<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934.
For the transition period from __________________ to _________________________
Commission File Number : 333-43129
BIG 5 CORP.
FKA: UNITED MERCHANDISING CORP.
(Exact name of registrant as specified in its charter)
California
(State of Incorporation)
95-1854273
(I.R.S employer identification number)
2525 EAST EL SEGUNDO BOULEVARD
EL SEGUNDO, CALIFORNIA 90245
(310) 536-0611
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrant has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports). Yes [X] No [ ]
Indicate by check mark whether the registrant has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding for each of the registrant's classes
of common stock, as of the latest practicable date. 1,000 shares of common
stock, $.01 par value, at May 6, 1998.
<PAGE> 2
BIG 5 CORP.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Title Page 1
Index 2
PART I -FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - March 29, 1998 and
December 28, 1997 3
Statements of Operations -
3 months ended March 29, 1998 and
March 30, 1997 4
Statements of Cash Flows -
3 months ended March 29, 1998 and
March 30, 1997 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of
Security-Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
</TABLE>
2
<PAGE> 3
BIG 5 CORP.
Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
March 29, December 28,
1998 1997
------------ ------------
<S> <C> <C>
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 4,055 $ 1,364
Trade and other receivables, net of allowance for doubtful
accounts of $128 and $118, respectively 4,172 6,702
Merchandise inventories 161,668 147,279
Prepaid expenses 697 1,053
------------ ------------
Total current assets 170,592 156,398
------------ ------------
Property and equipment:
Land 186 186
Buildings and improvements 15,861 15,353
Furniture and equipment 34,004 33,481
Less accumulated depreciation and amortization (22,754) (21,719)
------------ ------------
Net property and equipment 27,297 27,301
------------ ------------
Deferred income taxes, net 6,257 6,257
Leasehold interest, net of accumulated amortization of
$14,308 and $13,882, respectively 14,154 14,610
Other assets, at cost, less accumulated
amortization of $1,223 and $975, respectively 6,161 6,336
Goodwill, less accumulated amortization of $1,185
and $1,124, respectively 5,359 5,420
------------ ------------
$ 229,820 $ 216,322
============ ============
</TABLE>
<TABLE>
<CAPTION>
March 29, December 28,
1998 1997
------------ ------------
<S> <C> <C>
Liabilities and Stockholder's Equity (Unaudited)
Current liabilities:
Accounts payable $ 63,484 $ 44,089
Accrued expenses 29,165 31,428
------------ ------------
Total current liabilities 92,649 75,517
Deferred rent 6,150 5,988
Long-term debt 170,412 173,660
------------ ------------
Total liabilities 269,211 255,165
------------ ------------
Commitments and contingencies
Stockholder's deficit:
Common stock, $.01 par value. Authorized 3,000 shares;
issued and outstanding 1,000 shares -- --
Additional paid-in capital 35,080 35,080
Accumulated deficit (74,471) (73,923)
------------ ------------
Total stockholder's deficit (39,391) (38,843)
------------ ------------
$ 229,820 $ 216,322
============ ============
</TABLE>
See accompanying notes to financial statements
3
<PAGE> 4
BIG 5 CORP.
Statements of Operations
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
March 29, 1998 March 30, 1997
-------------- --------------
<S> <C> <C>
Net sales $ 110,089 $ 96,790
Cost of goods sold, buying and occupancy 74,765 66,583
------------ ------------
Gross profit 35,324 30,207
------------ ------------
Operating expenses:
Selling and administrative 29,309 26,239
Depreciation and amortization 2,067 1,967
------------ ------------
Total operating expenses 31,376 28,206
------------ ------------
Operating income 3,948 2,001
Interest expense, net 4,876 2,711
------------ ------------
Loss before
income taxes (928) (710)
Income tax (benefit) (380) -.-
------------ ------------
Net loss $ (548) $ (710)
============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
BIG 5 CORP.
Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------
March 29, 1998 March 30, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (548) $ (710)
Adjustments to reconcile net loss to net cash
provided/(used) by operating activities:
Depreciation and amortization 2,067 1,967
Amortization of deferred finance charge 248 166
Change in assets and liabilities:
Merchandise inventories (14,389) (8,826)
Trade accounts receivable, net 2,530 1,926
Prepaid expenses and other assets 283 286
Income taxes -- (1,696)
Accounts payable 19,395 1,363
Accrued expenses (2,228) (5,898)
------------ ------------
Net cash provided/(used) by operating activities 7,358 (11,422)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (1,419) (726)
------------ ------------
Net cash used in investing activities (1,419) (726)
------------ ------------
Cash flows from financing activities:
Net (payment)/borrowings under revolving credit facilities (3,248) 10,000
------------ ------------
Net cash provided by (used in) financing activities (3,248) 10,000
------------ ------------
Net increase/(decrease) in cash and cash equivalents 2,691 (2,148)
Cash and cash equivalents at beginning of period 1,364 4,797
------------ ------------
Cash and cash equivalents at end of period $ 4,055 $ 2,649
============ ============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
BIG 5 CORP.
Notes to Unaudited Financial Statements
(Dollars in Thousands)
FINANCIAL INFORMATION
1. In the opinion of management of Big 5 Corp. ("the Company"), the
accompanying unaudited financial statements contain all adjustments,
consisting only of normal recurring adjustments, which in the opinion of
management are necessary to present fairly and in accordance with
generally accepted accounting principles the financial position and cash
flows as of and for the period ended March 29, 1998. It should be
understood that accounting measurements at interim dates inherently
involve greater reliance on estimates than at fiscal year-end. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission; however, management
believes that the disclosures are adequate to make the information
presented not misleading.
2. These unaudited financial statements should be read in conjunction with
the Company's 1997 audited financial statements included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 28, 1997.
6
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands)
RESULTS OF OPERATIONS
The results of the interim periods are not necessarily indicative of results for
the entire fiscal year.
THREE MONTHS ENDED MARCH 29, 1998 VERSUS THREE MONTHS ENDED MARCH 30, 1997
The following table sets forth for the periods indicated operating results in
thousands of dollars and expressed as a percentage of sales.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------
March 29, 1998 March 30, 1997
-------------------------- -------------------------
<S> <C> <C> <C> <C>
Net sales $ 110,089 100.0% $ 96,790 100.0%
Cost of goods sold, buying and
occupancy 74,765 67.9 66,583 68.8
--------- --------- --------- ---------
Gross profit 35,324 32.1 30,207 31.2
--------- --------- --------- ---------
Operating expenses:
Selling and administrative 29,309 26.6 26,239 27.1
Depreciation and amortization 2,067 1.9 1,967 2.0
--------- --------- --------- ---------
Total operating expense 31,376 28.5 28,206 29.1
--------- --------- --------- ---------
Operating income 3,948 3.6 2,001 2.1
Interest expense 4,876 4.4 2,711 2.8
--------- --------- --------- ---------
Net loss before
income taxes (928) (0.8) (710) (0.7)
Income taxes (380) (0.3) -.- -.-
--------- --------- --------- ---------
Net loss $ (548) (0.5)% $ (710) (0.7)%
========= ========= ========= =========
EBITDA (a) $ 6,015 5.5% $ 3,968 4.1%
========= ========= ========= =========
</TABLE>
(a) EBITDA represents net earnings (loss) before taking into consideration
net interest expense, income tax expense, depreciation expense,
amortization expense, non-cash rent expense (see Footnote 5 in "Notes to
Financial Statements" of the Company's Annual Report on Form 10-K for
the fiscal year ended December 28, 1997). While EBITDA is not intended
to represent cash flow from operations as defined by generally accepted
accounting principles ("GAAP") and should not be considered as an
indicator of operating performance or an alternative to cash flow (as
measured by GAAP) as a measure of liquidity, it is included herein
because some investors believe it provides additional information with
respect to the ability of the Company to meet its future debt service,
capital expenditure and working capital requirements.
7
<PAGE> 8
1. Net Sales
Net sales increased 13.7% (or $13.3 million) from $96.8 million reported
for the three months ended March 30, 1997 to $110.1 million for the three
months ended March 29, 1998. Same store sales increased 8.9% compared with
the same period last year, reflecting the continued success of the
Company's merchandising programs, a favorable winter season, positive
general economic conditions in the Western United States, an extra
business day in the accounting period due to the timing of the Easter
Holiday, and an increase in store count from 196 at March 30, 1997 to 209
at March 29, 1998.
2. Gross Profit
Gross profit increased 16.9% (or $5.1 million) from $30.2 million for the
three months ended March 30, 1997 to $35.3 million for the three months
ended March 29, 1998, reflecting increased sales discussed above and
improved gross profit margin. Gross profit margin increased from 31.2% of
sales for the three month period in 1997 to 32.1% for the comparable three
month period this year. The improvement is a result of positive
comparisons in many of the Company's product categories including shoes
and the seasonal ski related product categories along with the leveraging
of fixed costs due to increased sales.
3. Operating Expenses
Selling and administrative expenses increased 11.7% (or $3.1 million) from
$26.2 million for the three months ended March 30, 1997 to $29.3 million
for the three months ended March 29, 1998, reflecting the increase in the
Company's store count between periods. As a percentage of sales, selling
and administrative expenses decreased from 27.1% for the 1997 period to
26.6% of sales in the 1998 period reflecting management's continued focus
on controlling expenses and its leveraging fixed costs due to increased
sales.
Depreciation and amortization increased 5.1% (or $0.1 million) from $2.0
million for the prior year period to $2.1 million for the three months
ended March 29, 1998. The increase reflected expenditures, and the related
depreciation and amortization from the growth in the Company's store base
during the past fiscal year.
4. Interest Expense
Interest expense increased 79.9% (or $2.2 million) from $2.7 million for
the prior year period to $4.9 million for the three months ended March 29,
1998. This increase reflected the impact of the Company's Recapitalization
(see "Liquidity and Capital Resources") which increased debt levels
beginning in the fourth quarter of 1997.
5. Income Taxes
The Company recorded an income tax benefit against operations of $0.4
million for the three months ended March 29, 1998 versus no tax provision
for the same period last year.
8
<PAGE> 9
6. Net Loss
Net loss for the three months ended March 29, 1998 decreased 22.8% (or
$0.2 million) from $0.7 million for the three months ended March 30, 1997
to $0.5 million for the three months ended March 29, 1998. This
improvement reflects the positive sales and margin results achieved during
the three months ended March 29, 1998.
7. Earnings Before Interest, Taxes, Depreciation, and Amortization ("EBITDA")
EBITDA increased 51.6% (or $2.0 million) from $4.0 million for the three
months ended March 30, 1997 to $6.0 million for the three months ended
March 29, 1998. This improvement reflects the positive sales and margin
results achieved during the three months ended March 29, 1998.
LIQUIDITY AND CAPITAL RESOURCES
In October 1997, Big 5 Holdings Corp. (the "Parent"), Robert W.
Miller, Steven G. Miller and Green Equity Investors, L.P. ("GEI") agreed to a
recapitalization agreement (the "Recapitalization Agreement") which resulted in
existing management and employees of the Company (and members of their families)
beneficially gaining majority ownership of the Company when the recapitalization
was completed on November 13, 1997 (the "Recapitalization").
In connection with the Recapitalization, the Company issued
$131.0 million in aggregate principal amount of Series A 10 7/8% Senior Notes
due 2007, requiring semi-annual interest payments. These notes were subsequently
exchanged for a like aggregate principal amount of Series B 10 7/8% Senior Notes
due 2007 (the "Senior Notes"), having substantially identical terms. The Company
has no mandatory payments of principal on the Senior Notes prior to their final
maturity in 2007.
The Company's primary sources of liquidity are cash flow from
operations and borrowings under the Company's five year, non-amortizing, $125.0
million revolving credit facility (the "CIT Credit Facility"). The Company
amended its then-current Credit Facility effective November 13, 1997, to provide
for the CIT Credit Facility. The CIT Credit Facility is secured by the Company's
trade accounts receivable, merchandise inventories and general intangible
assets. Subject to certain terms and conditions, the CIT Credit Facility permits
the Company to obtain revolving loans up to a maximum aggregate principal amount
that, together with the aggregate undrawn amount of all outstanding letters of
credit and of all unreimbursed amounts drawn under letters of credit, does not
exceed the lesser of $125.0 million and the Borrowing Base (as defined therein),
which is generally equal to 70% of the aggregate value of Eligible Inventory (as
defined therein) during November through February and 65% of the aggregate value
of Eligible Inventory during the remaining months of the year. The value of the
Company's Eligible Inventory as of March 29, 1998 was approximately $151.0
million. The Company intends to use net cash provided by operating activities
and borrowings under the CIT Credit Facility to fund its anticipated capital
expenditures and working capital requirements. However, if additional cash is
required, it may be difficult for the Company to obtain because the Company is
highly leveraged and is limited by restrictions contained in the CIT Credit
Facility and the indenture governing the Senior Notes.
As a result of borrowings under the Recapitalization, the
Company's interest expense increased from $2.7 million for the three months
ended March 30, 1997 to $4.9 million for the three months ended March 29, 1998.
The Company believes that cash flow from operations will be sufficient to cover
the interest expense arising from the CIT Credit Facility and the Senior Notes.
However, the Company's ability to meet its debt service obligations depends upon
its future performance, which, in
9
<PAGE> 10
turn, is subject to, among other things, general economic conditions and
regional risks, and to financial, business and other factors affecting the
operations of the Company, including factors beyond its control. Accordingly,
there can be no assurance that cash flow from operations will be sufficient to
meet the Company's debt service obligations.
Net cash provided by operating activities was $7.4 million for
the 13 weeks ended March 29, 1998 versus net cash used of $11.4 million for the
13 weeks ended March 30, 1997, reflecting increased accounts payable at the end
of the 1998 period.
Capital expenditures for the 13 weeks ended March 29, 1998 were
$1.4 million versus $0.7 million for the same period last year. Management
expects capital expenditures for Fiscal 1998 will range from $6.0 to $7.5
million and will be used primarily to fund the opening of approximately 15 to
20 new stores.
Net cash used in financing activities was $3.3 million for the 13
weeks ended March 29, 1998 versus cash provided of $10.0 million for the same
period last year. As of March 29, 1998, the Company had borrowings of $40.0
million and letter of credit commitments of $4.0 million outstanding under the
CIT Credit Facility compared to $60.0 million and $3.5 as of March 30, 1997,
with cash and cash equivalents of $4.1 million at March 29, 1998 compared to
$2.6 million at March 30, 1997.
The CIT Credit Facility and the Senior Notes indenture contain
various covenants which impose certain restrictions on the Company, including
the incurrence of additional indebtedness, the payment of dividends, and the
ability to make acquisitions. In addition, the CIT Credit Facility requires
compliance with the maintenance of certain financial ratios and other financial
covenants. The Company is in compliance with all the covenants under the CIT
Credit Agreement and the Senior Notes indenture.
The Company is not aware of any material environmental
liabilities relating to either past or current properties owned, operated or
leased by it. There can be no assurance that such liabilities do not currently
exist or will not exist in the future.
IMPACT OF ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standard Board issued Statement No. 130, (Reporting
Comprehensive Income); Statement No. 131, (Disclosure about Segment of an
Enterprise and Related Information); and Statement No. 132, (Employers'
Disclosures about Pensions and other Post Retirement Benefits). These statements
are effective for fiscal years beginning after December 15, 1997. Management has
determined that the disclosure requirements from these statements will not
impact the financial statements of the Company.
YEAR 2000
In 1997, the Company developed a plan to make its computer
systems Year 2000 compliant. The plan provides for the conversion efforts to be
completed by the end of 1998. The Year 2000 issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. The Company's plan is to upgrade its existing software with a
version which is Year 2000 compliant. As the upgrade is from its existing
vendors, the Company does not expect the costs to have a material impact on its
results of operations.
SEASONALITY
The Company's business is seasonal in nature. As a result, the
Company's results of operations are likely to vary during its fiscal year.
Historically, the Company's revenues and income are highest during its fourth
quarter, due to several factors. The fourth quarter contributed 26.9% in 1997
and 26.7% in 1996 of fiscal year net sales and 33.7% in 1997 and 37.5% in 1996
of fiscal year EBITDA. Any decrease in sales for such period could have a
material adverse effect on the Company's business, financial condition and
operating results for the entire fiscal year.
10
<PAGE> 11
IMPACT OF INFLATION
The Company does not believe that inflation has a material impact
on the Company's earnings from operations. The Company believes that it is
generally able to pass any inflationary increases in costs to its customers.
FORWARD-LOOKING STATEMENTS
Certain information contained herein includes "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 and is subject to the safe harbor created by that Act. Forward-looking
statements can be identified by the use of forward-looking terminology, such as
"may," "will," "should," "expect," "anticipate," "estimate," "continue," "plan,"
"intend" or other similar terminology. Such forward-looking statements, which
relate to, among other things, the financial condition, results of operations
and business of the Company, are subject to significant risks and uncertainties
that could cause actual results to differ materially and adversely from those
set forth in such statements. These include, without limitation, the Company's
ability to open new stores on a timely and profitable basis, the impact of
competition on revenues and margins, the effect of weather conditions and
general economic conditions in the western United States (which is the Company's
area of operation), the seasonal nature of the Company's business, and other
risks and uncertainties including the risk factors listed in the Company's
Registration Statement on Form S-4 as filed with the Securities and Exchange
Commission on January 16, 1998 and as may be detailed from time to time in the
Company's public announcements and filings with the Securities and Exchange
Commission. The Company assumes no obligation to publicly release the results of
any revisions to the forward-looking statements contained herein which may be
made to reflect events or circumstances occurring subsequent to the filing of
this Form 10-Q with the Securities and Exchange Commission or otherwise to
revise or update any oral or written forward-looking statements that may be made
from time to time by or on behalf of the Company.
11
<PAGE> 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various legal actions arising in the
ordinary course of business. In the opinion of management, the
ultimate disposition of matters currently pending against the
Company will not have a material adverse effect on the Company's
financial position.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security-Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
12
<PAGE> 13
SIGNATURES
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.
BIG 5 CORP.
A DELAWARE CORPORATION
Date: 5/13/98 By: /s/ STEVEN G. MILLER
----------------------------------
Steven G. Miller
President and
Chief Operating Officer
Date: 5/13/98 By: /s/ CHARLES P. KIRK
----------------------------------
Charles P. Kirk
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S STATEMENTS OF EARNINGS AND BALANCE SHEETS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> DEC-29-1997
<PERIOD-END> MAR-29-1998
<CASH> 4,055
<SECURITIES> 0
<RECEIVABLES> 4,172
<ALLOWANCES> 128
<INVENTORY> 161,668
<CURRENT-ASSETS> 170,592
<PP&E> 27,297
<DEPRECIATION> 22,754
<TOTAL-ASSETS> 229,820
<CURRENT-LIABILITIES> 92,649
<BONDS> 170,412
0
0
<COMMON> 35,080
<OTHER-SE> (74,471)
<TOTAL-LIABILITY-AND-EQUITY> 229,820
<SALES> 110,089
<TOTAL-REVENUES> 110,089
<CGS> 74,765
<TOTAL-COSTS> 74,765
<OTHER-EXPENSES> 31,376
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,876
<INCOME-PRETAX> (928)
<INCOME-TAX> (380)
<INCOME-CONTINUING> (548)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (548)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
