UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

~~[X]~~ x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~November~~May 3031, ~~2002~~2003

~~[ ]~~ o TRANSITION ~~REPORTS~~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.)


Delaware		94-2366177
(State or other jurisdiction of incorporation or organization)		(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]~~ x Yes ~~[ ]~~ o No

CLASS		OUTSTANDING AS OF NOVEMBER 30, 2002
Common Stock		26,696,807

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b –2). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


CLASS	OUTSTANDING AS OF May 31, 2003

Common Stock		26,972,897

TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION
~~Item 1. Financial Statements~~	Item 1. Financial Statements
	~~CONDENSED CONSOLIDATED BALANCE SHEETS~~	CONDENSED CONSOLIDATED BALANCE SHEETS
	~~CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS~~	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
	~~CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY~~	CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
	~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Item 3. Quantitative and Qualitative Disclosure About Market Risk
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 4. Controls and Procedures
	Item 3. Quantitative and Qualitative Disclosure About Market Risk
	Item 4. Controls and Procedures
PART II: OTHER INFORMATION
~~Item 1. Legal Proceedings~~	Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
	Item 5. Other Information
SIGNATURES
	Item 6. Exhibits and Reports on Form 8-K
CERTIFICATIONS
Exhibit 99.1
Exhibit 99.2
Exhibit 99.3

GOOD GUYS, INC.

INDEX

		~~PAGE~~	PAGE
PART I:	~~FINANCIAL INFORMATION~~	FINANCIAL INFORMATION
Item 1.	~~Financial Statements:~~	Financial Statements:
	Condensed Consolidated Balance Sheets — November 30, 2002, February 28, 2002 and November 30, 2001	3
		Condensed Consolidated Balance Sheets — May 31, 2003, February 28, 2003 and May 31, 2002		3
	Condensed Consolidated Statements of Operations — Three and nine month periods ended November 30, 2002 and 2001	4
		Condensed Consolidated Statements of Operations — Three month periods ended May 31, 2003 and 2002		4
	Condensed Consolidated Statement of Changes in Shareholders’ Equity — Nine month period ended November 30, 2002	5
		Condensed Consolidated Statement of Changes in Shareholders’ Equity — Three month period ended May 31, 2003		5
	Condensed Consolidated Statements of Cash Flows — Nine month periods ended November 30, 2002 and 2001	6
		Condensed Consolidated Statements of Cash Flows — Three month periods ended May 31, 2003 and 2002		6
	~~Notes to Condensed Consolidated Financial Statements~~	7Notes to Condensed Consolidated Financial Statements		7
Item 2.	~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~	8Management’s Discussion and Analysis of Financial Condition and Results of Operations		9
Item 3.	~~Quantitative and Qualitative Disclosure About Market Risk~~	10Quantitative and Qualitative Disclosure About Market Risk		10
Item 4.	~~Controls and Procedures~~	10Controls and Procedures		10
PART II:	~~OTHER INFORMATION~~	OTHER INFORMATION
Item 1.	~~Legal Proceedings~~	10Legal Proceedings		11
Item 6.	Exhibits and Reports on Form 8-K	10
Item 5.		Other Information		11
SIGNATURES		11
Item 6.		Exhibits and Reports on Form 8-K		11
CERTIFICATIONS		12
SIGNATURES				11
EXHIBITS		14
CERTIFICATIONS				12
EXHIBITS				14

PART I: FINANCIAL INFORMATION
Item 1. Financial Statements

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

				NOVEMBER 30,			FEBRUARY 28,			NOVEMBER 30,
				May 31,			February 28,			May 31,
				2002			2002			2001
				2003			2003			2002
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents			$	4,756		$	4,108		$	3,381
	Cash and equivalents			$	3,065		$	733		$	2,014
	Accounts receivable (less allowance for doubtful accounts of $1,953, $5,803 and $1,579 respectively)				33,151			24,145			27,504
	Accounts receivable (less allowance for doubtful accounts of $1,500, $1,463 and $5,562, respectively)				15,994			16,324			26,696
	Merchandise inventories				~~139~~96,~~065~~888			~~102~~100,~~109~~867			~~157~~106,~~183~~334
	Prepaid expenses				79,~~510~~598			69,~~733~~794			87,~~207~~094
		Total current assets			~~184~~125,~~482~~545			~~137~~127,~~095~~718			~~196~~142,~~275~~138
PROPERTY AND EQUIPMENT, NET
PROPERTY AND EQUIPMENT
	Leasehold improvements				66,~~222~~390			6466,~~436~~179			7466,~~081~~078
	Furniture, fixtures and equipment				7677,~~321~~548			7277,~~245~~034			7674,~~937~~024
	Construction in progress				~~1,878~~972			~~3,435~~942			~~4,381~~427
	Total property and equipment				144,421			140,116			155,399
	Total property and equipment, at cost				144,910			144,155			140,529
	Less accumulated depreciation and amortization				(~~100~~104,~~351~~775	)		(91102,~~357~~154	)		(9794,~~078~~260	)
	Property and equipment, net				4440,~~070~~135			4842,~~759~~001			5846,~~321~~269
OTHER ASSETS					~~647~~83			~~562~~686			~~571~~609
TOTAL ASSETS			~~TOTAL ASSETS~~	$	~~229~~165,~~199~~763		$	~~186~~170,~~416~~405		$	~~255~~189,~~167~~016
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
	Accounts payable			$	6437,~~510~~686		$	5325,~~863~~601		$	9660,~~955~~968
	Accrued expenses and other liabilities:
			Accrued payroll		10,119			10,930			11,753
			Payroll		7,631			7,418			10,504
			Sales taxes payable		4,774			4,609			5,365
			Sales taxes		3,573			3,401			4,405
			Store closure		85,~~116~~530			126,~~904~~297			—10,410
			Other		26,259			26,864			28,561
			Extended service plan		2,176			288			3,154
	Total current liabilities				113,778			109,170			142,634
			Other		18,842			16,230			14,606
REVOLVING CREDIT DEBT					65,613			23,231			41,518
	Total current liabilities				75,438			59,235			104,047
REVOLVING CREDIT DEBT					37,399			50,099			30,009
SHAREHOLDERS’ EQUITY:
	Preferred stock, $.001 par value:
			Authorized — 2,000,000 shares, Issued —none		—			—			—
	Common stock, $.001 par value Authorized —40,000,000 shares, Issued and outstanding—26,696,807, 23,449,608 and 23,372,907 shares, respectively				27			23			23
	Common stock, $.001 par value Authorized — 40,000,000 shares, Issued and outstanding — 26,972,897, 26,833,452 and 26,429,565 shares, respectively				27			27			26
	Additional paid-in-capital				111,~~327~~685			~~105~~111,~~416~~418			~~105~~110,~~107~~945
	Retained deficit				(61,546	)		(51,424	)		(34,115	)
	Accumulated deficit				(58,786	)		(50,374	)		(56,011	)
			Total shareholders’ equity		4952,~~808~~926			5461,~~015~~071			7154,~~015~~960
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY				$	~~229~~165,~~199~~763		$	~~186~~170,~~416~~405		$	~~255~~189,~~167~~016

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

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

			Three Months Ended						~~Nine Months Ended~~
			November 30,						November 30,
			May 31,
			2002			2001			2002			2001
			2003			2002
Net sales			$	~~171~~143,~~988~~352		$	~~197~~171,~~978~~033		$	~~520,513~~		$	~~560,461~~
Cost of sales				(~~124~~103,~~523~~703	)		(~~142~~121,~~031~~787	)		~~(373,097~~	)		~~(399,039~~	)
	Gross profit	~~Gross profit~~		4739,~~465~~649			5549,~~947~~246			~~147,416~~			~~161,422~~
Selling, general and administrative				(4744,~~349~~913	)		(5950,~~747~~978	)		~~(147,296~~	)		~~(170,981~~	)
Depreciation and amortization				(2,~~972~~524	)		(32,~~148~~903	)		~~(8,669~~	)		~~(9,590~~	)
Store closure				—			—			700			—
Store closure and impairment of asset recovery				—			700
Loss from operations				(27,~~856~~788	)		(63,~~948~~935	)		~~(7,849~~	)		~~(19,149~~	)
Interest expense, net				(~~880~~624	)		(~~1,136~~652	)		~~(2,273~~	)		~~(3,559~~	)
	Net loss		$	(38,~~736~~412	)	$	(84,~~084~~587	)	$	~~(10,122~~	)	$	~~(22,708~~	)
Net loss per share Basic			$	(0.14	)	$	(0.35	)	$	(0.38	)	$	(0.98	)
Net loss per share
		Diluted	$	(0.14	)	$	(0.35	)	$	(0.38	)	$	(0.98	)
		Basic	$	(0.31	)	$	(0.18	)
Weighted average shares Basic				26,697			23,357			26,431			23,263
		Diluted	$	(0.31	)	$	(0.18	)
		Diluted		26,697			23,357			26,431			23,263
Weighted average shares
		Basic		26,973			26,069
		Diluted		26,973			26,069

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

GOOD GUYS, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE ~~NINE~~THREE-MONTH PERIOD ENDED ~~NOVEMBER~~MAY 3031, ~~2002~~2003 (In thousands, except share data) (Unaudited)

		COMMON STOCK				ADDITIONAL		RETAINED
		Common Stock				Additional
						PAID-IN		EARNINGS
							Paid-in		Accumulated
		SHARES		AMOUNT		CAPITAL		(DEFICIT)			TOTAL
		Shares		Amount		Capital		Deficit			Total
Balance at February 28, 2002			23,449,608	$	23	$	105,416	$	(51,424	)	$	54,015
Balance at February 28, 2003			26,833,452	$	27	$	111,418	$	(50,374	)	$	61,071
Issuance of common stock under employee stock purchase plan			~~427~~139,~~199~~445		1		~~654~~214					~~655~~214
Proceeds from sale of common stock, net of offering expenses			2,800,000		3		5,179					5,182
	Amortization of restricted stock						53					53
Restricted stock:
Net loss for the three-month period ended May 31, 2003									(8,412	)		(8,412	)
	Issuance of restricted stock		20,000
Balance at May 31, 2003			26,972,897	$	27	$	111,685	$	(58,786	)	$	52,926
	Amortization						78					78
Net loss for the nine-month period ended November 30, 2002									(10,122	)		(10,122	)
Balance at November 30, 2002			26,696,807	$	27	$	111,327	$	(61,546	)	$	49,808

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

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

					NINE MONTHS ENDED
					Three Months Ended
					NOVEMBER 30,
					May 31,
					2002			2001
					2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net loss				$	(108,~~122~~412	)	$	(224,~~708~~587	)
	Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
	Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
			Depreciation and amortization			82,~~994~~636			92,~~864~~903
			Provision for store closure			(700	)		—
			Allowance for doubtful accounts			(37	)		(241	)
			Restricted stock amortization			78			161
			Provision for store closure			—			(700	)
			Restricted stock amortization			53			25
			Changes in assets and liabilities:
				Accounts receivable		~~(9,006~~367	)		1(2,~~349~~310	)
				Merchandise inventories		~~(36~~3,~~956~~979	)		(364,~~255~~225	)
				Prepaid expenses and other assets		~~(862~~799	)		~~1,492~~(408	)
				Accounts payable		1012,~~647~~085			537,~~525~~105
				Accrued expenses and other liabilities		(54,~~339~~118	)		5(11,~~123~~528	)
	Net cash (used in) provided by operating activities					(43,266	)		12,551
		Net cash provided by (used in) operating activities				15,588			(13,966	)
CASH FLOWS FROM INVESTING ACTIVITIES:
	Capital expenditures, net					(4,305	)		(6,638	)
	Purchase of fixed assets					(770	)		(413	)
				Net cash used in investing activities		(~~4,305~~770	)		(~~6,638~~413	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Net proceeds from borrowing (repayment) of revolving credit					42,382			(8,643	)
	Net proceeds from (repayment) borrowing of revolving credit					(12,700	)		6,778
	Issuance of common stock, net					~~5,837~~214			~~782~~5,507
		Net cash provided by (used in) financing activities				48,219			(7,861	)
		Net cash (used in) provided by financing activities				(12,486	)		12,285
		Net increase (decrease) in cash and cash equivalents				648			(1,948	)
		Net increase (decrease) in cash and equivalents				2,332			(2,094	)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD						4,108			5,329
CASH AND EQUIVALENTS, BEGINNING OF PERIOD						733			4,108
CASH AND EQUIVALENTS AT END OF PERIOD					$	4,756		$	3,381
CASH AND EQUIVALENTS, END OF PERIOD					$	3,065		$	2,014

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

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.

1.		The condensed consolidated balance sheets at May 31, 2003 and May 31, 2002, and the consolidated statements of operations and the consolidated statements of 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, 2003 and May 31, 2002, and the results of operations and cash flows for the three-month periods then ended. The balance sheet at February 28, 2003, 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, 2003. The results of operations for the three-month period ended May 31, 2003 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, 2003 and 2002 because their inclusion in net loss periods would be anti-dilutive to the earnings per share calculation.

		The Company accounts for its employee stock-based compensation using the intrinsic value method in accordance with Accounting Principle Board Opinion (“APB”) 25, “Accounting for Stock Issued to Employees” and its related interpretations and with the disclosure requirements of Statement of Financial Accounting Standard (“SFAS”) 148, “Accounting for Stock Based Compensation – Transition and Disclosure". Because the Company has granted 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.

		Equity instruments granted to non-employees are accounted for in accordance with the provisions of SFAS 123, “Accounting for Stock-Based Compensation” and Emerging Issues Task Force (“EITF”) 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods and Services”, under the fair value based method using the Black-Scholes option pricing model.

		Had compensation expense for the Company’s stock-based compensation plan been determined based upon fair values at the grant dates for awards under the plan in accordance with SFAS 123 calculated using the methods and assumptions described in Note 9 of the Annual 10-K, the Company’s net loss would have been as follows:


		Three months ended
		May 31,

(Dollars in thousands)		2003			2002

Net loss, as reported		$	(8,412	)	$	(4,587	)
Add: Stock compensation determined using intrinsic value method			56			25
Less: Stock compensation determined using fair value method			(68	)		(253	)

Pro forma net loss		$	(8,424	)	$	(4,815	)

Earnings per share:
	Basic – as reported	$	(0.31	)	$	(0.18	)
	Basic – pro forma	$	(0.31	)	$	(0.18	)
	Diluted – as reported	$	(0.31	)	$	(0.18	)
	Diluted – pro forma	$	(0.31	)	$	(0.18	)

3.		Store closure accrual

		As of June 2003, the Company had closed all eight stores scheduled for closure. Prior to December 31, 2002 and in accordance with EITF 94-3, the Company recorded the estimated costs associated with closing a store during the period in which the store was identified and approved by management under a plan of termination, which includes the method of disposition and the expected date of completion. These costs included direct costs to terminate a lease or future lease obligations, net of expected sub-lease income, and the difference between the carrying values and estimated recoverable values of long-lived and intangible assets. Severance and other employee-related costs were recorded in the period in which the closure and related severance packages are communicated to the affected employees. After December 31, 2002, the Company adopted SFAS 146, which requires costs associated with the termination of the lease to be recorded when the store is closed, and other liabilities for costs associated with an exit or disposal activity to be recognized when the liability is incurred. The movement in the store closure accrual of $0.8 million during the period represents cash payments. In the prior year period, the Company had executed lease termination agreements for five stores resulting in a reversal of estimated termination costs of $0.7 million. The total accrual for store closure expenses at May 31, 2003 was $5.5 million, compared to $6.3 million at February 28, 2003 and $10.4 million at May 31, 2002.

4.		Borrowings

		Through May 31, 2006, the Company has a $100 million revolving credit facility from Bank of America and GE Capital. The Company is required to comply with 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, 2003, the Company had borrowings of $37.4 million outstanding under the revolving credit agreement, with $16.0 million available to borrow under the credit facility. 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.

5.		In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure". SFAS 148 amends SFAS 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions of SFAS 148 were effective for the Company’s fiscal year ended February 28, 2003. The interim disclosure provisions are effective for the first quarter of the fiscal year ending May 31, 2004. The Company continues to account for stock-based compensation using the intrinsic value method in accordance with the provisions of APB 25, as allowed by SFAS 123. As a result, the adoption of SFAS 148 did not have any impact on the Company’s consolidated financial statements.

6.		In November 2002, the Emerging Issues Task Force (“EITF’) reached a consensus regarding EITF 02-16, “Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor". EITF 02-16 addresses the timing of recognition and classification of consideration received from vendors, including rebates and allowances. EITF 02-16 is effective for certain of the Company’s vendor rebates and allowances commencing in November 2002. The adoption of EITF 02-16 had no impact on the Company’s consolidated financial statements.

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~~ 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~~ 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~~ 2003 Annual Report on Form 10-K under “Information Regarding Forward ~~Looking~~ Looking Statements” and “Risk Factors”.

RESULTS OF OPERATIONS

Net sales for the three months ended ~~November~~May 3031, ~~2002~~2003 were $~~172~~143.04 million, a decline of 1316.12%, compared to $~~198~~171.0 million in net sales for the same period last year. This decrease ~~reflects~~is ~~the closure of 7 stores and a 9.7% decline in same store sales,~~ primarily due to the ~~challenging~~impact of the economic climate and ~~promotional environment.~~five ~~Net~~stores ~~sales for~~ the ~~nine~~Company ~~months~~closed ~~ended~~in ~~November 30,~~the ~~2002~~same ~~were~~period ~~$520~~last year.5 Actual ~~million,~~comparable astore ~~decline~~sales ofdecreased ~~7.1~~14%, ~~compared~~and tothe ~~$560.5 million~~Company inexpects ~~net~~continued ~~sales for the~~ same store ~~period~~sale ~~last~~decreases ~~year.~~through ~~Comparable~~the ~~store~~first ~~sales~~half ~~for~~of the ~~nine-month period declined 4~~year.~~0%,~~ ~~due~~The Company continued to ~~the~~see ~~same~~increases ~~factors~~in ~~mentioned~~average ~~above. Average~~ transaction size and gross profit per transaction, although ~~increased~~these ~~for~~gains ~~both~~were minimized by the ~~quarter~~overall ~~and~~decline ~~the nine~~in ~~months~~store traffic.

Sales of ~~digital~~the ~~products~~latest ~~for~~digital ~~the~~and ~~quarter~~high-tech products, ~~which~~including ~~include~~ flat panel and ~~high~~ high-definition televisions, ~~digital~~high ~~cameras,~~definition ~~wireless~~set-top ~~phones~~boxes and ~~home~~MP3 ~~theater~~players ~~systems,~~ continued totheir ~~show~~ strong ~~growth. Sales of flat panel televisions~~demand, ~~which~~ ~~include~~but ~~plasma~~those ~~and~~gains ~~liquid~~were ~~crystal~~offset ~~displays,~~by ~~increased~~declines ~~more~~in ~~than 400~~audio ~~percent~~business ~~from~~and ~~a year ago. Sales of~~ more ~~mature~~established ~~technologies~~categories, such as ~~audio components~~traditional ~~and VCRs, continued to decline~~televisions. 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~~reduced ~~the nine months ended November 30, 2002 increased~~ to 7.97% of ~~product~~ sales from 7.39% of ~~product~~ sales ~~for~~in the same period ~~last~~in the prior year.

Gross profit as a percentage of net sales decreased to 27.67% for the three months ended ~~November~~May 3031, ~~2002~~2003 compared to 28.38% for the same period ~~last~~in the prior year. ~~The~~ This decrease reflects ~~the~~increased promotional ~~environment and aggressive inventory management~~expenses, ~~including the focused~~ higher sell-through of ~~under-performing and~~ discontinued ~~brands~~products and ~~models~~increased ~~during~~service ~~the first part of the quarter, as part of the Company’s gross profit return on investment (GMROI) effort~~costs. ~~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 $5047.34 million, including depreciation and amortization, decreased $125.68 million for the three months ended ~~November~~May 3031, ~~2002~~2003, compared to $6253.92 million for the ~~same~~ same period in the prior year. These expenses represented 2933.31% of net sales in ~~the~~ the three months ended ~~November~~May 3031, ~~2002~~2003 compared to 31.81% for the same period in the prior year. The decrease in selling, general and administrative ~~and store closure~~ expenses, including depreciation and amortization, ~~for~~reflects the ~~period~~continued istight ~~primarily~~control over ~~due~~costs; to the ~~Company’s~~ ~~ongoing~~increase ~~efforts~~in topercentage ~~lower~~reflects ~~its~~the ~~cost~~lower ~~structure,~~sales ~~including~~volume. ~~closing~~In ~~seven~~the ~~stores,~~prior ~~renegotiating~~year ~~more than twenty store leases~~period, ~~restructuring~~the ~~support operations~~Company ~~and~~had ~~retiring~~executed alease ~~number~~termination ofagreements ~~expensive~~for five ~~operating leases. Selling~~stores, ~~general~~ ~~and~~resulting ~~administrative~~in ~~and~~a ~~store~~reversal ~~closure expenses~~ of ~~$155.3 million, including~~estimated ~~depreciation~~termination ~~and~~costs ~~amortization,~~of ~~decreased~~ $250.~~3 million for the nine~~7 ~~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 $0.96 million for the three months ended ~~November 30~~May 31, 2003 ~~2002~~ from $10.17 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.~~

As a result of the factors discussed above, the net loss for the three months ended May 31, 2003 was $8.4 million compared to a net loss of $4.6 million for the three months ended May 31, 2002. The net loss per share for the three months ended May 31, 2003 was $0.31 per share compared to a net loss of $0.18 per share for the same period in the prior year.

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~~May 3031, ~~2002~~2003, the Company had cash and equivalents of $43.81 million, compared to $2.0 million at May 31, 2002. The Company’s working capital was $7050.7 1 million at ~~November~~May 3031, ~~2002~~2003 compared to $5338.61 million at ~~November~~May 3031, ~~2001~~2002. Net cash provided ~~used~~ by operating activities was $4315.36 million for the ~~nine~~three months ended ~~November~~ May 3031, ~~2002~~2003 compared to cash ~~provided~~ used of $1214.60 million for the same period in the prior year. ~~The~~This ~~increase in net cash used~~ primarily reflects the ~~Company’s~~timing ~~elective~~of ~~strategy~~payments tofor ~~reduce~~ accounts ~~payables and maximize cash discounts at advantageous rates relative to~~payable ~~the cost of borrowing. The increase in net cash used by operating activities is~~ offset by ~~$42.4 million~~borrowings ofagainst ~~proceeds from borrowing on~~ the revolving credit ~~line within~~facility ~~financing~~and ~~activities, compared to~~ a ~~repayment~~reduction ~~of $8.6 million for the~~in ~~same~~merchandise ~~period~~inventories, inachieved ~~the~~through ~~prior~~more ~~year.~~effective ~~The~~supply ~~increase in receivables reflects primarily~~chain ~~credit~~management ~~card~~and ~~sales resulting from~~ the ~~timing~~gross ofprofit ~~the~~return ~~Thanksgiving~~on ~~holiday. Inventory~~investment ~~levels of $139.1 million at November 30~~initiative, ~~2002~~including ~~are $18.1 million or~~SKU 11rationalization.~~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 $40.3 8 million for the ~~nine~~three months ended ~~November~~May 3031, ~~2002~~2003 compared to $60.6 4 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.

Through May 31, 2006, the Company has a $100 million revolving credit facility from Bank of America and GE Capital. The Company is required to comply with 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, 2003, the Company had borrowings of $37.4 million outstanding under the revolving credit agreement, with $16.0 million available to borrow under the credit facility. 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.

The Company expects to fund its working capital requirements with a combination of cash flows from operations, normal trade credit, the revolving credit facility, and lease financing arrangements, though any continued decreases in its same store sales beyond the first half of fiscal 2004 could adversely affect its ability to do so.

As of June 2003, the Company had closed all eight stores scheduled for closure. With respect to these stores, the Company has executed lease termination agreements for five stores and is currently negotiating either the termination of the lease or the sub-lease of two of the remaining stores. Execution of the five lease terminations resulted in a reversal of estimated termination costs of $0.7 million in the three months ending May 31, 2002. The amendment to the lease for the Pinole, California store allows the Company to re-open the store in a smaller format, which it expects to do so in August 2003. In the fiscal year ended February 28, 2003, the amendment, after negotiation fees and certain expenses, resulted in a reversal of $1.0 million from the estimated store closure accrual established for that store in January 2002. The Company has reassessed its reserves for the remaining two stores and believes that they are adequate. The total accrual for store closure expenses at May 31, 2003 was $5.5 million, compared to $6.3 million at February 28, 2003 and $10.4 million at May 31, 2002.

The Company continues to implement its turnaround strategy to sustain 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 first half of the year. Profitability is contingent upon many factors, including, but not limited to, the continued successful implementation of the turnaround strategy, 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.

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~~May 3031, ~~2002~~2003), 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)~~13a – 14(c) and ~~15(d)~~15d – 14(c)) on ~~January~~June 326, 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~~internal 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.

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 5. Other Information

By the attached press release, dated July 8, 2003, the Company announced certain management changes.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

99.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.3		Press Release, dated July 8, 2003.

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

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

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.	~~GOOD GUYS, INC.~~
Date: January 3, 2003	By:	/s/ KENNETH R. WELLER Kenneth R. Weller Chairman and Chief Executive Officer
Date: July 15, 2003	By:	/s/	KENNETH R. WELLER
Date: January 3, 2003	By:	/s/ DAVID A. CARTER David A. Carter Chief Financial Officer
			Kenneth R. Weller
			Chairman and Chief Executive Officer
Date: July 15, 2003	By:	/s/	DAVID A. CARTER
			David A. Carter
			Chief Financial Officer

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 the 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

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.

Date: January 3, 2003 /s/ KENNETH R. WELLER Kenneth R. Weller Chairman and Chief Executive Officer


Date: July 15, 2003	/s/	KENNETH R. WELLER
		Kenneth R. Weller
		Chairman and Chief Executive Officer

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;

24. 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 the 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

35. 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.

Date: January 3, 2003 /s/ DAVID A. CARTER David A. Carter Chief Financial Officer


Date: July 15, 2003	/s/	DAVID A. CARTER
		David A. Carter
		Chief Financial Officer

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Filing Compare · GOOD GUYS INC