UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| [X] |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 31, 2002
or
| [ ] |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from_______________to_______________
Commission File Number: 0-14134
GOOD GUYS, INC.
(exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
94-2366177 (I.R.S. Employer Identification No.) |
1600 Harbor Bay Parkway
Alameda, CA 94502
(Address of principal executive offices)
(510) 747-6000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
| CLASS | OUTSTANDING AS OF May 31, 2002 | |
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| Common Stock | 26,429,565 |
GOOD GUYS, INC.
INDEX
| Page | |||||
PART I: FINANCIAL INFORMATION |
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Item 1. Financial Statements: |
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Condensed Consolidated Balance Sheets — May 31, 2002, February 28, 2002 and May 31, 2001 |
3 | ||||
Condensed Consolidated Statements of Operations — Three month periods ended May 31, 2002 and 2001 |
4 | ||||
Condensed Consolidated Statement of Changes in Shareholders’ Equity — Three month period ended
May 31, 2002 |
5 | ||||
Condensed Consolidated Statements of Cash Flows — Three month periods ended May 31, 2002 and 2001 |
6 | ||||
Notes to Condensed Consolidated Financial Statements |
7 | ||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
8 | ||||
PART II: OTHER INFORMATION |
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Item 1. Legal Proceedings |
10 | ||||
Item 6. Exhibits and Reports on Form 8-K |
10 | ||||
SIGNATURES |
11 | ||||
2
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
GOOD GUYS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
| May 31, | February 28, | May 31, | |||||||||||||
| 2002 | 2002 | 2001 | |||||||||||||
ASSETS |
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CURRENT ASSETS: |
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Cash and equivalents |
$ | 2,014 | $ | 4,108 | $ | 4,200 | |||||||||
Accounts receivable (less allowance for doubtful
accounts of $5,562, $5,803 and $1,380 respectively) |
26,696 | 24,145 | 24,179 | ||||||||||||
Merchandise inventories |
106,334 | 102,109 | 116,841 | ||||||||||||
Prepaid expenses |
7,094 | 6,733 | 9,497 | ||||||||||||
Total current assets |
142,138 | 137,095 | 154,717 | ||||||||||||
PROPERTY AND EQUIPMENT, NET |
|||||||||||||||
Leasehold improvements |
66,078 | 64,436 | 73,952 | ||||||||||||
Furniture, fixtures and equipment |
74,024 | 72,245 | 76,922 | ||||||||||||
Construction in progress |
427 | 3,435 | 1,710 | ||||||||||||
Total property and equipment |
140,529 | 140,116 | 152,584 | ||||||||||||
Less accumulated depreciation and amortization |
(94,260 | ) | (91,357 | ) | (93,250 | ) | |||||||||
Property and equipment, net |
46,269 | 48,759 | 59,334 | ||||||||||||
OTHER ASSETS |
609 | 562 | 477 | ||||||||||||
TOTAL ASSETS |
$ | 189,016 | $ | 186,416 | $ | 214,528 | |||||||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
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CURRENT LIABILITIES: |
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Accounts payable |
$ | 60,968 | $ | 53,863 | $ | 60,139 | |||||||||
Accrued expenses and other liabilities: |
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Payroll |
10,504 | 10,930 | 8,590 | ||||||||||||
Sales taxes |
4,405 | 4,609 | 4,350 | ||||||||||||
Store closure |
10,410 | 12,904 | — | ||||||||||||
Other |
17,760 | 26,864 | 27,121 | ||||||||||||
Total current liabilities |
104,047 | 109,170 | 100,200 | ||||||||||||
REVOLVING CREDIT DEBT |
30,009 | 23,231 | 31,201 | ||||||||||||
SHAREHOLDERS’ EQUITY: |
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Preferred stock, $.001 par value: |
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Authorized — 2,000,000 shares,
Issued — none |
— | — | — | ||||||||||||
Common stock, $.001 par value
Authorized — 40,000,000 shares,
Issued and outstanding — 26,429,565,
23,449,608 and 23,215,320 shares, respectively
|
26 | 23 | 23 | ||||||||||||
Additional paid-in-capital |
110,945 | 105,416 | 104,595 | ||||||||||||
Retained deficit |
(56,011 | ) | (51,424 | ) | (21,491 | ) | |||||||||
Total shareholders’ equity |
54,960 | 54,015 | 83,127 | ||||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ | 189,016 | $ | 186,416 | $ | 214,528 | |||||||||
The accompanying notes are an integral part of these financial statements.
3
GOOD GUYS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
| Three Months Ended | ||||||||||
| May 31, | ||||||||||
| 2002 | 2001 | |||||||||
Net sales |
$ | 171,033 | $ | 171,541 | ||||||
Cost of sales |
(121,787 | ) | (122,870 | ) | ||||||
Gross profit |
49,246 | 48,671 | ||||||||
Selling, general and administrative |
(50,978 | ) | (54,183 | ) | ||||||
Depreciation and amortization |
(2,903 | ) | (3,209 | ) | ||||||
Store closure |
700 | — | ||||||||
Loss from operations |
(3,935 | ) | (8,721 | ) | ||||||
Interest expense, net |
(652 | ) | (1,363 | ) | ||||||
Net loss |
$ | (4,587 | ) | $ | (10,084 | ) | ||||
Net loss per share |
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Basic |
$ | (0.18 | ) | $ | (0.44 | ) | ||||
Diluted |
$ | (0.18 | ) | $ | (0.44 | ) | ||||
Weighted average shares |
||||||||||
Basic |
26,069 | 23,166 | ||||||||
Diluted |
26,069 | 23,166 | ||||||||
The accompanying notes are an integral part of these financial statements.
4
GOOD GUYS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE THREE-MONTH PERIOD ENDED MAY 31, 2002
(In thousands except share data)
(Unaudited)
| Common Stock | Additional | Retained | |||||||||||||||||||
| Paid-in | Earnings | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | |||||||||||||||||
Balance at February 28, 2002 |
23,449,608 | $ | 23 | $ | 105,416 | $ | (51,424 | ) | $ | 54,015 | |||||||||||
Issuance of common stock under
employee stock purchase plan |
159,957 | 273 | 273 | ||||||||||||||||||
Proceeds from sale of common
stock, net of
offering expenses |
2,800,000 | 3 | 5,231 | 5,234 | |||||||||||||||||
Restricted stock: |
|||||||||||||||||||||
Issuance of restricted stock |
20,000 | ||||||||||||||||||||
Amortization |
25 | 25 | |||||||||||||||||||
Net loss for the three-month
period ended May 31, 2002 |
(4,587 | ) | (4,587 | ) | |||||||||||||||||
Balance at May 31, 2002 |
26,429,565 | $ | 26 | $ | 110,945 | $ | (56,011 | ) | $ | 54,960 | |||||||||||
The accompanying notes are an integral part of these financial statements.
5
GOOD GUYS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Three Months Ended | ||||||||||||
| May 31, | ||||||||||||
| 2002 | 2001 | |||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net loss |
$ | (4,587 | ) | $ | (10,084 | ) | ||||||
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities: |
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Depreciation and amortization |
2,903 | 3,209 | ||||||||||
Allowance for doubtful accounts |
(241 | ) | 174 | |||||||||
Provision for store closure |
(700 | ) | — | |||||||||
Restricted stock amortization |
25 | 88 | ||||||||||
Changes in assets and liabilities: |
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Accounts receivable |
(2,310 | ) | 5,025 | |||||||||
Merchandise inventories |
(4,225 | ) | 4,087 | |||||||||
Prepaid expenses and other assets |
(408 | ) | 296 | |||||||||
Accounts payable |
7,105 | 16,243 | ||||||||||
Accrued expenses and other liabilities |
(11,528 | ) | (495 | ) | ||||||||
Net cash (used in) provided by operating activities |
(13,966 | ) | 18,543 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchase of fixed assets |
(413 | ) | (1,055 | ) | ||||||||
Net cash used in investing activities |
(413 | ) | (1,055 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
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Net proceeds from borrowing (repayment) of revolving credit |
6,778 | (18,960 | ) | |||||||||
Issuance of common stock, net |
5,507 | 343 | ||||||||||
Net cash provided by (used in) financing activities |
12,285 | (18,617 | ) | |||||||||
Net decrease in cash and equivalents |
(2,094 | ) | (1,129 | ) | ||||||||
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD |
4,108 | 5,329 | ||||||||||
CASH AND EQUIVALENTS AT END OF PERIOD |
$ | 2,014 | $ | 4,200 | ||||||||
The accompanying notes are an integral part of these financial statements.
6
GOOD GUYS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 1. | The condensed consolidated balance sheets at May 31, 2002 and May 31, 2001, and the consolidated statements of operations and cash flows for the three-month periods then ended have been prepared from the Company’s records without audit and in management’s opinion, include all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at May 31, 2002 and May 31, 2001, and the results of operations and cash flows for the three-month periods then ended. The balance sheet at February 28, 2002, presented herein, has been derived from the Company’s audited balance sheet. Certain information and disclosures normally included in the Company’s notes to the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted from these interim financial statements. Accordingly, these interim financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2002. The results of operations for the three-month period ended May 31, 2002 are not necessarily indicative of the operating results for the full fiscal year. | |
| 2. | Basic earnings per share is computed as net income (loss) available to common stockholders divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur from common shares to be issued through stock options and warrants. | |
| The potential dilutive effects of stock options and warrants were excluded from diluted earnings per share for the three-month periods ended May 31, 2002 and 2001 because their inclusion in net loss periods would be anti-dilutive to the earnings per share calculation. | ||
| 3. | Store closure accrual | |
| As of June 2002, the Company had closed seven of the eight stores scheduled for closure, with the remaining store to be closed during the fiscal year ending February 28, 2003. In accordance with EITF 94-3, revenues and expenses are recorded in operations while the stores continue to operate. The movement in the store closure accrual of $2.5 million during the period represents cash payments of $1.8 million and a decrease of $0.7 million in the accrual as a result of a reassessment of the remaining accrual, based on store termination agreements signed during the period. The Company’s closing accrual balance is $10.4 million. | ||
| 4. | Borrowings | |
| As announced on May 23, 2002, the Company received a four-year extension, through May 31, 2006, on its $100 million revolving credit facility from Bank of America and GE Capital. The Company is 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. Available borrowings under the credit agreement are limited to certain levels of eligible accounts receivable and inventory balances, but may be increased from October 1 through December 20 of each year to meet seasonal needs. At May 31, 2002, the Company had borrowings of $30.0 million outstanding under the revolving credit agreement, with $11.3 million available to borrow under the credit facility. At May 31, 2001, the Company had borrowings of $31.2 million outstanding under the revolving credit agreement, with $26.5 million available to borrow under the credit facility. | ||
| 5. | In June 2001, Statement of Financial Accounting Standard (“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. 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 adoption of SFAS 141 and SFAS 142 had no impact on the Company’s financial statements. | |
| 6. | 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. The adoption of SFAS 143 and SFAS 144 had no impact on the Company’s financial statements. |
7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
BUSINESS OUTLOOK AND RISK FACTORS
The trend analyses and other non-historical information contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations are “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor provisions of those Sections. Such forward-looking statements include, without limitation, statements concerning the Company’s future net sales, net earnings and other operating results. The Company’s actual results could differ materially from those discussed in the forward looking statements due to a number of factors, including but not limited to, the successful implementation of the Company’s restructuring program, increases in promotional activities of the Company’s competitors, changes in consumer buying attitudes, changes in vendor support, changes in the Company’s merchandise sales mix including discontinued product categories, general economic conditions and other factors referred to in the Company’s 2002 Annual Report on Form 10-K under “Information Regarding Forward Looking Statements” and “Risk Factors”.
RESULTS OF OPERATIONS
Net sales for the three months ended May 31, 2002 were $171.0 million, a decline of 0.3%, compared to $171.5 million in net sales for the same period last year. This decrease is primarily due to the impact of the closed stores, the closures of which were announced on January 7, 2002. Actual comparable store sales increased 2% and were positive for each of the three months. The growth in comparable store sales was driven by a strong demand for digital products, an increase in average transaction size and improving economic conditions in California.
Sales of high-definition televisions, including digital, plasma and liquid crystal displays, continued their fast-paced growth, as did sales of other leading technology products such as digital video disc (DVD) recorders, mobile video, digital cameras and camcorders. The sale of Extended Service Protection contracts remained the same as the same period in the prior year at 7.8% of sales.
Gross profit as a percentage of net sales increased to 28.8% for the three months ended May 31, 2002 compared to 28.4% for the same period in the prior year. This improvement in gross margin is primarily attributable to the Company’s continued emphasis on higher-end entertainment electronics, lower promotional expenses and reduced distribution costs.
Selling, general and administrative and store closure expenses of $53.2 million, including depreciation and amortization, decreased $4.2 million for the three months ended May 31, 2002, compared to $57.4 million for the same period in the prior year. These expenses represented 31.1% of net sales in the three months ended May 31, 2002 compared to 33.5% for the same period in the prior year. The decrease in selling, general and administrative expenses, including depreciation and amortization, for the first quarter is the result of improved logistics, management’s cost saving initiatives and execution of management’s turn-around strategy. The Company reassessed its store closure accrual based on store termination agreements signed during the period, resulting in a decrease of $0.7 million in the accrual.
Interest expense decreased to $0.7 million for the three months ended May 31, 2002 from $1.4 million in the same period last year. The decrease was primarily attributable to the favorable rates during the period.
As a result of the factors discussed above, the net loss for the three months ended May 31, 2002 was $4.6 million compared to a net loss of $10.1 million for the three months ended May 31, 2001. The net loss per share for the three months ended May 31, 2002 was $0.18 per share compared to a net loss of $0.44 per share for the same period in the prior year.
Liquidity and Capital Resources
At May 31, 2002, the Company had cash and equivalents of $2.0 million. The Company’s working capital was $38.1 million at May 31, 2002 compared to $54.5 million at May 31, 2001. Net cash used by operating activities was $14.0 million for the three months ended May 31, 2002 compared to cash provided of $18.5 million for the same period in the prior year. The use of cash primarily reflects the timing of payments for advertising and commissions on the Extended Service Protection contracts.
Net cash used in investing activities for the purchase of fixed assets was $0.4 million for the three months ended May 31, 2002 compared to $1.1 million used in investing activities for the same period in the prior year.
8
As announced on May 23, 2002, the Company received a four-year extension, through May 31, 2006, on its $100 million revolving credit facility from Bank of America and GE Capital. The Company is 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. Available borrowings under the credit agreement are limited to certain levels of eligible accounts receivable and inventory balances, but may be increased from October 1 through December 20 of each year to meet seasonal needs. As well as the increased seasonal availability during the holiday season, the amended facility offers the ability to increase borrowings for incremental inventory purchases and lower costs. At May 31, 2002, the Company had borrowings of $30.0 million outstanding under the revolving credit agreement, with $11.3 million available to borrow under the credit facility. At May 31, 2001, the Company had borrowings of $31.2 million outstanding under the revolving credit agreement, with $26.5 million available to borrow under the credit facility.
The Company expects to fund its working capital requirements for the next twelve months with a combination of cash flows from operations, normal trade credit, the revolving credit facility, and lease financing arrangements.
Recent developments include, as announced previously, a $5.6 million private placement of 2.8 million restricted shares of common stock in March 2002, resulting in net proceeds of $5.2 million, and the continued execution of the Company’s restructuring, cost saving and logistic programs.
As of June 2002, the Company had closed seven of the eight stores scheduled for closure, with the remaining store to be closed during the fiscal year ending February 28, 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. At May 31, 2002 the Company’s closing accrual balance was $10.4 million.
The return to profitability is contingent upon many factors, including, but not limited to, the successful implementation of the current restructuring program, the development of consumer acceptance of new technologies, consumer demand for existing technologies, the presence or absence of new features on existing merchandise, continued vendor support and economic conditions in the regions in which its stores are located.
Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to market risks, which include changes in U.S. interest rates. The Company does not engage in financial transactions for trading or speculative purposes. The interest due on the Company’s line of credit is based on variable interest rates and therefore affected by changes in market interest rates. If interest rates on existing variable rate debt rose 98 basis points (a 10% change from the bank’s reference rate as of May 31, 2002), the Company’s results from operations and cash flows would not be materially affected.
The Company believes that there has been minimal inflation in the consumer electronics industry because of competition among manufacturers and technological changes. Therefore, inflation has not had a material effect on its net sales or cost of sales.
9
GOOD GUYS, INC.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various legal proceedings arising during the normal course of business. The Company believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material impact on its financial position or results of operations.
Item 6. Exhibits and Reports on Form 8-K
| b) | Reports on Form 8-K filed during the quarter. | |
| Form 8-K filed on March 18, 2002, reporting under Item 5, the completion of the $5.6 million placement of the Company’s common stock. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| GOOD GUYS, INC. | |||
| Date: | June 25, 2002 | By: | /s/ KENNETH R. WELLER |
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Kenneth R. Weller Chairman and Chief Executive Officer |
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