<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 October 3, 1999
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.
SUCCESSOR TO: UNITED MERCHANDISING CORP.
DBA: BIG 5 SPORTING GOODS
(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 17, 1999.
<PAGE> 2
BIG 5 CORP.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Title Page 1
Index 2
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (Unaudited)
Condensed Balance Sheets -- October 3, 1999 and January 3, 1999 3
Condensed Statements of Operations -- Three months and nine months
ended October 3, 1999 and September 27, 1998 4
Condensed Statements of Cash Flows -- Nine months ended October 3,
1999 and nine months ended September 27, 1998 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7-17
Item 3. Market Risk Disclosure 17
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security-Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
1
<PAGE> 3
BIG 5 CORP.
Condensed Balance Sheets
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
October 3, January 3,
1999 1999
---------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ -- $ --
Trade and other receivables, net of allowance
for doubtful accounts of $190 and $201, respectively 2,551 6,347
Merchandise inventories 162,857 147,296
Prepaid expenses 1,595 1,336
-------- --------
Total current assets 167,003 154,979
-------- --------
Property and equipment:
Land 186 186
Buildings and improvements 22,031 18,910
Furniture and equipment 41,972 37,870
Less accumulated depreciation and amortization (31,814) (27,428)
-------- --------
Net property and equipment 32,375 29,538
-------- --------
Deferred income taxes, net 6,158 6,158
Leasehold interest, net of accumulated amortization of
$17,158 and $15,669 respectively 11,576 12,793
Other assets, at cost, less accumulated
amortization of $2,072 and $995, respectively 9,811 8,773
Goodwill, less accumulated amortization of $1,556
and $1,371, respectively 4,988 5,174
-------- --------
$231,911 $217,415
======== ========
Liabilities and Stockholder's Deficit
Current liabilities:
Accounts payable $ 61,516 $ 56,096
Accrued expenses 32,439 31,258
-------- --------
Total current liabilities 93,955 87,354
Deferred rent 7,041 6,586
Long-term debt 155,278 151,352
-------- --------
Total liabilities 256,274 245,292
-------- --------
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 39,281 39,281
Accumulated deficit (63,644) (67,158)
-------- --------
Total stockholder's deficit (24,363) (27,877)
-------- --------
$231,911 $217,415
======== ========
</TABLE>
See accompanying notes to condensed financial statements
3
<PAGE> 4
BIG 5 CORP.
Condensed Statements of Operations
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------- -------------------------------------
October 3, 1999 September 27, 1998 October 3, 1999 September 27, 1998
--------------- ------------------ --------------- ------------------
<S> <C> <C> <C> <C>
Net sales $131,440 $126,647 $374,116 $354,861
Cost of goods sold, buying and
occupancy 88,400 86,598 248,950 238,354
--------- --------- --------- ---------
Gross profit 43,040 40,049 125,166 116,507
--------- --------- --------- ---------
Operating expenses:
Selling and administration 33,730 31,042 98,136 89,967
Depreciation and amortization 2,386 2,104 7,101 6,237
--------- --------- --------- ---------
Total operating expenses 36,116 33,146 105,237 96,204
--------- --------- --------- ---------
Operating income 6,924 6,903 19,929 20,303
Interest expense, net 4,339 4,624 13,388 14,285
--------- --------- --------- ---------
Income before income taxes 2,585 2,279 6,541 6,018
Income taxes 1,059 934 2,681 2,467
--------- --------- --------- ---------
Income before extraordinary loss 1,526 1,345 3,860 3,551
Extraordinary loss from early extinguishment
of debt, net of income tax benefit (346) -- (346) --
--------- --------- --------- ---------
Net income $1,180 $1,345 $3,514 $3,551
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE> 5
BIG 5 CORP.
Condensed Statement of Cash Flows
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------------------
October 3, 1999 September 27, 1998
----------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $3,514 $3,551
Adjustments to reconcile net income to net cash
provided/(used) by operating activities:
Depreciation and amortization 7,101 6,237
Amortization of deferred finance charge and discounts 67 717
Extraordinary loss from early extinguishment of debt 586 --
Change in assets and liabilities:
Merchandise inventories (15,561) (3,483)
Trade accounts receivable, net 3,796 4,181
Prepaid expenses and other assets (584) (37)
Accounts payable 3,076 12,658
Accrued expenses 1,154 2,774
-------- --------
Net cash provided by operating activities 3,149 26,598
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (8,037) (4,986)
Purchase of long-term investments (1,363) --
-------- --------
Net cash used in investing activities (9,400) (4,986)
-------- --------
Cash flows from financing activities:
Net (payment)/borrowings under revolving credit facilities, and other 21,190 (22,187)
Repurchase Senior Notes (14,939) --
-------- --------
Net cash provided by (used in) financing activities 6,251 (22,187)
-------- --------
Net increase/(decrease) in cash and cash equivalents 0 (575)
Cash and cash equivalents at beginning of period 0 1,364
-------- --------
Cash and cash equivalents at end of period $0 $789
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE> 6
BIG 5 CORP.
Notes to Unaudited Condensed Financial Statements
(Dollars in Thousands)
FINANCIAL INFORMATION
1. Big 5 Corp. ("the Company") operates in one business segment, as a sporting
goods retailer under the Big 5 Sporting Goods name carrying a broad range
of hardlines, softlines and footwear, operating 225 stores at October 3,
1999 in California, Washington, Arizona, Oregon, Texas, New Mexico, Nevada,
Utah and Idaho.
2. In the opinion of management of the Company, the accompanying unaudited
condensed 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 October 3, 1999, January 3, 1999
and September 27, 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.
3. These unaudited condensed financial statements should be read in
conjunction with the Company's 1998 audited financial statements included
in the Company's Annual Report on Form 10-K for the fiscal year ended
January 3, 1999.
4. Summary of Significant Accounting Policies
Certain prior year balances in the accompanying condensed financial
statements have been reclassified to conform to current year presentation.
5. During the third quarter of the current year, the Company repurchased and
retired $15 million face value of the Series B 10 7/8% Senior Notes due
2007 (the "Senior Notes"). Recognition of deferred costs related to the
Senior Notes resulted in an extraordinary loss of $0.3 million, net of
related income taxes of $0.2 million. Subsequent to October 3, 1999, the
Company repurchased and retired an additional $2.0 million face value of
the Company's Senior Notes.
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 OCTOBER 3, 1999 VERSUS THREE MONTHS ENDED SEPTEMBER 27, 1998
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
---------------------------------------------------
October 3, 1999 September 27, 1998
------------------------ ----------------------
<S> <C> <C> <C> <C>
Net sales $ 131,440 100.0% $ 126,647 100.0%
Cost of goods sold, buying and
occupancy 88,400 67.3 86,598 68.4
--------- ----- --------- -----
Gross profit 43,040 32.7 40,049 31.6
--------- ----- --------- -----
Operating expenses:
Selling and administrative 33,730 25.7 31,042 24.5
Depreciation and amortization 2,386 1.8 2,104 1.7
--------- ----- --------- -----
Total operating expense 36,116 27.5 33,146 26.2
--------- ----- --------- -----
Operating income 6,924 5.3 6,903 5.5
Interest expense, net 4,339 3.3 4,624 3.7
--------- ----- --------- -----
Income before
income taxes 2,585 2.0 2,279 1.8
Income taxes 1,059 0.8 934 0.7
--------- ----- --------- -----
Income before
extraordinary loss 1,526 1.2 1,345 1.1
Extraordinary loss from early
extinguishment of debt, net
of income tax benefit (346) (0.3) -- 0.0
--------- ----- --------- -----
Net income $ 1,180 0.9% $ 1,345 1.1%
========= ===== ========= =====
EBITDA (a) $ 9,310 7.1% $ 9,007 7.1%
========= ===== ========= =====
</TABLE>
(a) EBITDA represents net earnings 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 January 3, 1999), and where relevant to the period referenced,
extraordinary loss from early
7
<PAGE> 8
extinguishment of debt. 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 3.8% (or $4.8 million) from $126.6 million reported for
the three months ended September 27, 1998 to $131.4 million for the three
months ended October 3, 1999. Same store sales, or sales for stores open
throughout the quarter in 1999 and 1998, increased 2.9%, representing the
fifteenth consecutive quarter of positive same store comparisons. Sales
attributable to an increase in store count from 213 at September 27, 1998
to 225 at October 3, 1999 represented a 3.5% sales increase for the
quarter. These increases were partially offset by the timing of the
quarter, which began and ended one week later this year versus last year
resulting in one less week of higher volume summer season sales in this
year's three month period. On a comparable week basis net sales would have
increased 6.4% rather than the reported 3.8%, from $123.5 million for the
three months ended October 4, 1998 (adjusted date for comparison) to the
$131.4 million reported for the three months ended October 3, 1999.
2. Gross Profit
Gross profit increased 7.5% (or $3.0 million) from $40.0 million for the
three months ended September 27, 1998 to $43.0 million for the three months
ended October 3, 1999, reflecting increased sales and improved product
margins. Gross profit margin increased from 31.6% of sales for the three
months in 1998 to 32.7% of sales for the three months in 1999. The
improvement for the three months ended October 3, 1999 was due to positive
comparisons in many of the Company's product categories.
3. Operating Expenses
Selling and administrative expenses increased 8.7% (or $2.7 million) from
$31.0 million for the three months ended September 27, 1998 to $33.7
million for the three months ended October 3, 1999, primarily reflecting
the increase in the Company's store count between periods. As a percentage
of sales, selling and administrative expenses increased from 24.5% of sales
for the 1998 period to 25.7% of sales in the 1999 period. The majority of
this increase, or approximately 0.6%, results from the impact on sales of
the one week difference in quarter ends between years (see "Net Sales"
above).
Depreciation and amortization increased 13.4% (or $0.3 million) from $2.1
million for the three months ended September 27, 1998 to $2.4 million for
the three months ended October 3, 1999. The increase is primarily from
depreciation and amortization from more stores as well as costs for the
Company's new point-of-sale hardware and related software (see "Liquidity
and Capital Resources").
4. Interest Expense, Net
Interest expense, net decreased 6.2% (or $0.3 million) from $4.6 million
for the prior year period to $4.3 million for the three months ended
October 3, 1999. The decrease is primarily due to lower
8
<PAGE> 9
average debt balances during the third quarter of 1999 versus the same
period last year. The Company's debt balances consist of borrowings under
the CIT Credit Facility and the Senior Notes (see "Liquidity and Capital
Resources").
5. Income Taxes
Income tax expense increased from $0.9 million for the prior year period to
$1.1 million for the three months ended October 3, 1999. Income taxes are
based upon the estimated effective tax rate for the entire fiscal year
applied to the pre-tax income for the period. The effective tax rate is
subject to ongoing evaluation by management.
6. Extraordinary Loss from Early Extinguishment of Debt
There was an extraordinary loss of $0.3 million, net of taxes, for the
three months ended October 3, 1999, in connection with the repurchase of
$15 million face value of the Company's previously outstanding Senior
Notes. Recognition of deferred costs related to the Senior Notes resulted
in an extraordinary loss of $0.3 million, net of related income taxes of
$0.2 million. There was no such extraordinary loss for the same period last
year.
7. Net Income
Net income for the three months ended October 3, 1999 decreased 12.3% (or
$0.1 million) from $1.3 million for the three months ended September 27,
1998 to $1.2 million for the three months ended October 3, 1999 due to the
factors discussed above.
8. Earnings Before Interest, Taxes, Depreciation, and Amortization ("EBITDA")
EBITDA increased 3.4% (or $0.3 million) from $9.0 million for the three
months ended September 27, 1998 to $9.3 million for the three months ended
October 3, 1999. This improvement reflects the positive operating results
achieved during the three months ended October 3, 1999 compared to the
three months ended September 27, 1998.
9
<PAGE> 10
NINE MONTHS ENDED OCTOBER 3, 1999 VERSUS NINE MONTHS ENDED SEPTEMBER 27, 1998
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
---------------------------------------------------
October 3, 1999 September 27, 1998
------------------------ ----------------------
<S> <C> <C> <C> <C>
Net sales $ 374,116 100.0% $ 354,861 100.0%
Cost of goods sold, buying and
occupancy 248,950 66.5 238,354 67.2
--------- ----- --------- -----
Gross profit 125,166 33.5 116,507 32.8
--------- ----- --------- -----
Operating expenses:
Selling and administration 98,136 26.2 89,967 25.4
Depreciation and amortization 7,101 1.9 6,237 1.8
--------- ----- --------- -----
Total operating expense 105,237 28.1 96,204 27.2
--------- ----- --------- -----
Operating income 19,929 5.3 20,303 5.7
Interest expense, net 13,388 3.6 14,285 4.0
--------- ----- --------- -----
Net income before
Income taxes 6,541 1.7 6,018 1.7
Income taxes 2,681 0.7 2,467 0.7
--------- ----- --------- -----
Income before
extraordinary loss 3,860 1.0 3,551 1.0
Extraordinary loss from early
Extinguishment of debt, net
of income tax benefit (346) (0.1) -- 0.0
--------- ----- --------- -----
Net income $ 3,514 0.9% $ 3,551 1.0%
========= ===== ========= =====
EBITDA (a) $ 27,030 7.2% $ 26,540 7.5%
========= ===== ========= =====
</TABLE>
- ----------
(a) EBITDA represents net earnings 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 January 3, 1999), and where relevant to the period referenced,
extraordinary loss from early extinguishment of debt. 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
10
<PAGE> 11
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 5.4% (or $19.2 million) from $354.9 million reported
for the nine months ended September 27, 1998 to $374.1 million for the nine
months ended October 3, 1999. Same store sales, or sales for stores open
throughout the nine months in 1999 and 1998, increased 1.6% compared with
the same period last year. Sales attributable to an increase in store count
from 213 at September 27, 1998 to 225 at October 3, 1999 constituted the
remainder of the 5.4% sales increase for the nine months. The one week
difference in the timing of the respective nine month periods does not have
as significant an impact on nine month comparisons as it does for quarter
versus quarter comparisons (see "Net Sales -- Three Months Ended October 3,
1999 versus Three Months Ended September 27, 1998").
2. Gross Profit
Gross profit increased 7.4% (or $8.7 million) from $116.5 million for the
nine months ended September 27, 1998 to $125.2 million for the nine months
ended October 3, 1999, reflecting the increased sales discussed above and
improved product margins. Gross profit margin increased from 32.8% of sales
for the first nine months in 1998 to 33.5% for the comparable first nine
months in 1999. The improvement in gross profit margin for the nine months
ended October 3, 1999 was due to positive comparisons in many of the
Company's product categories.
3. Operating Expenses
Selling and administrative expenses increased 9.1% (or $8.2 million) from
$89.9 million for the nine months ended September 27, 1998 to $98.1 million
for the nine months ended October 3, 1999. This increase resulted primarily
from an increase in the Company's store base from 213 stores at September
27, 1998 to 225 at October 3, 1999, as well as planned increases in
advertising expense during the nine month period. When measured as a
percentage of sales, selling and administrative expenses increased from
25.4% of sales for the 1998 period to 26.2% of sales for the 1999 period
primarily reflecting planned increases in advertising expenses during
certain periods this year. The one week difference in the timing of the
respective nine month periods does not have as significant an impact on
nine month comparisons as it does for quarter versus quarter comparisons
(see "Operating Expenses -- Three Months Ended October 3, 1999 versus Three
Months Ended September 27, 1998").
Depreciation and amortization expense increased 13.9% (or $0.9 million)
from $6.2 million for the prior year period to $7.1 million for the nine
months ended October 3, 1999. The increase is due primarily to depreciation
and amortization on expenditures related to growth in the Company's store
base from 213 at September 27, 1998 to 225 at October 3, 1999, as well as
expenditures for the Company's new point-of-sale registers and software.
4. Interest Expense, Net
Interest expense, net decreased 6.3% (or $0.9 million) from $14.3 million
for the prior year period to $13.4 million for the nine months ended
October 3, 1999. The decrease is primarily due to lower average debt
balances during the first nine months of 1999 versus the same period last
year. The
11
<PAGE> 12
Company's debt balances consist of borrowings under the CIT Credit Facility
and the Senior Notes (see "Liquidity and Capital Resources").
5. Income Taxes
Income tax expense was $2.7 million for the nine months ended October 3,
1999 versus $2.5 million for the same period last year. Income taxes are
based upon the estimated effective tax rate for the entire fiscal year
applied to the pre-tax income for the period. The effective tax rate is
subject to ongoing evaluation by management.
6. Extraordinary Loss from Early Extinguishment of Debt
There was an extraordinary loss of $0.3 million, net of taxes, for the nine
months ended October 3, 1999, in connection with the repurchase of $15
million face value of the Company's previously outstanding Senior Notes.
Recognition of deferred costs related to the Senior Notes resulted in an
extraordinary loss of $0.3 million, net of related income taxes of $0.2
million. There was no such extraordinary loss for the same period last
year.
7. Net Income
Net income for the nine months ended October 3, 1999 decreased $0.1 million
from net income of $3.6 million for the nine months ended September 27,
1998 to net income of $3.5 million for the nine months ended October 3,
1999 due to the factors discussed above.
8. Earnings Before Interest, Taxes, Depreciation, and Amortization ("EBITDA")
EBITDA increased 1.8% (or $0.5 million) from $26.5 million for the nine
months ended September 27, 1998 to $27.0 million for the nine months ended
October 3, 1999. This improvement reflects the positive sales and margin
results achieved during the nine months ended October 3, 1999.
LIQUIDITY AND CAPITAL RESOURCES
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 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 October 3, 1999 was approximately $153.4 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
12
<PAGE> 13
and the indenture governing the Senior Notes. Available borrowings on the CIT
Credit Facility amounted to $52.6 million at October 3, 1999.
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 repurchased $15.0 million face value of the Senior
Notes during the nine months ended October 3, 1999. Subsequent to October 3,
1999, the Company repurchased an additional $2.0 million face value of Senior
Notes.
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 decreased from $26.6 million for
the nine months ended September 27, 1998 to $3.1 million for the nine months
ended October 3, 1999, primarily reflecting normalization of working capital
seasonal trends in the 1999 period. The Recapitalization had impacted those
trends during the nine months ended September 27, 1998.
Net cash used in investing activities increased from $5.0 million for the
nine months ended September 27, 1998 to $9.4 million for the nine months ended
October 3, 1999. The Company purchased $1.4 million accreted value of Big 5
Holdings Corp. (the parent corporation of the Company) Senior Discount Notes and
repurchased $15.0 million face value of the Company's Senior Notes with
borrowings under the CIT Credit Facility during the nine months ended October 3,
1999. Subsequent to October 3, 1999, the Company repurchased an additional $2.0
million face value of the Company's Senior Notes with borrowings under the CIT
Credit Facility.
Capital expenditures increased from $5.0 million for the nine months ended
September 27, 1998 to $8.0 million for the nine months ended October 3, 1999.
Management expects capital expenditures for the current fiscal year will
approximate $10 million and will be used primarily to fund the opening of 15 new
stores (of which 5 have already been opened), as well as approximately $3.0
million related to new point-of-sale registers and software for the Company's
stores which will be rolled out during the first quarter of next year.
Net cash provided by/(used in) financing activities changed from net cash
used in financing activities of $22.2 million last year to net cash provided of
$6.3 million for the nine months ended October 3, 1999. As of October 3, 1999,
the Company had borrowings of $39.8 million and letter of credit commitments of
$6.9 million outstanding under the CIT Credit Facility and Senior Notes
outstanding of $115.5 million compared to borrowings of $21.1 million and letter
of credit commitments
13
<PAGE> 14
of $7.8 million outstanding under the CIT Credit Facility and Senior Notes
outstanding of $130.4 million as of September 27, 1998. There were no cash and
cash equivalents at October 3, 1999 compared to $0.8 million at September 27,
1998.
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.
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 of Financial
Accounting Standards (SFAS) No. 133, (Accounting for Derivative Instruments and
Hedging Activities) effective for all fiscal quarters of fiscal years beginning
after June 15, 2000, as amended by SFAS No. 137. Management has determined that
the accounting and disclosure requirements from this statement will not impact
the financial statements of the Company.
YEAR 2000
Background
The Year 2000 issue is primarily the result of computer programs using a
two-digit format, as opposed to four digits, to indicate the year. Computer
programs that are date dependent are found in the software that operates many
information technology ("IT") systems as well as in the computer based devices
which control many types of electronic equipment. Computer programs that are not
Year 2000 compliant will be unable to interpret dates beyond the year 1999,
which could cause a system failure or other computer errors, leading to a
disruption in the operation of the related IT systems or electronic equipment.
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 Company's applications
that were not Year 2000 compliant have been or will be replaced by upgrades to
existing systems.
The Company's computer hardware platform is an IBM AS/400 system upon which
all of the Company's business critical software systems reside. In the third
quarter of 1999, the Company completed testing of these software systems by
rolling the calendar forward to January 2000 on a separate IBM AS/400 used
14
<PAGE> 15
by the Company for testing new systems. These tests have been successful and the
Company anticipates no significant Year 2000 issues with these systems.
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 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
have been completed and the Company has tested all of its systems including
these changes for Year 2000 compliance. This testing was successfully completed
during the third quarter and no major issues are expected into the year 2000.
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 IBM 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
90% of all personal computers currently comply, with the remainder to be
upgraded before the end of 1999. 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 has completed
assessment of its non-IT systems and does not expect disruptions related to
non-IT systems although no assurances can be made.
The Company has contacted each of its major suppliers and vendors prior to the
end of 1998 to request written certification regarding their Year 2000
compliance. Approximately 25% of suppliers and vendors have responded to the
Company's requests to date. The Company will continue follow-up mailings
throughout 1999 but cannot guarantee full supplier and vendor compliance by
year-end.
15
<PAGE> 16
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 $0.6 million, plus an additional $6.5 million in replacement costs
for projects that are not Year 2000 related but have some Year 2000 remediation
benefits. The total amount expended through October 3, 1999, was approximately
$0.6 million directly related to Year 2000 remediation and $3.9 million for
projects which are not Year 2000 related but have some Year 2000 remediation
benefits. 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. 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, revenues
and income are highest during fourth quarters, due to industry wide holiday
retail sales trends. The fourth quarter contributed 27.8% in 1998 and 26.9% in
1997 of fiscal year net sales and 32.9% in 1998 and 33.7% in 1997 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.
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
16
<PAGE> 17
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the ordinary course of its business, the Company is exposed to certain market
risks, primarily changes in interest rates. After an assessment of these risks
to the Company's operations, the Company believes that its primary market risk
exposures (within the meaning of Regulation S-K Item 305) are not material and
are not expected to have any material adverse effect on the Company's financial
condition, results of operations or cash flows for the next fiscal year.
17
<PAGE> 18
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.
18
<PAGE> 19
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: 11/17/99 By: /s/ STEVEN G. MILLER
------------------------------------
Steven G. Miller
President and
Chief Operating Officer
Date: 11/17/99 By: /s/ CHARLES P. KIRK
------------------------------------
Charles P. Kirk
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
19
<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-02-2000
<PERIOD-START> JUL-05-1999
<PERIOD-END> OCT-03-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 2,551
<ALLOWANCES> 190
<INVENTORY> 162,857
<CURRENT-ASSETS> 167,003
<PP&E> 32,375
<DEPRECIATION> 31,814
<TOTAL-ASSETS> 231,911
<CURRENT-LIABILITIES> 93,955
<BONDS> 155,278
0
0
<COMMON> 0
<OTHER-SE> (24,363)
<TOTAL-LIABILITY-AND-EQUITY> 231,911
<SALES> 131,440
<TOTAL-REVENUES> 131,440
<CGS> 88,400
<TOTAL-COSTS> 88,400
<OTHER-EXPENSES> 36,116
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,339
<INCOME-PRETAX> 2,585
<INCOME-TAX> 1,059
<INCOME-CONTINUING> 1,526
<DISCONTINUED> 0
<EXTRAORDINARY> (346)
<CHANGES> 0
<NET-INCOME> 1,180
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
