31 Second Amendment to Loan and Security Agreement by and among
Good Guys - California, Inc., Bank of America and GE Capital,
dated as of May 22, 2002.
21.1 List of Subsidiaries
23.1 Independent Auditors' Consent.
24.1 Power of Attorney.
*Compensatory plan or arrangement.
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