<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 July 4, 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 August 17, 1999.
<PAGE> 2
BIG 5 CORP.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Title Page 1
Index 2
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (Unaudited)
Condensed Balance Sheets - July 4, 1999 and
January 3, 1999 3
Condensed Statements of Operations -
Three months and six months ended July 4, 1999 and
June 28, 1998 4
Condensed Statements of Cash Flows -
Six months ended July 4, 1999 and
June 28, 1998 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-15
Item 3. Market Risk Disclosure 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of
Security-Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
2
<PAGE> 3
BIG 5 CORP.
Condensed Balance Sheets
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
July 4, 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 $227 and $201, respectively 3,445 6,347
Merchandise inventories 164,504 147,296
Prepaid expenses 1,689 1,336
------------ ------------
Total current assets 169,638 154,979
------------ ------------
Property and equipment:
Land 186 186
Buildings and improvements 20,466 18,910
Furniture and equipment 40,328 37,870
Less accumulated depreciation and amortization (30,068) (27,428)
------------ ------------
Net property and equipment 30,912 29,538
------------ ------------
Deferred income taxes, net 6,158 6,158
Leasehold interest, net of accumulated amortization of
$16,714 and $15,669 respectively 12,020 12,793
Other assets, at cost, less accumulated
amortization of $1,398 and $995, respectively 10,201 8,773
Goodwill, less accumulated amortization of $1,495
and $1,371, respectively 5,050 5,174
------------ ------------
$ 233,979 $ 217,415
============ ============
</TABLE>
<TABLE>
<CAPTION>
July 4, January 3,
1999 1999
------------ ------------
<S> <C> <C>
Liabilities and Stockholder's Deficit
Current liabilities:
Accounts payable $ 63,994 $ 56,096
Accrued expenses 27,605 31,258
------------ ------------
Total current liabilities 91,599 87,354
------------ ------------
Deferred rent 6,913 6,586
Long-term debt 161,010 151,352
------------ ------------
Total liabilities 259,522 245,292
------------ ------------
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 (64,824) (67,158)
------------ ------------
Total stockholder's deficit (25,543) (27,877)
------------ ------------
$ 233,979 $ 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 Six Months Ended
-------------------------------- --------------------------------
July 4, 1999 June 28, 1998 July 4, 1999 June 28, 1998
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net sales $ 125,579 $ 118,125 $ 242,676 228,214
Cost of goods sold, buying and
occupancy 81,722 76,992 160,550 151,757
------------ ------------ ------------ ------------
Gross profit 43,857 41,133 82,126 76,457
------------ ------------ ------------ ------------
Operating expenses:
Selling and administration 32,700 29,616 64,406 58,925
Depreciation and amortization 2,335 2,066 4,715 4,133
------------ ------------ ------------ ------------
Total operating expenses 35,035 31,682 69,121 63,058
------------ ------------ ------------ ------------
Operating income 8,822 9,451 13,005 13,399
Interest expense, net 4,507 4,785 9,049 9,661
------------ ------------ ------------ ------------
Income before income taxes 4,315 4,666 3,956 3,738
Income taxes 1,769 1,913 1,622 1,533
------------ ------------ ------------ ------------
Net income $ 2,546 $ 2,753 $ 2,334 $ 2,205
============ ============ ============ ============
</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>
Six Months Ended
---------------------------------
July 4, 1999 June 28, 1998
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,334 $ 2,205
Adjustments to reconcile net income to net cash
provided/(used) by operating activities:
Depreciation and amortization 4,715 4,133
Amortization of deferred finance charge and discounts 136 474
Change in assets and liabilities:
Merchandise inventories (17,208) (8,478)
Trade accounts receivable, net 2,902 3,189
Prepaid expenses and other assets (574) 96
Accounts payable 9,639 7,600
Accrued expenses (3,653) (3,147)
------------ ------------
Net cash provided/(used) by operating activities (1,709) 6,072
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (4,828) (3,131)
Purchase of long-term investments (1,363) --
------------ ------------
Net cash used in investing activities (6,191) (3,131)
------------ ------------
Cash flows from financing activities:
Net (payment)/borrowings under revolving credit facilities, and other 7,900 (3,248)
Dividends paid to Parent -- (27)
------------ ------------
Net cash provided by (used in) financing activities 7,900 (3,275)
------------ ------------
Net increase/(decrease) in cash and cash equivalents 0 (334)
Cash and cash equivalents at beginning of period 0 1,364
------------ ------------
Cash and cash equivalents at end of period $ 0 $ 1,030
============ ============
</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 223 stores at July 4, 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 period ended July 4, 1999. 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.
In March 1998, the AICPA Accounting Standard Executive Committee issued
Statement of Position 98-1 ("SOP 98-1"), Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. The SOP requires
capitalization of certain costs related to computer software developed or
obtained for internal use. The Company has adopted SOP 98-1 in fiscal 1999
without a material impact on its financial position or results of
operations.
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 JULY 4, 1999 VERSUS THREE MONTHS ENDED JUNE 28, 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
--------------------------------------------------------------------
July 4, 1999 June 28, 1998
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
Net sales $ 125,579 100.0% $ 118,125 100.0%
Cost of goods sold, buying and
occupancy 81,722 65.1 76,992 65.2
---------- ---------- ---------- ----------
Gross profit 43,857 34.9 41,133 34.8
---------- ---------- ---------- ----------
Operating expenses:
Selling and administrative 32,700 26.0 29,616 25.1
Depreciation and amortization 2,335 1.9 2,066 1.7
---------- ---------- ---------- ----------
Total operating expense 35,035 27.9 31,682 26.8
---------- ---------- ---------- ----------
Operating income 8,822 7.0 9,451 8.0
Interest expense, net 4,507 3.6 4,785 4.1
---------- ---------- ---------- ----------
Net income before
income taxes 4,315 3.4 4,666 4.0
Income taxes 1,769 1.4 1,913 1.6
---------- ---------- ---------- ----------
Net income $ 2,546 2.0% $ 2,753 2.3%
========== ========== ========== ==========
EBITDA (a) $ 11,157 8.9% $ 11,517 9.7%
========== ========== ========== ==========
</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). 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 6.3% (or $7.5 million) from $118.1 million reported for
the three months ended June 28, 1998 to $125.6 million for the three months
ended July 4, 1999. Same store sales, or sales for stores open throughout
the quarter in 1999 and 1998, increased 1.1%, representing the fourteenth
consecutive quarter of same store sales increases. Sales attributable to an
increase in store count from 209 at June 28, 1998 to 223 at July 4, 1999
constituted the remainder of the 6.3% sales increase for the quarter.
2. Gross Profit
Gross profit increased 6.6% (or $2.7 million) from $41.1 million for the
three months ended June 28, 1998 to $43.9 million for the three months ended
July 4, 1999, from increased sales and improved product margins. Gross
profit margin increased from 34.8% for the three months in 1998 to 34.9% for
the comparable period this year. The improvement for the three months ended
July 4, 1999 was due to positive comparisons in many of the Company's
product categories.
3. Operating Expenses
Selling and administrative expenses increased 10.4% (or $3.1 million) from
$29.6 million for the three months ended June 28, 1998 to $32.7 million for
the three months ended July 4, 1999, reflecting the increased stores as well
as planned increases in advertising during the quarter. As a percentage of
sales, selling and administrative expenses increased from 25.1% in 1998 to
26.0% in 1999.
Depreciation and amortization increased 13.1% (or $0.3 million) from $2.1
million for the prior year period to $2.3 million for the three months ended
July 4, 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 5.8% (or $0.3 million) from $4.8 million for
the prior year period to $4.5 million for the three months ended July 4,
1999. Lower than average borrowings under the CIT Credit Facility (see
Liquidity and Capital Resources) during the second quarter of 1999 versus
the same period last year caused the decrease. Borrowings under the CIT
Credit Facility were $30.5 million at July 4, 1999 compared to $40.0 million
at June 28, 1998.
5. Income Taxes
Income tax expense decreased from $1.9 million for the prior year period to
$1.8 million for the three months ended July 4, 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. Net Income
Net income for the three months ended July 4, 1999 decreased 7.5% (or $0.2
million) from $2.8 million for the three months ended June 28, 1998 to $2.5
million for the three months ended July 4, 1999 due to the factors discussed
above.
8
<PAGE> 9
7. Earnings Before Interest, Taxes, Depreciation, and Amortization ("EBITDA")
EBITDA decreased 3.1% (or $0.4 million) from $11.5 million for the three
months ended June 28, 1998 to $11.2 million for the three months ended July
4, 1999 due to the factors discussed above.
SIX MONTHS ENDED JULY 4, 1999 VERSUS SIX MONTHS ENDED JUNE 28, 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>
Six Months Ended
--------------------------------------------------------------
July 4, 1999 June 28, 1998
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net sales $ 242,676 100.0% $ 228,214 100.0%
Cost of goods sold, buying and
occupancy 160,550 66.2 151,757 66.5
---------- ---------- ---------- ----------
Gross profit 82,126 33.8 76,457 33.5
---------- ---------- ---------- ----------
Operating expenses:
Selling and administration 64,406 26.5 58,925 25.8
Depreciation and amortization 4,715 1.9 4,133 1.8
---------- ---------- ---------- ----------
Total operating expense 69,121 28.4 63,058 27.6
---------- ---------- ---------- ----------
Operating income 13,005 5.4 13,399 5.9
Interest expense, net 9,049 3.7 9,661 4.2
---------- ---------- ---------- ----------
Net income before income taxes 3,956 1.7 3,738 1.7
Income taxes 1,622 0.7 1,533 0.7
---------- ---------- ---------- ----------
Net income $ 2,334 1.0% $ 2,205 1.0%
========== ========== ========== ==========
EBITDA (a) $ 17,720 7.3% $ 17,532 7.7%
========== ========== ========== ==========
</TABLE>
(a) EBITDA represents net earnings before taking into consideration net interest
expense, income tax expense, depreciation expense, amortization expense and
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). 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.
9
<PAGE> 10
1. Net Sales
Net sales increased 6.3% (or $14.5 million) from $228.2 million reported for
the six months ended June 28, 1998 to $242.7 million for the six months
ended July 4, 1999. Same store sales, or sales for stores open throughout
the six months in 1999 and 1998, increased 0.9% compared with the same
period last year. Sales attributable to an increase in store count from 209
at June 28, 1998 to 223 at July 4, 1999 constituted the remainder of the
6.3% sales increase.
2. Gross Profit
Gross profit increased 7.4% (or $5.7 million) from $76.5 million for the six
months ended June 28, 1998 to $82.1 million for the six months ended July 4,
1999, reflecting the increased sales discussed above and improved product
margins. Gross profit margin increased from 33.5% for the first six months
in 1998 to 33.8% for the comparable period this year. The improvement in
gross profit margin for the six months ended July 4, 1999 was due to
positive comparisons in many of the Company's product categories.
3. Operating Expenses
Selling and administrative expenses increased 9.3% (or $5.5 million) from
$58.9 million for the six months ended June 28, 1998 to $64.4 million for
the six months ended July 4, 1999. This increase resulted primarily from an
increase in the Company's store base from 209 stores last year to 223 at
July 4, 1999 as well as planned increases in advertising expenditures during
the six month period. When measured as a percentage of sales, selling and
administrative expenses increased from 25.8% in 1998 to 26.5% in 1999.
Depreciation and amortization increased 14.1% (or $0.6 million) from $4.1
million for the prior year period to $4.7 million for the six months ended
July 4, 1999. The increase resulted from depreciation and amortization on
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 6.3% (or $0.6 million) from $9.7 million for
the prior year period to $9.0 million for the six months ended July 4, 1999.
Lower than average borrowings under the CIT Credit Facility (see Liquidity
and Capital Resources) during the second quarter of 1999 versus the same
period last year caused the decrease. Borrowings under the CIT Credit
Facility were $30.5 million at July 4, 1999 compared to $40.0 million at
June 28, 1998.
5. Income Taxes
Income tax expense was $1.6 million for the six months ended July 4, 1999
versus $1.5 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.
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<PAGE> 11
6. Net Income
Net income for the six months ended July 4, 1999 increased $0.1 million from
$2.2 million for the six months ended June 28, 1998 to $2.3 million for the
six months ended July 4, 1999. This improvement reflects the positive sales
and margin results and lower interest expense achieved during the six months
ended July 4, 1999.
7. Earnings Before Interest, Taxes, Depreciation, and Amortization ("EBITDA")
EBITDA increased 1.1% (or $0.2 million) from $17.5 million for the six
months ended June 28, 1998 to $17.7 million for the six months ended July 4,
1999. This improvement reflects the positive sales and margin results
achieved during the six months ended July 4, 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 July 4, 1999 was approximately $155.0 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
from incurring additional indebtedness, among other things, by restrictions
contained in the CIT Credit Facility and the indenture governing the Senior
Notes. Available borrowings on the CIT Credit Facility amounted to $67.2 million
at July 4, 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 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
11
<PAGE> 12
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/(used in) operating activities changed from net
cash provided of $6.1 million for the 26 weeks ended June 28, 1998 to net cash
used in operating activities of $1.7 million for the 26 weeks ended July 4,
1999, primarily reflecting normalization of working capital seasonal trends
following the Company's Recapitalization.
Net cash used in investing activities increased from $3.1 million for
the six months ended June 28, 1998 to $6.2 million for the six months ended July
4, 1999. Capital expenditures increased from $3.1 million for the six months
ended June 28,1998 to $4.8 million for the six months ended July 4, 1999.
Management expects capital expenditures for the current fiscal year will range
from $10 to $11 million and will be used primarily to fund the opening of
approximately 15 new stores (of which 4 have already been opened), as well as
approximately $3.8 million for the installation of new point-of-sale registers
and software in the Company's stores (of which $0.9 million has been expended
to-date). The Company purchased $1.4 million accreted value of Big 5 Holdings
Corp. (the parent corporation of the Company) Senior Discount Notes during the
six months ended July 4, 1999. Subsequent to July 4, 1999, the Company
repurchased $15.0 million face value of the Company's Senior Notes with
borrowings under the CIT Credit Facility.
Net cash provided by/(used in) financing activities changed from net
cash used in financing activities of $3.3 million last year to net cash provided
of $7.9 million for the six months ended July 4, 1999. As of July 4, 1999, the
Company had borrowings of $30.5 million and letter of credit commitments of $3.7
million outstanding under the CIT Credit Facility compared to $40.0 million and
$5.3 million, respectively as of June 28, 1998, with no cash and cash
equivalents at July 4, 1999 compared to $1.0 million at June 28, 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
12
<PAGE> 13
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. The Company's applications
that were not Year 2000 compliant have been replaced by upgrades to existing
systems and, as described below, are currently being tested for Year 2000
compliance.
The Company's computer hardware platform is an IBM AS/400 system upon
which all of the Company's business critical software systems reside. Subsequent
to July 4, 1999 the Company began a complete test of these software systems by
rolling the calendar forward to January 2000 on a separate IBM AS/400 used by
the Company for testing new systems. The Company expects this testing to be
completed during the third quarter.
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
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<PAGE> 14
and the Company is currently testing all of its systems including these changes
for the Year 2000. This testing is expected to be completed during the third
quarter.
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
80% 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.
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, 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 July 4, 1999,
was approximately $0.5 million directly related to Year 2000 remediation and
$3.1 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.
14
<PAGE> 15
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 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
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.
16
<PAGE> 17
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.
--------------------------------------------
17
<PAGE> 18
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: 8/17/99 By: /S/ STEVEN G. MILLER
----------------------------------------------
Steven G. Miller
President and
Chief Operating Officer
Date: 8/17/99 By: /S/ CHARLES P. KIRK
----------------------------------------------
Charles P. Kirk
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
18
<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> APR-05-1999
<PERIOD-END> JUL-04-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 3,445
<ALLOWANCES> 227
<INVENTORY> 164,504
<CURRENT-ASSETS> 169,638
<PP&E> 30,912
<DEPRECIATION> 30,068
<TOTAL-ASSETS> 233,979
<CURRENT-LIABILITIES> 91,599
<BONDS> 161,010
0
0
<COMMON> 0
<OTHER-SE> (25,543)
<TOTAL-LIABILITY-AND-EQUITY> 233,979
<SALES> 125,579
<TOTAL-REVENUES> 125,579
<CGS> 81,722
<TOTAL-COSTS> 81,722
<OTHER-EXPENSES> 35,035
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,507
<INCOME-PRETAX> 4,315
<INCOME-TAX> 1,769
<INCOME-CONTINUING> 2,546
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,546
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
