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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

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 November 30, 2002

or

[  ]        TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from          to

Commission File Number: 0-14134

GOOD GUYS, INC.

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

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GOOD GUYS, INC.

INDEX

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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements

GOOD GUYS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)

The accompanying notes are an integral part of these financial statements.

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GOOD GUYS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

The accompanying notes are an integral part of these financial statements.

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GOOD GUYS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE NINE-MONTH PERIOD ENDED NOVEMBER 30, 2002
(In thousands, except share data)
(Unaudited)

The accompanying notes are an integral part of these financial statements.

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GOOD GUYS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

The accompanying notes are an integral part of these financial statements.

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GOOD GUYS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.		The condensed consolidated balance sheets at November 30, 2002 and November 30, 2001, the consolidated statements of operations for the three-month and nine-month periods then ended and the consolidated statements of cash flows for the nine-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 November 30, 2002 and November 30, 2001, the results of operations for the three-month and nine-month periods then ended and cash flows for the nine-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 and nine-month periods ended November 30, 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 and nine-month periods ended November 30, 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 previously scheduled for closure, with the remaining store to be closed during the current fiscal year ending February 28, 2003. In accordance with EITF No. 94-3, revenues and expenses are recorded in operations while the stores continue to operate. The movement in the store closure accrual of $4.8 million during the nine-month period represents cash payments of $4.1 million and a decrease of $0.7 million in the accrual as a result of a reassessment of the remaining lease liabilities, based on lease termination agreements signed during the period. The Company’s closing accrual balance at November 30, 2002 is $8.1 million, compared to $12.9 million at February 28, 2002 and $0.0 million at November 30, 2001.
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 beginning in October 2002, may be increased from October 1 through December 20 of each year to meet seasonal needs. At November 30, 2002, the Company had borrowings of $65.6 million outstanding under the revolving credit agreement, with $15.9 million available to borrow under the credit facility. At November 30, 2001, the Company had borrowings of $41.5 million outstanding under the revolving credit agreement, with $14.4 million available to borrow under the credit facility.
5.		In June 2002, Statement of Financial Accounting Standard (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” was issued which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue (“EITF”) No. 94-3. The Company will adopt the provisions of SFAS No. 146 for restructuring activities, if any, initiated after December 31, 2002. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of the Company’s commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing future restructuring costs, if any, as well as the amounts recognized.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

BUSINESS OUTLOOK AND RISK FACTORS

The trend analyses and other non-historical information contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations are “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor provisions of those Sections. Such forward-looking statements include, without limitation, statements concerning the Company’s future net sales, net earnings and other operating results, liquidity and capital resources, and inflation. 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 November 30, 2002 were $172.0 million, a decline of 13.1%, compared to $198.0 million in net sales for the same period last year. This decrease reflects the closure of 7 stores and a 9.7% decline in same store sales, primarily due to the challenging economic and promotional environment. Net sales for the nine months ended November 30, 2002 were $520.5 million, a decline of 7.1%, compared to $560.5 million in net sales for the same period last year. Comparable store sales for the nine-month period declined 4.0%, due to the same factors mentioned above. Average transaction size and gross profit per transaction increased for both the quarter and the nine months.

Sales of digital products for the quarter, which include flat panel and high definition televisions, digital cameras, wireless phones and home theater systems, continued to show strong growth. Sales of flat panel televisions, which include plasma and liquid crystal displays, increased more than 400 percent from a year ago. Sales of more mature technologies, such as audio components and VCRs, continued to decline. The sale of Extended Service Protection contracts for the three months ended November 30, 2002, increased to 7.9% of product sales from 7.4% of product sales during the same period a year ago. The sale of Extended Service Protection contracts for the nine months ended November 30, 2002 increased to 7.9% of product sales from 7.3% of product sales for the same period last year.

Gross profit as a percentage of net sales decreased to 27.6% for the three months ended November 30, 2002 compared to 28.3% for the same period last year. The decrease reflects the promotional environment and aggressive inventory management, including the focused sell-through of under-performing and discontinued brands and models during the first part of the quarter, as part of the Company’s gross profit return on investment (GMROI) effort. Gross profit as a percentage of net sales decreased to 28.3% for the nine months ended November 30, 2002 compared to 28.8% for the same period last year due substantially to the same factors mentioned above.

Selling, general and administrative and store closure expenses of $50.3 million, including depreciation and amortization, decreased $12.6 million for the three months ended November 30, 2002, compared to $62.9 million for the same period in the prior year. These expenses represented 29.3% of net sales in the three months ended November 30, 2002 compared to 31.8% for the prior year. The decrease in selling, general and administrative and store closure expenses, including depreciation and amortization, for the period is primarily due to the Company’s ongoing efforts to lower its cost structure, including closing seven stores, renegotiating more than twenty store leases, restructuring support operations and retiring a number of expensive operating leases. Selling, general and administrative and store closure expenses of $155.3 million, including depreciation and amortization, decreased $25.3 million for the nine months ended November 30, 2002, compared to $180.6 million for the same period in the prior year. These expenses represented 29.8% of net sales compared to 32.2% for the prior year reflecting the same factors listed above.

Interest expense decreased to $0.9 million for the three months ended November 30, 2002 from $1.1 million in the same period last year. The decrease was primarily attributable to the favorable interest rates during the period and an increased focus by the Company on working capital management. Interest expense decreased to $2.3 million for the nine months ended November 30, 2002, from $3.6 million in the same period last year.

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As a result of the factors discussed above, the net loss for the three months ended November 30, 2002 was $3.7 million compared to a net loss of $8.1 million for the three months ended November 30, 2001. The net loss per share for the three months ended November 30, 2002 was $0.14 per share compared to a net loss of $0.35 per share for the prior year. The net loss for the nine months ended November 30, 2002 was $10.1 million, or a net loss of $0.38 per share, compared to a net loss of $22.7 million, or a net loss of $0.98 per share, for the nine months ended November 30, 2001.

Liquidity and Capital Resources

At November 30, 2002, the Company had cash and equivalents of $4.8 million. The Company’s working capital was $70.7 million at November 30, 2002 compared to $53.6 million at November 30, 2001. Net cash used by operating activities was $43.3 million for the nine months ended November 30, 2002 compared to cash provided of $12.6 million for the same period in the prior year. The increase in net cash used primarily reflects the Company’s elective strategy to reduce accounts payables and maximize cash discounts at advantageous rates relative to the cost of borrowing. The increase in net cash used by operating activities is offset by $42.4 million of proceeds from borrowing on the revolving credit line within financing activities, compared to a repayment of $8.6 million for the same period in the prior year. The increase in receivables reflects primarily credit card sales resulting from the timing of the Thanksgiving holiday. Inventory levels of $139.1 million at November 30, 2002 are $18.1 million or 11.5% lower than at the same time last year, reflecting the Company’s enhanced focus on inventory management.

Net cash used in investing activities, for the purchase of fixed assets, was $4.3 million for the nine months ended November 30, 2002 compared to $6.6 million used in investing activities for the same period in the prior year.

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 beginning in October 2002, may be increased from October 1 through December 20 of each year to meet seasonal needs. At November 30, 2002, the Company had borrowings of $65.6 million outstanding under the revolving credit agreement, with $15.9 million available to borrow under the credit facility. At November 30, 2001, the Company had borrowings of $41.5 million outstanding under the revolving credit agreement, with $14.4 million available to borrow under the credit facility. The increase in borrowing was due to the Company’s previously mentioned strategy to reduce accounts payable balances and increase cash discounts at rates advantageous when compared to the costs of borrowing.

The Company expects to fund its working capital requirements for the next twelve months with a combination of cash flows from operations, normal trade credit and the revolving credit facility.

As of June 2002, the Company had closed seven of the eight stores previously 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 November 30, 2002 the Company’s closing accrual balance was $8.1 million, compared to $12.9 million at February 28, 2002 and $0.0 million at November 30, 2001.

The Company continues to implement its restructuring program in order to return to profitability. Based on the current economic and promotional environment, the Company has adjusted its internal plan to reflect lower gross profit margins and a decline in comparable store sales in the second half of the year. The continued reduction of selling, general and administrative expenses, improved operating efficiencies and supply chain management are expected to enable the Company to attain its goal of returning to profitability. 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.

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Item 3. 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 November 30, 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.

Item 4. Controls and Procedures

(a)		Evaluation of disclosure controls and procedures. The Company’s principal executive officer and its principal financial officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13(a) – 14(c) and 15(d) – 14(c)) on January 3, 2003, have concluded that, as of such date, the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities.
(b)		Changes in internal controls. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s disclosure controls and procedures subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in the Company’s internal controls. As a result, no corrective actions were required or undertaken.

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

(a) Exhibits

(b) Reports on Form 8-K filed during the quarter.

     No reports on form 8-K were filed during the quarter.

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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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CERTIFICATIONS

I, Kenneth R. Weller, certify that:

1.		I have reviewed this quarterly report on Form 10-Q of Good Guys, Inc.;
2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a – 14 and 15 d – 14) for the registrant and we have:

	(a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	(b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	(c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors:

	(a)		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	(b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.

The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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I, David A. Carter, certify that:

1.		I have reviewed this quarterly report on Form 10-Q of Good Guys, Inc.;
2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a – 14 and 15 d – 14) for the registrant and we have:

	(a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	(b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	(c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

2.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors:

	(a)		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	(b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

3.

The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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