10-Q 1 v75134e10-q.txt FORM 10-Q 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 1, 2001 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 15, 2001. 2 BIG 5 CORP. INDEX

2 3 BIG 5 CORP. Condensed Balance Sheets (Dollars in thousands) (Unaudited)

See accompanying notes to condensed financial statements 3 4 BIG 5 CORP. Condensed Statements of Operations (Dollars in Thousands) (Unaudited)

See accompanying notes to condensed financial statements. 4 5 BIG 5 CORP. Condensed Statement of Cash Flows (Dollars in Thousands) (Unaudited)

See accompanying notes to condensed financial statements. 5 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 252 stores at July 1, 2001 in California, Washington, Arizona, Oregon, Texas, New Mexico, Nevada, Utah, Idaho and Colorado. 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 as of July 1, 2001 and December 31, 2000 and the results of operations and cash flows for the periods ended July 1, 2001 and July 2, 2000. 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 2000 audited financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. 4. During the first six months of 2001, the Company paid a dividend to Big 5 Holdings, Inc. (the "Parent"). The dividend was used by Parent to repurchase and retire $12.5 million face value of Parent's Senior Discount Notes due 2008 (the "Parent Discount Notes"). See "Liquidity and Capital Resources" of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. 6 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 1, 2001 VERSUS THREE MONTHS ENDED JULY 2, 2000 The following table sets forth for the periods indicated operating results in thousands of dollars and expressed as a percentage of sales.

(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 December 31, 2000). 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 8 1. Net Sales Net sales increased by $14.2 million, or 10.3%, to $151.5 million for the three months ended July 1, 2001 from $137.3 million reported for the three months ended July 2, 2000. This growth reflected an increase of $7.9 million in same store sales and an increase of $7.6 million in new store sales. The remaining difference in sales between periods reflects sales attributable to closed stores. Same store sales (sales for stores open throughout the quarter in 2001 and 2000) increased by 5.8% for the three months ended July 1, 2001, representing the twenty-second consecutive quarter of same store sales increases. This increase was attributable to higher sales in the majority of the Company's merchandise categories. New store sales reflect sales for the 19 new stores opened after July 2, 2000. 2. Gross Profit Gross profit increased by $5.2 million, or 10.8%, to $53.6 million for the three months ended July 1, 2001 from $48.4 million for the three months ended July 2, 2000. Gross profit margin was 35.4% for three months ended July 1, 2001 compared to 35.3% for the three months ended July 2, 2000. The Company was able to achieve higher gross profit margins primarily due to increased same store sales, which caused store occupancy costs to decrease as a percentage of sales. 3. Operating Expenses Selling and administrative expenses increased by $4.4 million, or 12.2%, to $40.4 million for the three months ended July 1, 2001 from $36.0 million for the three months ended July 2, 2000. The increase in selling and administrative expense reflects an increase in the Company's store count from 236 stores last year to 252 at July 1, 2001. When measured as a percentage of net sales, selling and administrative expenses were 26.7% for the three months ended July 1, 2001 compared to 26.3% for the three months ended July 2, 2000. The increase in selling and administrative expenses on a percentage basis was due to one-time expenses related to training of store personnel for the completion of the rollout of the Company's new point-of-sale systems to all stores and added advertising expense during the three months ended July 1, 2001. Depreciation and amortization increased by $0.3 million, or 10.9%, to $2.6 million for the three months ended July 1, 2001 from $2.3 million for the three months ended July 2, 2000. The increase was primarily due to added depreciation and amortization related to expenditures for the growth in the Company's store base between periods, as well as depreciation and amortization related to expenditures for the Company's new point-of-sale register systems. 4. Interest Expense, Net Interest expense, net decreased by $0.4 million, or 10.4%, to $4.0 million for the three months ended July 1, 2001 from $4.4 million for the three months ended July 2, 2000. This decrease reflected lower average daily debt balances during the three months ended July 1, 2001 versus the comparable period last year in addition to lower average interest rates on the Company's revolving debt during the three months ended July 1, 2001 versus the three months ended July 2, 2000. 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 by $0.4 million to $2.7 million for the three months ended July 1, 2001 from $2.3 million for the prior year period, reflecting an increase in pre-tax income between periods. Income taxes are provided 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. 8 9 6. Extraordinary Gain From Early Extinguishment of Debt There was no extraordinary gain for the three months ended July 1, 2001. There was an extraordinary gain of $0.05 million, net of taxes and costs related to the repurchase of $5.75 million face value of the Senior Notes during the three months ended July 2, 2000. 7. Net Income As a result of the factors described above, net income for the three months ended July 1, 2001 increased by $0.5 million, or 15.8%, to $3.9 million for the three months ended July 1, 2001 from $3.4 million for the three months ended July 2, 2000. This increase reflects higher operating income achieved during the three months ended July 1, 2001. 8. Earnings Before Interest, Taxes, Depreciation, and Amortization ("EBITDA") EBITDA increased by $0.8 million, or 6.6%, to $13.2 million for the three months ended July 1, 2001 from $12.4 million for the three months ended July 2, 2000. This improvement reflects the positive sales and margin results achieved during the three months ended July 1, 2001 compared to the three months ended July 2, 2000. 9 10 SIX MONTHS ENDED JULY 1, 2001 VERSUS SIX MONTHS ENDED JULY 2, 2000 The following table sets forth for the periods indicated operating results in thousands of dollars and expressed as a percentage of sales.

(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 December 31, 2000). 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. 10 11 1. Net Sales Net sales increased by $27.6 million, or 10.4%, to $294.6 million reported for the six months ended July 1, 2001 from $267.0 million for the six months ended July 2, 2000. This growth reflected an increase of $15.7 million in same store sales and an increase of $13.3 million in new store sales. The remaining difference in sales between periods reflects sales attributable to closed stores. Same store sales (sales for stores open throughout the six months in 2001 and 2000) increased by 5.9% for the six months ended July 1, 2001, which was attributable to higher sales in the majority of the Company's merchandise categories. New store sales reflect the opening of six stores during the first six months of 2001, as well as fifteen new stores opened during fiscal 2000. 2. Gross Profit Gross profit increased by $10.1 million, or 11.1%, to $101.4 million for the six months ended July 1, 2001 from $91.3 million for the six months ended July 2, 2000. Gross profit margin was 34.4% for the six months ended July 1, 2001 compared to 34.2% for the six months ended July 2, 2000. The Company was able to achieve higher gross profit margins primarily due to improved selling margins in a majority of the Company's product categories as well as increased same store sales, which caused store occupancy costs to decrease as a percentage of sales. 3. Operating Expenses Selling and administrative expenses increased by $7.7 million, or 10.8%, to $78.6 million for the six months ended July 1, 2001 from $70.9 million for the six months ended July 2, 2000. The increase in selling and administrative expenses reflects an increase in the Company's store base from 236 stores last year to 252 at July 1, 2001. When measured as a percentage of sales, selling and administrative expenses were 26.7% for the six months ended July 1, 2001 compared to 26.6% for the six months ended July 2, 2000. The increase in selling and administrative expenses on a percentage basis was due to one-time expenses related to training of store personnel for the completion of the rollout of the Company's new point-of-sale systems to all stores. Depreciation and amortization increased by $0.5 million, or 10.7%, to $5.1 million for the six months ended July 1, 2001 from $4.6 million for the prior year period. The increase was primarily due to added depreciation and amortization related to expenditures for the growth in the Company's store base in the six months ended July 1, 2001, as well as depreciation and amortization related to expenditures for the Company's new point-of-sale register systems. 4. Interest Expense, Net Interest expense, net decreased by $0.7 million, or 7.5%, to $8.1 million for the six months ended July 1, 2001 from $8.8 million for the prior year period. This decrease reflected lower average daily debt balances during the six months ended July 1, 2001 versus the comparable period last year in addition to lower average interest rates on the Company's revolving debt during the six months ended July 1, 2001 versus the six months ended July 2, 2000. 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 by $1.1 million to $3.9 million for the six months ended July 1, 2001 from $2.8 million for the prior year period, reflecting an increase in pre-tax income between years. 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. 11 12 6. Extraordinary Gain From Early Extinguishment of Debt There was no extraordinary gain for the six months ended July 1, 2001. There was an extraordinary gain of $0.1 million, net of taxes and costs related to the Senior Notes, for the six months ended July 2, 2000. 7. Net Income As a result of the factors described above, net income for the six months ended July 1, 2001 increased by $1.5 million, or 34.0%, to net income of $5.7 million for the six months ended July 1, 2001 from net income of $4.2 million for the six months ended July 2, 2000. This increase reflects higher operating income achieved during the six months ended July 1, 2001. 8. Earnings Before Interest, Taxes, Depreciation, and Amortization ("EBITDA") EBITDA increased by $2.4 million, or 12.2%, to $22.8 million for the six months ended July 1, 2001 from $20.4 million for the six months ended July 2, 2000. This improvement reflects the positive sales and margin results achieved during the six months ended July 1, 2001. 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 1, 2001 was approximately $168.7 million. As of July 1, 2001, loans under the CIT Credit Facility bear interest at a rate of LIBOR (3.98% at July 1, 2001) plus 1.50% or the Chase Manhattan prime lending rate (6.75% at July 1, 2001) plus 0.0%. 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. 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 and retired $19.1 million face value of the Senior Notes during the 1999 fiscal year and $7.75 million face value of the Senior Notes during the 2000 fiscal year. As of July 1, 2001, $103.8 million face value of the Senior Notes remained outstanding. 12 13 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 used in operating activities for the six months ended July 1, 2001 and July 2, 2000 was $3.6 and $4.6 million, respectively. The decrease in cash used primarily reflects improved earnings during the first six months ended July 1, 2001 in addition to a build up of inventory in anticipation of peak seasons offset partially by net income and non-cash charges. Capital expenditures for the six months ended July 1, 2001 and July 2, 2000 were $4.5 million and $5.2 million, respectively. The variance was primarily attributable to the opening of new stores as well as timing of expenditures related to the Company's new point-of-sale store register systems. The Company expended $0.5 million on hardware and software to complete this project during the six months ended July 1, 2001. The Company expects capital expenditures for the remaining six months of 2001 will range from approximately $4.5 to $5.5 million to be used primarily to fund the opening of approximately 7 to 9 new stores, store maintenance and remodels, warehouse and headquarters maintenance and systems related expenditures. Net cash provided by financing activities for the six months ended July 1, 2001 and July 2, 2000 was $8.0 million and $9.8 million, respectively. During the six months ended July 2, 2000, the Company repurchased and retired $7.75 million face value of the Senior Notes. During the six months ended July 1, 2001, the Company issued a dividend to Parent of $6.7 million, with which the Parent repurchased and retired $12.5 million face value of the Parent Discount Notes. As of July 1, 2001, the Company had borrowings of $53.3 million and letter of credit commitments of $4.5 million outstanding under the CIT Credit Facility, and $103.8 million of Senior Notes outstanding. These balances compared to borrowings of $54.6 million and letter of credit commitments of $5.0 million outstanding under the CIT Credit Facility, and $103.8 million of Senior Notes outstanding as of July 2, 2000. There were no cash and cash equivalents at both July 1, 2001 and at July 2, 2000. 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 On July 20, 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. These new pronouncements significantly change the permissible accounting methods for business combinations and the treatment of goodwill and other intangible assets. Prior to the adoption of these new standards, goodwill and similar intangible assets were generally amortized into income on a stated periodic basis. This treatment will 13 14 be replaced by an alternative system, which will not require intangible amortization on a stated basis but rather will require periodic testing of the intangible for impairment, with no charge to income except to the extent of any such impairment. The Company is required to adopt the provisions of SFAS No. 141 immediately and SFAS 142 effective January 1, 2002, at which time the Company will cease to record periodic goodwill charges absent an impairment charge. As of July 1, 2001, the Company had recorded on its balance sheet $4.6 million of goodwill. 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 27.7% in 2000 and 27.3% in 1999 of fiscal year net sales and 35.5% in 2000 and 35.1% in 1999 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. 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. ITEM 3. 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. 14 15 PART II - OTHER INFORMATION Item 1. Legal Proceedings On August 9, 2001, the Company received a copy of a complaint filed in the California Superior Court in Los Angeles entitled Mosely, et al., v. Big 5 Corp., Case No. BC255749, alleging violations of the California Labor Code and the Business and Professions Code. This complaint was brought as a purported class action with two subclasses comprised of the Company's California store managers and the Company's California first assistant store managers. The plaintiffs allege that the Company improperly classified its store managers and first assistant store managers as exempt employees not entitled to overtime pay for work in excess of forty hours per week. They seek, on behalf of the class members, back pay for overtime allegedly not paid, statutory penalties in the amount of an additional thirty days' wages for each such employee whose employment terminated in the four years preceding the complaint, and injunctive relief to require the Company to treat its store management as non-exempt. The complaint has only recently been filed. The Company has not yet answered the complaint and discovery has not commenced. The Company intends to defend the case vigorously. The Company's results of operations and financial position could be adversely affected by an adverse judgment in this matter. The Company is involved in various other legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these 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 None. (b) Reports on Form 8-K None. 15 16 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: 8/15/01 By: /s/ STEVEN G. MILLER ------- --------------------- Steven G. Miller President and Chief Executive Officer Date: 8/15/01 By: /s/ CHARLES P. KIRK ------- -------------------- Charles P. Kirk Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 16

BIG 5 CORP /CA/ 10-Q