<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 September 27, 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)
Delaware
(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 November 11, 1998.
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BIG 5 CORP.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Title Page 1
Index 2
PART I -FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - September 27, 1998 and
December 28, 1997 3
Statements of Operations -
Three months and nine months ended September 27, 1998 and
September 28, 1997 4
Statements of Cash Flows -
Nine months ended September 27, 1998 and nine months ended
September 28, 1997 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of
Security-Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
2
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BIG 5 CORP.
Balance Sheets
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 27, December 28,
1998 1997
--------- ---------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 789 $ 1,364
Trade and other receivables, net of allowance for doubtful
accounts of $115 and $118, respectively 2,521 6,702
Merchandise inventories 150,762 147,279
Prepaid expenses 855 1,053
--------- ---------
Total current assets 154,927 156,398
--------- ---------
Property and equipment:
Land 186 186
Buildings and improvements 17,073 15,353
Furniture and equipment 36,131 33,481
Less accumulated depreciation and amortization (25,463) (21,719)
--------- ---------
Net property and equipment 27,927 27,301
--------- ---------
Deferred income taxes, net 6,257 6,257
Leasehold interest, net of accumulated amortization of
$15,190 and $13,882 respectively 13,273 14,610
Other assets, at cost, less accumulated
amortization of $1,675 and $975, respectively 5,855 6,336
Goodwill, less accumulated amortization of $1,309
and $1,124, respectively 5,235 5,420
--------- ---------
$ 213,474 $ 216,322
========= =========
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable $ 56,747 $ 44,089
Accrued expenses 34,137 31,428
--------- ---------
Total current liabilities 90,884 75,517
--------- ---------
Deferred rent 6,392 5,988
Long-term debt 151,490 173,660
--------- ---------
Total liabilities 248,766 255,165
--------- ---------
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 (70,372) (73,923)
--------- ---------
Total stockholder's deficit (35,292) (38,843)
--------- ---------
$ 213,474 $ 216,322
========= =========
</TABLE>
See accompanying notes to condensed financial statements
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BIG 5 CORP.
Statements of Operations
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $126,647 $117,079 $354,861 $324,177
Cost of goods sold, buying and
occupancy 86,598 80,274 238,354 218,675
-------- -------- -------- --------
Gross profit 40,049 36,805 116,507 105,502
-------- -------- -------- --------
Operating expenses:
Selling and administration 31,042 28,532 89,967 82,603
Depreciation and amortization 2,104 2,089 6,237 6,087
-------- -------- -------- --------
Total operating expenses 33,146 30,621 96,204 88,690
-------- -------- -------- --------
Operating income 6,903 6,184 20,303 16,812
Interest expense, net 4,624 2,495 14,285 7,913
-------- -------- -------- --------
Income before income taxes 2,279 3,689 6,018 8,899
Income taxes 934 408 2,467 408
-------- -------- -------- --------
Net income $ 1,345 $ 3,281 $ 3,551 $ 8,491
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed financial statements.
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BIG 5 CORP.
Statement of Cash Flows
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
September 27, September 28,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,551 $ 8,491
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,237 6,087
Amortization of deferred finance charges and debt discount 717 495
Deferred tax benefit -- (3,295)
Change in assets and liabilities:
Merchandise inventories (3,483) (11,627)
Trade & other receivables 4,181 1,822
Prepaid expenses and other assets (37) (54)
Accounts payable 12,658 214
Accrued expenses 2,774 (4,086)
-------- --------
Net cash provided by (used in) operating activities 26,598 (1,953)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (4,986) (3,227)
-------- --------
Net cash used in investing activities (4,986) (3,227)
-------- --------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit facilities (22,187) 776
Other -.- 23
-------- --------
Net cash provided by (used in) financing activities (22,187) 799
-------- --------
Net decrease in cash and cash equivalents (575) (4,381)
Cash and cash equivalents at beginning of period 1,364 4,797
-------- --------
Cash and cash equivalents at end of period $ 789 $ 416
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
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BIG 5 CORP.
Notes to 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, results
of operations, and cash flows as of and for the periods ended September
27, 1998 and September 28, 1997. 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.
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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 SEPTEMBER 27, 1998 VERSUS THREE MONTHS ENDED SEPTEMBER 28,
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
----------------------------------------------------------
September 27, 1998 September 28, 1997
------------------------ ------------------------
<S> <C> <C> <C> <C>
Net sales $126,647 100.0% $117,079 100.0%
Cost of goods sold, buying and
occupancy 86,598 68.4 80,274 68.6
-------- ----- -------- -----
Gross profit 40,049 31.6 36,805 31.4
-------- ----- -------- -----
Operating expenses:
Selling and administrative 31,042 24.5 28,532 24.4
Depreciation and amortization 2,104 1.7 2,089 1.8
-------- ----- -------- -----
Total operating expense 33,146 26.2 30,621 26.2
-------- ----- -------- -----
Operating income 6,903 5.5 6,184 5.3
Interest expense, net 4,624 3.7 2,495 2.1
-------- ----- -------- -----
Income before
income taxes 2,279 1.8 3,689 3.2
Income taxes 934 0.7 408 0.3
-------- ----- -------- -----
Net income $ 1,345 1.1% $ 3,281 2.8%
======== ===== ======== =====
EBITDA (a) $ 9,007 7.1% $ 8,273 7.1%
======== ===== ======== =====
</TABLE>
(a) EBITDA represents net earnings before taking into consideration net
interest expense, income tax expense, depreciation expense, and
amortization expense which includes 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.
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1. Net Sales
Net sales increased 8.2% (or $9.5 million) from $117.1 million reported
for the three months ended September 28, 1997 to $126.6 million for the
three months ended September 27, 1998. Same store sales increased 4.9%
compared with the same period last year, representing the eleventh
consecutive quarter of positive same store comparisons. These favorable
comparisons reflect the continued success of the Company's merchandising
programs and positive general economic conditions in the Western United
States. Sales attributable to an increase in store count from 202 at
September 28, 1997 to 213 at September 27, 1998 constituted the remainder
of the 8.2% sales increase for the quarter.
2. Gross Profit
Gross profit increased 8.8% (or $3.2 million) from $36.8 million for the
three months ended September 28, 1997 to $40.0 million for the three
months ended September 27, 1998, reflecting the increased sales discussed
above and improved gross profit margin. Gross profit margin increased from
31.4% of sales in the 1997 quarter to 31.6% of sales in the 1998 quarter
this year primarily reflecting the leveraging of occupancy and
distribution center fixed costs due to increased sales.
3. Operating Expenses
Selling and administrative expenses increased 8.8% (or $2.5 million) from
$28.5 million for the three months ended September 28, 1997 to $31.0
million for the three months ended September 27, 1998, primarily
reflecting the increase in the Company's store count between periods and
increased advertising expenditures during the quarter. As a percentage of
sales, selling and administrative expenses increased from 24.4% of sales
for the 1997 period to 24.5% of sales in the 1998 period.
Depreciation and amortization of $2.1 million for the three months ended
September 27, 1998 approximated the corresponding figure for the three
months ended September 28, 1997.
4. Interest Expense, Net
Interest expense, net increased 85.3% (or $2.1 million) from $2.5 million
for the prior year period to $4.6 million for the three months ended
September 27, 1998. This increase is the result of the Company's
Recapitalization (see "Liquidity and Capital Resources") which increased
debt levels beginning in the fourth quarter of 1997, and was partially
offset by a lower average balance on the Company's CIT Credit Facility
which reflected a balance of $21.1 million at September 27, 1998 versus a
balance of $50.8 million at September 28, 1997 (see "Liquidity and Capital
Resources").
5. Income Taxes
The Company recorded income tax expense against operations of $0.9 million
for the three months ended September 27, 1998 versus $0.4 million for the
same period last year. Income tax expense is based upon the estimated
effective tax rate for the entire fiscal year. The effective tax rate is
subject to ongoing evaluation by management.
6. Net Income
Net income for the three months ended September 27, 1998 decreased 59.0%
(or $2.0 million) from $3.3 million for the three months ended September
28, 1997 to $1.3 million for the three months ended September 27, 1998.
This decrease reflects the impact of the Company's fourth quarter 1997.
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Recapitalization (see "Liquidity and Capital Resources") which raised debt
levels resulting in increased interest expense during this year's three
month period. Income tax expense recorded during the three month period
this year also contributed to the decrease in net income. These factors
more than offset the positive operating results achieved by the Company
during the three months ended September 27, 1998 compared to the three
months ended September 28, 1997.
7. Earnings Before Interest, Taxes, Depreciation, and Amortization ("EBITDA")
EBITDA increased 8.9% (or $0.7 million) from $8.3 million for the three
months ended September 28, 1997 to $9.0 million for the three months ended
September 27, 1998. This improvement reflects the positive operating
results achieved during the three months ended September 27, 1998 compared
to the three months ended September 28, 1997.
NINE MONTHS ENDED SEPTEMBER 27, 1998 VERSUS NINE MONTHS ENDED SEPTEMBER 28, 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>
Nine Months Ended
----------------------------------------------------------
September 27, 1998 September 28, 1997
----------------------- -----------------------
<S> <C> <C> <C> <C>
Net sales $354,861 100.0% $324,177 100.0%
Cost of goods sold, buying and
occupancy 238,354 67.2 218,675 67.5
-------- ----- -------- -----
Gross profit 116,507 32.8 105,502 32.5
-------- ----- -------- -----
Operating expenses:
Selling and administration 89,967 25.4 82,603 25.5
Depreciation and amortization 6,237 1.8 6,087 1.9
-------- ----- -------- -----
Total operating expense 96,204 27.2 88,690 27.4
-------- ----- -------- -----
Operating income 20,303 5.7 16,812 5.2
Interest expense, net 14,285 4.0 7,913 2.4
-------- ----- -------- -----
Net income before
income taxes 6,018 1.7 8,899 2.7
Income taxes 2,467 0.7 408 0.1
-------- ----- -------- -----
Net income $ 3,551 1.0% $ 8,491 2.6%
======== ===== ======== =====
EBITDA (a) $ 26,540 7.7% $ 22,899 7.1%
======== ===== ======== =====
</TABLE>
(a) EBITDA represents net earnings before taking into consideration
net interest expense, income tax expense, depreciation expense,
and amortization expense which includes non-cash rent expense
(see Footnote 5 in "Notes to Financial Statements" of the
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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.
1. Net Sales
Net sales increased 9.5% (or $30.7 million) from $324.2 million reported
for the nine months ended September 28, 1997 to $354.9 million for the
nine months ended September 27, 1998. Same store sales increased 5.6%
compared with the same period last year reflecting the continued success
of the Company's merchandising programs and positive general economic
conditions in the Western United States. Sales attributable to an increase
in store count from 202 at September 28, 1997 to 213 at September 27, 1998
constituted the remainder of the 9.5% sales increase for the nine months.
2. Gross Profit
Gross profit increased 10.4% (or $11.0 million) from $105.5 million for
the nine months ended September 28, 1997 to $116.5 million for the nine
months ended September 27, 1998, reflecting the increased sales discussed
above and improved gross profit margin. Gross profit margin increased from
32.5% of sales for the first nine month period in 1997 to 32.8% for the
comparable first nine month period this year. The improvement in gross
profit margin for the nine months ended September 27, 1998 was due to
positive comparisons in many of the Company's product categories as well
as the leveraging of occupancy and distribution center fixed costs due
to increased sales.
3. Operating Expenses
Selling and administrative expenses increased 8.9% (or $7.4 million) from
$82.6 million for the nine months ended September 28, 1997 to $90.0
million for the nine months ended September 27, 1998. This increase
resulted primarily from an increase in the Company's store base from 202
stores last year to 213 at the end of September 1998. When measured as a
percentage of sales, selling and administrative expenses decreased from
25.5% of sales for the 1997 period to 25.4% of sales in the 1998 period,
as a result of management's continued focus on controlling expenses and
its leveraging of fixed costs due to increased sales.
Depreciation and amortization expense increased 2.5% (or $0.1 million)
from $6.1 million for the prior year period to $6.2 million for the nine
months ended September 27, 1998. The increase is due to depreciation and
amortization of expenditures related to the growth in the Company's store
base during the past fiscal year.
4. Interest Expense, Net
Interest expense, net increased 80.5% (or $6.4 million) from $7.9 million
for the prior year period to $14.3 million for the nine months ended
September 27, 1998. This increase is a result of the impact of the
Company's Recapitalization (see "Liquidity and Capital Resources") which
increased debt levels beginning in the fourth quarter of 1997, and was
partially offset by a lower average balance on the Company's CIT Credit
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Facility which reflected a balance of $21.1 million at September 27, 1998
versus a balance of $50.8 million at September 28, 1997 (see "Liquidity
and Capital Resources").
5. Income Taxes
The Company recorded income tax expense against operations of $2.5 million
for the nine months ended September 27, 1998 versus $0.4 million for the
same period last year. Income tax expense is based upon the estimated
effective tax rate for the entire fiscal year. The effective tax rate is
subject to ongoing evaluation by management.
6. Net Income
Net income for the nine months ended September 27, 1998 decreased $4.9
million from net income of $8.5 million for the nine months ended
September 28, 1997 to net income of $3.6 million for the nine months ended
September 27, 1998. This decrease reflects the impact of the Company's
fourth quarter 1997 Recapitalization (see "Liquidity and Capital
Resources") which raised debt levels resulting in increased interest
expense during this year's nine month period. Income tax expense recorded
during the nine month period this year also contributed to the decrease in
net income. These factors more than offset the positive operating results
achieved by the Company during the nine months ended September 27, 1998
compared to the nine months ended September 28, 1997.
7. Earnings Before Interest, Taxes, Depreciation, and Amortization ("EBITDA")
EBITDA increased 15.9% (or $3.6 million) from $22.9 million for the nine
months ended September 28, 1997 to $26.5 million for the nine months ended
September 27, 1998. Increased same store sales, gross margin and operating
efficiencies were the primary factors contributing to the improvement.
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
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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 September 27, 1998 was approximately $140.8
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 from incurring additional indebtedness, among
other things, 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 $7.9 million for the nine months ended September 28, 1997
to $14.3 million for the nine months ended September 27, 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 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 $26.6 million for the nine months
ended September 27, 1998 versus net cash used in operating activities of $2.0
million for the nine months ended September 28, 1997, primarily reflecting
improved operating results combined with reduced inventory purchases and
increased payables leverage during the nine month period ended September 27,
1998.
Capital expenditures for the nine months ended September 27, 1998 were $5.0
million versus $3.2 million for the same period last year. Management expects
capital expenditures for the current fiscal year will range from $6.0 to $6.5
million and will be used primarily to fund the opening of 12 new stores (of
which 6 have already been opened).
Net cash used in financing activities was $22.2 million for the nine months
ended September 27, 1998 reflecting the Company's significant reduction in
borrowings during the period versus cash provided in financing activities of
$0.8 million for the same period last year. As of September 27, 1998, the
Company had borrowings of $21.1 million and letter of credit commitments of $7.8
million outstanding under the CIT Credit Facility compared to $50.8 million and
$9.6 million, respectively, as of September 28, 1997, with cash and cash
equivalents of $0.8 million at September 27, 1998 compared to $0.4 million at
September 28, 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
certain financial ratios and other financial covenants. The Company is currently
in compliance with all the covenants under the CIT Credit Agreement and the
Senior Notes indenture.
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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 Standards 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.
The Financial Accounting Standards Board issued Statement No. 133, (Accounting
for Derivative Instruments and Hedging Activities) effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Management has
determined that the disclosure requirements from this statement will not impact
the financial statements of the Company.
In April 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5 ("SOP 98-5"), Reporting on the Costs of Start-up
Activities. SOP 98-5 requires that costs of start-up activities, including
organization costs and store openings, be expensed as incurred. SOP 98-5 is
effective for financials statements for fiscal years beginning after December
15, 1998. Restatement of previously issued financial statements is not
permitted. In the fiscal year SOP 98-5 is first adopted, the application should
be reported as a cumulative effect of a change in accounting principle. The
Company has not yet determined whether the application of SOP 98-5 will have a
material impact on the Company's financial position or results of operations.
YEAR 2000 UPDATE
GENERAL
In 1997, the Company began to develop a program to coordinate changes to
computer and non-computer systems in order to achieve a Year 2000 date
conversion without disruption to the Company's operations. The Year 2000 effort,
which includes the implementation of previously planned business critical
systems and specific Year 2000 projects, is on track to be completed before the
end of 1999, although no assurances can be given. The majority of the Company's
applications that are not Year 2000 compliant have been, or will be replaced by
upgrades to existing systems. Making the remaining non-compliant applications
Year 2000 compliant will not result in incremental costs to the Company, but
rather will be accomplished by the redeployment of existing information
technology ("IT") resources. Accordingly, the Company does not expect its
internal Year 2000 effort to have a material impact on its results of
operations, liquidity or financial condition, although the Company cannot
predict whether its outside vendors, suppliers and support systems will be
compliant and whether that might have an effect. In addition, the Company has
not deferred any other projects that will have a material impact on its results
of operations, liquidity or financial condition.
IT SYSTEMS
During 1997, the Company began a study to determine the scope of its Year 2000
exposure. Since the Company relies on outside software vendors for all of its
merchandise distribution and financial systems, the Company's first efforts were
to gain assurance that all systems were either compliant or upgradable to a Year
2000 compliant version. After completion of its study in March 1998, the Company
found that all of its systems either were compliant, or could be compliant with
an upgrade to existing software. Certain of these outside software systems have
customized add-on features created by the Company's IT department. Therefore,
the Company has redeployed one full-time programmer to the Year 2000 project to
update software code that was customized by the Company and added on to its
outside software systems to make these custom changes compliant. These changes
are expected to be completed before the end of the first quarter of 1999.
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The Year 2000 plan also focuses on the Company's IT hardware where date
sensitive embedded technology could create the need for upgrades. In August and
September of 1997 the Company's main computer platform, two AS 400's, were
upgraded from CISC technology to Year 2000 compliant RISC technology. In
addition, all personal computers have been checked for compliance. Approximately
40% of all personal computers currently comply, with the remainder to be
upgraded within the next twelve months. The Company's network server was
upgraded in late 1997 and is fully compliant. Other hardware, including Telxon
hand held radio frequency devices, cash registers, modems, routers and other IT
communications devices are either Year 2000 compliant, or are in the process of
being upgraded. There are no other internal software or hardware issues to the
best of the Company's knowledge and the Company fully expects to have all
systems compliant prior to the end of 1999.
NON-IT SYSTEMS
Non-IT systems may contain date sensitive embedded technology requiring Year
2000 upgrades. Examples of this technology include security equipment such as
access and alarm systems, as well as telephone equipment. The Company is not a
product manufacturer; therefore, the embedded chip issue relates to equipment
used by the Company in its internal facilities. The Company expects to complete
assessment of its non-IT systems by the end of 1998.
The Company also intends to contact each of its major suppliers and vendors
prior to the end of 1998 to request written certification regarding their Year
2000 compliance.
COSTS
The total cost associated with required modifications for Year 2000 compliance
is not expected to be material to the Company's results of operations, liquidity
and financial condition. The estimated total cost of the Year 2000 effort is
approximately $0.5 million. The total amount expended through September 1998,
was approximately $0.2 million. The estimated future cost of completing the Year
2000 effort is estimated to be approximately $0.3 million. The Year 2000 effort
is funded primarily from the existing IT budget and has not forced the deferral
or cancellation of any budgeted IT projects.
RISKS AND CONTINGENCY PLANNING
The Company has initiated contingency planning for possible Year 2000 issues
including such outside factors as credit card processing, supply chain and
banking operations. Where needed, the Company will establish contingency plans
based on the Company's actual testing experience and assessment of outside
risks. The Company anticipates final contingency plans to be in place by June
1999. However, to the extent outside support systems (such as credit card
processors and suppliers) may not be Year 2000 compliant by the end of 1999,
such noncompliance could result in circumstances which could have a material
adverse effect on the Company's business, financial condition, and operating
results.
Readers are cautioned that forward looking statements contained in the Year 2000
Update should be read in conjunction with the Company's disclosures under the
heading "Forward-Looking Statements."
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
14
<PAGE> 15
for such period could have a material adverse effect on the Company's business,
financial condition and operating results for the entire fiscal year.
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.
15
<PAGE> 16
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
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None.
----------------------
16
<PAGE> 17
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: 11/11/98 By: /s/ STEVEN G. MILLER
-----------------------------------
Steven G. Miller
President and
Chief Operating Officer
Date: 11/11/98 By: /s/ CHARLES P. KIRK
-----------------------------------
Charles P. Kirk
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
17
<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-03-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> SEP-27-1998
<CASH> 789
<SECURITIES> 0
<RECEIVABLES> 2,521
<ALLOWANCES> 115
<INVENTORY> 150,762
<CURRENT-ASSETS> 154,927
<PP&E> 27,927
<DEPRECIATION> 25,463
<TOTAL-ASSETS> 213,474
<CURRENT-LIABILITIES> 90,884
<BONDS> 151,490
0
0
<COMMON> 35,080
<OTHER-SE> (70,372)
<TOTAL-LIABILITY-AND-EQUITY> 213,474
<SALES> 126,647
<TOTAL-REVENUES> 126,647
<CGS> 86,598
<TOTAL-COSTS> 86,598
<OTHER-EXPENSES> 33,116
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,711
<INCOME-PRETAX> 2,222
<INCOME-TAX> 776
<INCOME-CONTINUING> 1,446
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,446
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
