<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

[X]     ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE
        ACT OF 1934

                    For the fiscal year ended January 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)
          SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
                                      None
          SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
                                      None

Indicate by check mark whether the registrant (1) 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) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]   No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. (X)

No voting stock of the registrant is held by non-affiliates of the registrant.
The registrant's voting stock is wholly-owned by Big 5 Holdings Corp., a
Delaware Corporation. Neither the registrant's nor Big 5 Holdings Corp.'s voting
stock is publicly traded.

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 March 31, 1999.

                      DOCUMENTS INCORPORATED BY REFERENCE:
                                      None


<PAGE>   2
                                     PART I


ITEM 1:  BUSINESS

GENERAL

         Big 5 Corp. (the "Company" or "Big 5") is the leading sporting goods
retailer in the Western United States, operating 221 stores under the "Big 5
Sporting Goods" name at January 3, 1999. The Company's core market is
California, Washington and Nevada and beginning in 1993, it expanded into
Arizona, Idaho, Oregon, New Mexico, Texas and Utah. Big 5 provides a full-line
product offering of over 25,000 SKU's in a traditional sporting goods store
format that averages 11,000 square feet. The Company's products include athletic
shoes and apparel, tennis, golf, ski, snowboard, in-line skating, fitness,
outdoor and team sports equipment for the competitive and recreational sporting
goods customer. Big 5 offers customers attractive values on recognized
brand-name merchandise at a wide variety of price points. Important brand-names
offered by the Company include Nike, Reebok, Wilson, K2, Rollerblade, Coleman,
Spalding, Adidas, Fila, Speedo, Easton and Columbia, among others. The Company
augments its value image by emphasizing merchandise produced exclusively for the
Company, and on a selective basis, opportunistic buys comprising first quality
items, including overstock and close-out merchandise. These merchandise values
are communicated weekly through print advertising created by the Company in
order to generate store traffic and drive sales. For the twelve months ended
January 3, 1999, the Company generated $491.4 million of revenue, $39.5 million
of EBITDA (as defined below) and a same store sales increase of 5.2% over the
prior period. Through the period ended January 3, 1999, Big 5 has enjoyed 12
consecutive quarterly increases in same store sales over the comparable prior
period.

         Big 5 was founded in 1955 by Robert W. Miller, Maurie Liff and Harry
Liff, with the establishment of five retail locations in Los Angeles, Burbank,
Inglewood, Glendale and San Jose. The Company originally sold World War II
surplus items including tents, sleeping bags, air mattresses, housewares, tools
and other merchandise. Other sporting goods gradually entered the product mix
and as a result, in 1963, the Company decided to become a sporting goods
specialist and changed its trade name to "Big 5 Sporting Goods." In 1971, the
Company was acquired by Thrifty Corporation ("Thrifty"), which was subsequently
purchased by Pacific Enterprises ("PE") in 1986. Throughout these changes in
ownership, management remained relatively constant and in 1992, management in
conjunction with Leonard Green & Partners, L.P. ("LGP") bought the Company. In
October 1997, Big 5 Holdings Corp., the parent corporation of the Company
("Parent"), Robert W. Miller, Steven G. Miller and Green Equity Investors, L.P.
("GEI") agreed to a Plan of Recapitalization and Stock Repurchase Agreement (the
"Recapitalization Agreement") which resulted in existing management and
employees of the Company (and members of their families) beneficially owning the
majority of Parent. Several transactions (collectively referred to as the
"Recapitalization") were effected pursuant to the Recapitalization Agreement,
including the reincorporation of the Company in Delaware as Big 5 Corp. See
"Liquidity and Capital Resources" for a detailed description of the
Recapitalization.


MERCHANDISING

         Offering approximately 25,000 SKUs, the typical Company store targets
the competitive and recreational sporting goods customer with a full-line
product offering at a wide variety of price points. The Company believes its
long history of success is attributable to its adherence to a consistent
merchandising strategy, the key elements of which are summarized below:

         Delivering Consistent Value to Consumers. The Company offers consistent
value to consumers by offering a distinctive combination of in-line products,
"special make-up" merchandise (produced exclusively for the Company under a
manufacturer's brand name), private label merchandise and opportunistic buys.
The Company offers this consistent value to its customers while maintaining
strong 


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margins as a result of its ability to purchase in large quantities and
quickly adjust this combination of merchandise to take advantage of purchasing
opportunities. Through its 43 years of operations, the Company has developed
specific expertise in selling its particular mix of these products, thereby
building the Company's price image, driving its weekly print advertisements and
creating retail traffic.

         The Company sources its in-line branded merchandise from an extensive
list of major sporting goods equipment, athletic footwear and apparel
manufacturers. Below is a selection of some of the brands carried by the
Company:

<TABLE>
<S>                     <C>                   <C>                <C>                  <C>
     Adidas             Columbia              Icon (Proform)     Prince               Russell Athletic
     Bauer              Daiwa                 Jansport           Rawlings             Shimano
     Brooks             Danskin               K2                 Reebok               Spalding
     Bushnell           Discus                Nike               Remington            Titleist
     Casio              Easton                Nordica            Rollerblade          Wilson
     Coleman            Fila                  Pentland           Rossignol            Zebco
</TABLE>


         The Company also offers a variety of private label merchandise to
complement its branded product offerings. The Company's private label items
include shoes, apparel, tennis rackets, binoculars, camping equipment and
fishing supplies. They are sold under the labels: Fives, Court Casuals, Sports
Essentials, Rugged Exposures, Hot Voltage, Golden Bear, Body Glove (licensed),
Kemper (licensed) and Pacifica.

         Offering a Customized Product Assortment. Through its 43 years of
experience across different demographic, economic and competitive markets, the
Company's management has refined its merchandising strategy to increase sales by
offering a selection of goods that meets customer demands while managing
inventory levels. The Company believes it provides consumers with a merchandise
offering that compares favorably to its competitors, including the superstores,
in terms of category selection. A goal of the Company's merchandising strategy
is to offer a customized and selected assortment of products which enables the
consumer to comparison shop at a Big 5 store without being overwhelmed by a
large number of different products in any one category. The Company tailors its
merchandise selection and quantity on a store-by-store basis in order to satisfy
each region's specific needs and buying habits.

         The Company's buyers work closely with senior management to determine
the product selection, promotion and pricing of the merchandise mix. The Company
utilizes an integrated merchandising, distribution and financial information
system. Management uses the information provided to continually refine its
merchandise mix, pricing strategy, advertising effectiveness and inventory
levels.

         Market Leader in Core Market Served. The Company has built a recognized
franchise by establishing a strong presence in its core market of California,
Washington and Nevada and by consistently promoting quality brand-name products
at attractive prices. The Company has over triple the number of stores as its
closest full-line sporting goods competitor in such core market. This
concentration of stores provides economies of scale in advertising and
distribution as well as increased customer awareness of the Big 5 name.


ADVERTISING

         The Company believes that the consistency and reach of Big 5's print
advertising programs have created high customer awareness of Big 5. Through
years of focused advertising, Big 5 has reinforced its reputation for providing
quality products at attractive prices. The Company attempts to highlight a broad
range of merchandise categories in every advertisement to maintain customer
awareness of its full-line product offering. The Company's advertising message
is reinforced 52 weeks a year in the form of newspaper inserts or mailers,
typically consisting of four standard pages using color photography. The Company
believes that its print advertising consistently reaches more households in its
core market than does 


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<PAGE>   4
the print advertising of its competitors. The Company's effectiveness in
communicating the product values it offers is evidenced by the fact that
typically 40% of sales have been products included in these weekly
advertisements.

         The Company uses its professional in-house advertising staff rather
than an outside advertising agency. The staff centrally handles all of its
advertising, including design, layout, production and media management. This
approach has been in place since its founding. Big 5's in-house advertising
enables management the flexibility to react quickly to merchandise trends and
maximize the effectiveness of its weekly inserts and mailers.


EXPANSION AND STORE DEVELOPMENT

         The Company's expansion within and beyond its core market has been
systematic and designed to take advantage of Big 5's name recognition and to
capitalize on the Company's economical store format and distinctive merchandise
mix. Throughout the Company's history, management has emphasized careful site
selection and controlled growth. Over the past five fiscal years, 64 stores have
opened (13 new stores annually on average), of which 52% were outside of the
Company's core market of California, Washington and Nevada. These non-core
stores have grown to 17% of the Company's store base at the end of 1998. The
following table sets forth certain information regarding the Company's expansion
program during the periods indicated:

<TABLE>
<CAPTION>
                                                 New Stores
                                  ------------------------------------------- 
                                              New       Core                               No. Of Stores
     Year                         Total     Markets   Markets    Acquisitions   Closures   at Period End
     --------------------------   -----     -------   -------    ------------   --------   -------------
<S>                               <C>       <C>       <C>        <C>            <C>        <C>
     1994  .  . . . . . . . . .     15         4        11            -           (2)           175
     1995  .  . . . . . . . . .     19         6         6            7           (2)           192
     1996  .  . . . . . . . . .      4         2         2            -            -            196
     1997  .  . . . . . . . . .     14         5         9            -            -            210
     1998  .  . . . . . . . . .     12         9         3            -           (1)           221
</TABLE>


         The Company has identified numerous expansion opportunities to further
penetrate its core market, develop recently entered markets and expand into new
market areas with similar demographic, competitive and economic profiles as its
existing markets. The typical Big 5 store size provides the Company with a large
selection of locations for new store placement which, in turn, allows the
Company to open stores conveniently located to the customer. Continuing its
controlled growth strategy, the Company plans on opening approximately 15-20
stores annually over the next five years. This expansion plan is designed to
take advantage of the growing economies of the Company's existing and recently
entered markets and to capitalize on opportunities in fast growing new markets.

         Big 5's store format requires a low investment in fixtures and
equipment (approximately $275,000), working capital (approximately $500,000, of
which one-third is typically financed by vendors) and real estate (leased,
"built-to-suit" locations). The Company's leases generally require the lessor,
rather than the Company, to fund all or a significant portion of the capital
expenditures related to new store construction and costs of improvements. The
Company expects that the net cash generated from operations, together with
borrowings under the CIT Credit Facility (as defined below), will enable the
Company to finance the expenditures related to its planned expansion.


MANAGEMENT INFORMATION SYSTEMS

         Big 5 believes its ability to generate an efficiently stocked
merchandise selection and store inventory level that satisfies customer demands
while effectively managing inventory levels is a critical component of its
merchandising strategy and serves to differentiate the Company from its
competition. The 


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Company is able to execute this strategy as a result of its effective use of its
integrated management information systems, called the COACH (Customer Oriented
Approach for Continued High-Performance) system.

         The COACH system is a low maintenance data processing environment
capable of supporting Big 5's future growth (see "Year 2000"). The COACH
system provides the Company with valuable inventory tracking information through
the implementation of store-level perpetual inventories. Each store has a unique
inventory model that allows the Company to maximize inventory mix at the store
level. The COACH system also includes a local area network that connects all
corporate users to electronic mail, scheduling and the host AS/400 system. The
host system and the Company's stores are linked by a network that provides
satellite communications for credit card, in-house tender authorization, and
daily polling of sales at the store level. In Big 5's distribution center, radio
frequency terminals are used in the areas of receiving, stock putaway, stock
movement, order filling, cycle counting and inventory management. Store
processes have been streamlined by implementing radio frequency, hand-held
terminals to assist in store ordering, receiving transfers and perpetual
inventories. The COACH system also helps the Company to control shrink.
Management believes its use of these systems is more extensive, disciplined and
sophisticated than that of many of its competitors.


DISTRIBUTION

         The Company maintains a 440,000 square foot leased distribution center
in Fontana, California that serviced all 221 of its stores at January 3, 1999.
The Fontana facility is fully integrated with the COACH management information
system that provides warehousing and distribution capabilities. The COACH system
enhances the Company's distribution process and aids in controlling distribution
costs. Big 5 believes that its Fontana distribution facility can readily support
the Company's expansion plans discussed above.

         The distribution facility was constructed in 1990 and warehouses the
majority of the merchandise carried in the Company's stores. Big 5 estimates
that 98% of all store merchandise is received from its distribution center. The
Company distributes merchandise from the facility to its stores at least once a
week, Monday through Saturday, using a fleet of 23 leased tractors, 12 leased
trailers, two Company-owned tractors, 49 Company-owned trailers as well as
contract carriers.

         On March 5, 1996, the Company purchased the Fontana facility building
and improvements from MLTC Funding, Inc. ("MLTC"), which previously owned and
leased such property to the Company, and then entered into a sale and leaseback
agreement with regard to the Fontana facility. Prior to this transaction, the
Company owned the land associated with the facility and leased the buildings and
improvements.


INDUSTRY AND COMPETITION

         Sporting goods are marketed through various retail entities, including
sporting goods stores, department stores, discount retailers, specialty stores,
electronic commerce and mail order. According to the National Sporting Goods
Association, total U.S. retail sales of sporting goods were approximately $44.3
billion in 1998. In general, the Company's competitors tend to fall into four
basic categories: traditional sporting goods stores, mass merchandisers,
specialty sporting goods stores and sporting goods superstores.

         Traditional Sporting Goods Stores. This category consists of
traditional sporting goods chains, including the Company. These stores range in
size from 5,000 to 20,000 square feet and are frequently located in regional
malls and multi-store shopping centers. The traditional chains typically carry a
varied assortment of merchandise and attempt to position themselves as
convenient neighborhood stores. Sporting goods retailers operating stores within
this category include Oshman's, Hibbett's and Copeland's.

         Mass Merchandisers. This category includes discount retailers such as
Wal-Mart and Kmart and department stores such as JC Penney and Sears. These
stores range in size from approximately 50,000 to 


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200,000 square feet and are primarily located in regional malls, shopping
centers or free-standing sites. Sporting goods merchandise and apparel represent
a small portion of the total merchandise in these stores and the selection is
often more limited than in other sporting goods retailers. Although generally
price competitive, discount and department stores typically have limited
customer service in their sporting goods departments.

         Specialty Sporting Goods Stores. This category consists of two groups.
The first group generally includes athletic footwear specialty stores, which are
typically 2,000 to 20,000 square feet in size and are located in shopping malls.
Examples include such retail chains as Foot Locker, Lady Foot Locker and Just
for Feet. These retailers are highly focused, with most of their sales coming
from athletic footwear and team licensed apparel. The second group consists of
pro shops and stores specializing in a particular sport or recreation. This
group includes backpacking and mountaineering specialty stores and specialty
skate shops and golf shops. Typically, prices at specialty stores tend to be
higher than prices at the sporting goods superstores and traditional sporting
goods stores.

         Sporting Goods Superstores. Stores in this category typically are
larger than 35,000 square feet and tend to be free-standing locations. These
stores emphasize high volume sales and a large number of SKU's. Examples include
Oshman's Super Sports, The Sports Authority, Jumbo Sports, Sport Chalet, Gart
Sports and Sportmart.

         The Company believes that it competes successfully with each of the
competitors discussed above by focusing on what the Company believes are the
primary factors of competition in the sporting goods industry. These factors
include experienced and knowledgeable personnel, personal attention given to
customers, breadth, depth, price and quality of merchandise offered,
advertising, purchasing and pricing policies, effective sales techniques, direct
involvement of senior officers in monitoring store operations, management
information systems and store location and format.


DESCRIPTION OF SERVICE MARKS AND TRADEMARKS

         The Company uses "Big 5 Sporting Goods" name as a service mark in
connection with its business operations and has registered this name as a
federal service mark. The Company has also registered federally and/or locally
as trademarks and service marks certain private labels under which it sells a
variety of merchandise, including apparel.


EMPLOYEES

         As of January 3, 1999, Big 5 had approximately 5,248 full and part-time
employees. The General Warehousemen Union, Local 598, International Brotherhood
of Teamsters ("Local 598") currently represents 398 hourly employees (or
approximately 7.6%) in the Company's distribution center and certain stores. In
September 1997, the Company negotiated two contracts with Local 598 covering
these employees, which expire on August 31, 2000. The Company has not had a
strike or work stoppage in the last 19 years. The Company believes that it
provides working conditions and wages that are comparable to those offered by
other retailers in the industry, and that its employee relations are good.

         The Company emphasizes friendly and knowledgeable customer service at
its stores. To provide the proper incentives, the Company has established
various advancement and compensation programs. Store managers and first
assistant managers receive a commission based on their store's gross sales. In
addition, full-time employees are given opportunities for career advancement,
and part-time employees are eligible to receive merit-based pay increases.
Periodic store sales contests are held throughout the year.


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<PAGE>   7
EMPLOYEE TRAINING

         The Company has developed an extensive training program for all store
employees, including salespeople, cashiers and management trainees. An
introductory program for all full-time retail employees stresses excellence in
customer service as well as effective selling skills. The Company's InfoWindow,
an interactive, multimedia training system, provides a cost-effective,
consistent method of training employees, which is designed to improve
performance, customer service and on-the-job safety. Store employees gain
hands-on practice using a touch-screen monitor and simulated keyboard to learn
how to provide high quality customer service and use the Company's in-store
systems. In addition, cashiers receive additional training relating to the
Company's point-of-sale system and cash handling. Management trainees receive
additional training throughout their careers, including seminars that focus on
advanced management and sales skills, and store specific information relating to
loss prevention, scheduling and merchandising strategy.



ITEM 2:  PROPERTIES

         As of January 3, 1999, Big 5 operated 221 stores in nine western
states. All but one of the Company's store sites are leased. Only six, or
approximately 3%, of the Company's leases are due to expire in the next five
years without renewal options, and most of the Company's long-term leases
contain renewal options. The average lease expiration term of the Company's
existing leases, taking into account renewal options, is approximately 20 years.
The Company believes that it benefits from long-term below-market leases in many
of its locations. The Company's stores average approximately 11,000 square feet
in size typically ranging from 8,000 to 15,000 square feet and are located
primarily in multi-store shopping centers or as free standing units. Specific
store locations are selected based on market demographics, competitive factors
and site economics. The Company currently leases its Fontana warehouse facility
from the State of Wisconsin Investment Board. The lease for the facility has an
initial term of ten years and commenced on March 5, 1996. The Company also has
the right to exercise three five-year options beyond the initial ten-year term.

         The chart below sets forth information with respect to Big 5's
geographic markets:

<TABLE>
<CAPTION>
                                            STORE STATISTICS BY REGION
                                               AS OF JANUARY 3, 1999
                                                                                          PERCENTAGE
                                                     YEAR              NUMBER              OF TOTAL
         REGIONS                                   ENTERED           OF STORES          NUMBER OF STORES
         -------                                   -------           ---------          ----------------
<S>                                                <C>               <C>                <C>

         California:
                Southern California                  1955                   82                   37%
                Northern California                  1971                   48                   22
                Central California                   1974                   23                   10
                                                                      --------             --------
                            Total California                               153                   69
                                                                      --------             --------
         Washington                                  1984                   26                   12
         Arizona                                     1993                   11                    5
         Oregon                                      1995                   11                    5
         Texas                                       1995                    7                    3
         New Mexico                                  1995                    5                    2
         Nevada                                      1978                    4                    2
         Utah                                        1998                    3                    1
         Idaho                                       1993                    1                    1
                                                                      --------             --------
         Total                                                             221                  100%
                                                                      ========             ========
</TABLE>


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ITEM 3:  LEGAL PROCEEDINGS

         The Company is from time to time involved in routine litigation
incidental to the conduct of its business. The Company regularly reviews all
pending litigation matters in which it is involved and establishes reserves
deemed appropriate by management for such litigation matters. The Company
believes that no litigation currently pending against it will have a material
adverse effect on its financial position or results of operations.


ITEM 4:  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         There were no matters submitted to a vote of security holders during
the year ended January 3, 1999.


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                                     PART II



ITEM 5:  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
         MATTERS.

         The Company is a wholly-owned subsidiary of Parent. Neither the
Company's nor Parent's capital stock is publicly traded. Restrictive covenants
in the Company's revolving credit facility generally restrict the declaration or
payment of dividends on the Company's common stock other than to enable Parent
to pay operating and overhead expenses and certain other limited types of
expenses. The Senior Notes (as defined below) restrict the declaration and
payment of dividends unless the Company satisfies certain financial covenants,
among other things.



ITEM 6:  SELECTED HISTORICAL FINANCIAL DATA

         The following selected historical financial data have been prepared by
the Company's management from the audited financial statements and the notes
thereto of United Merchandising Corp. (which was reincorporated in Delaware as
Big 5 Corp. in connection with the Recapitalization) and Big 5 Corp. With
respect to the selected historical financial data, the Company means United
Merchandising Corp. for fiscal years 1994 through 1996, and Big 5 Corp. for
fiscal years 1997 and 1998. The selected historical financial data should be
read in conjunction with, and are qualified in their entirety by, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical financial statements of the Company and the related notes
thereto.


<TABLE>
<CAPTION>
                                                                            FISCAL YEAR (a)
                                                 ---------------------------------------------------------------------
                                                    1994           1995           1996           1997           1998
                                                 ---------      ---------      ---------      ---------      ---------
<S>                                              <C>            <C>            <C>            <C>            <C>      

         STATEMENT OF OPERATIONS DATA:
         Net  sales .........................    $ 364,109      $ 370,126      $ 404,265      $ 443,541      $ 491,430
         Cost of goods sold, buying and
               occupancy ....................      244,777        256,583        277,116        298,893        330,243
                                                 ---------      ---------      ---------      ---------      ---------
               Gross  profit ................      119,332        113,543        127,149        144,648        161,187
         Operating expenses:
               Selling and administrative ...       92.238         95,158        101,053        110,131        121,643
               Depreciation and
                     amortization ...........        9,180         11,991          9,578          8,176          8,890
                                                 ---------      ---------      ---------      ---------      ---------
         Total operating expenses ...........      101,418        107,149        110,631        118,307        130,533
                                                 ---------      ---------      ---------      ---------      ---------
         Operating  income ..................       17,914          6,394         16,518         26,341         30,654
         Interest  expense ..................       11,712         12,347         11,482         12,442         19,285
                                                 ---------      ---------      ---------      ---------      ---------
         Income (loss) before income taxes
               and  extraordinary  loss .....        6,202         (5,953)         5,036         13,899         11,369
         Income  taxes ......................        1,903            368            970          1,436          4,604
                                                 ---------      ---------      ---------      ---------      ---------
         Income (loss) before extraordinary
               loss .........................        4,299         (6,321)         4,066         12,463          6,765
         Extraordinary loss from early
               extinguishment of debt, net of
               income  taxes ................       (2,855)            --         (1,285)        (1,597)            --
                                                 ---------      ---------      ---------      ---------      ---------
         Net income  (loss) .................    $   1,444      $  (6,321)     $   2,781      $  10,866      $   6,765
                                                 =========      =========      =========      =========      =========
</TABLE>


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<TABLE>
<CAPTION>
                                                                            FISCAL YEAR (a)
                                                 ---------------------------------------------------------------------
                                                    1994           1995           1996           1997           1998
                                                 ---------      ---------      ---------      ---------      ---------
<S>                                              <C>            <C>            <C>            <C>            <C>      

         OTHER DATA:
         EBITDA (b) .........................    $  27,094      $  18,385      $  26,096      $  34,517      $  39,544
         EBITDA margin ......................          7.4%           5.0%           6.5%           7.8%           8.0%
         Cash flow provided by (used in)
               operating activities .........    $  14,647      ($  3,824)     $  19,798      $   3,631      $  29,699
         Cash flow provided by (used in)
               investing  activities ........       (9,342)        (7,374)         1,539         (5,151)       (11,106)
         Cash flow provided by (used in)
               financing  activities ........       (4,937)         6,728        (19,738)        (1,913)       (19,957)
         Capital  expenditures ..............        9,153          6,822          3,453          5,151          8,500
         Ratio of earnings to fixed
               charges  (c) .................         1.3x             --           1.2x           1.6x           1.4x

         OPERATING DATA:
         Same store sales increase/
               (decrease)  (d) ..............          5.7%          (4.9%)          3.7%           6.6%           5.2%
         End of  period  stores .............          175            192            196            210            221
         Inventory  turns (e) ...............         1.9x           1.8x           2.2x           2.2x           2.3x

         BALANCE SHEET DATA END OF PERIOD:
         Net working capital (f) ............    $  69,064      $  74,994      $  70,428      $  80,881      $  67,625
         Total  assets ......................      227,707        207,119        197,869        216,322        217,415
         Total  debt ........................       96,450        103,594         86,450        173,660        151,352
         Stockholder's equity (deficit) .....       35,395         29,074         31,855        (38,843)       (27,877)
</TABLE>

(Notes to table on previous page and this page)
-------------------------------------------------------

(a)  The Company's fiscal year is a 52 or 53 week year ending on the Sunday
     closest to the calendar year end. Fiscal years 1994 through 1997 consist of
     52 weeks and fiscal year 1998 consists of 53 weeks.

(b)  EBITDA represents net earnings (loss) 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"), 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 to provide
     additional information with respect to the ability of the Company to meet
     its future debt service, capital expenditure and working capital
     requirements. See "Management's Discussion and Analysis of Financial
     Condition and Results of Operations."

(c)  For the purpose of calculating the ratio of earnings to fixed charges,
     "earnings" represents income before provisions for income taxes and fixed
     charges. "Fixed charges" consist of interest expense, amortization of debt
     financing costs, and one third of lease expense, which management believes
     is representative of the interest component of lease expense. Earnings were
     insufficient to cover fixed charges by approximately $6,383 for fiscal year
     1995.

(d)  Same store sales data for a fiscal year reflects stores open throughout
     that fiscal year and the prior fiscal year.

(e)  Inventory turns equal fiscal year cost of goods sold, buying and occupancy
     costs divided by 4 quarter average FIFO inventory balances adjusted to
     exclude overhead costs capitalized into inventory balances.

(f)  Net working capital is defined as current assets less current liabilities
     excluding current maturities of long-term debt.


                                       10
<PAGE>   11
ITEM 7:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

     The following should be read in conjunction with the historical financial
statements of United Merchandising Corp. (reincorporated in Delaware as Big 5
Corp.) and the related notes thereto. The Company's fiscal year ends on the
Sunday closest to December 31. Accordingly, fiscal years 1996, 1997 and 1998
ended on December 29, 1996, December 28, 1997 and January 3, 1999, respectively.
Certain information in this Management's Discussion and Analysis section
includes forward-looking statements. Such forward-looking statements relate to
the Company's financial condition, results of operations, expansion plans, and
business (see "Forward-Looking Statements").


RESULTS OF OPERATIONS

     The Company operates in one business segment, as a sporting goods retailer
under the Big 5 Sporting Goods name. The table below sets forth certain
statement of operation components as a percentage of net sales.

<TABLE>
<CAPTION>
                                                                                FISCAL YEAR
                                                                    ------------------------------------
                                                                     1996           1997           1998
                                                                    ------         ------         ------
<S>                                                                 <C>            <C>            <C>   
         STATEMENT OF OPERATIONS DATA:
         Net sales .........................................         100.0%         100.0%         100.0%
         Gross profit ......................................          31.5%          32.6%          32.8%
         Selling and administrative ........................          25.0%          24.8%          24.8%
         Depreciation and amortization .....................           2.4%           1.8%           1.8%
         Operating income ..................................           4.1%           6.0%           6.2%
         EBITDA ............................................           6.5%           7.8%           8.0%
</TABLE>


(The fiscal years ended January 3, 1999, December 28, 1997 and December 29, 1996
are referred to below as "Fiscal 1998", "Fiscal 1997" and "Fiscal 1996",
respectively.)


FISCAL 1998 VERSUS FISCAL 1997

         Fiscal 1998 was a 53-week period for the Company. As a result, the
following discussion of Fiscal 1998 versus Fiscal 1997 reflects a comparison of
a 1998 53-week period to a 1997 52-week period. Exceptions to this comparison
are noted where appropriate.

         Net sales. Net sales increased 10.8% (or $47.9 million) from $443.5
million for 52 weeks in Fiscal 1997 to $491.4 million for 53 weeks in Fiscal
1998. Same store sales increased 5.2% for Fiscal 1998 versus a comparable period
in 1997. Sales generated from new stores opened in Fiscal 1997 and Fiscal 1998
and the extra week of sales in Fiscal 1998 versus Fiscal 1997 created the
remainder of the Fiscal 1998 net sales increase. Store count at the end of
Fiscal 1998 was 221 versus 210 at the end of Fiscal 1997 as the Company opened
twelve new stores and closed one during the year. The Company achieved positive
same store sales of 4.1% during the fourth quarter of Fiscal 1998, representing
the twelfth consecutive quarter of positive quarterly same store sales results.

         Gross Profit. Gross profit increased 11.4% (or $16.5 million) from
$144.6 million in Fiscal 1997 to $161.2 million in Fiscal 1998, reflecting
increased sales (as discussed above) and improved gross profit margin. Gross
profit margin increased from 32.6% in Fiscal 1997 to 32.8% in Fiscal 1998. The
improvement is primarily the result of improved productivity and leveraging of
fixed costs at the Company's distribution center while maintaining overall gross
profit margins for product sales and store inventory shrink results.


                                       11
<PAGE>   12
         Operating Expenses. Selling and administrative expenses increased 10.5%
(or $11.5 million) from $110.1 million in Fiscal 1997 to $121.6 million in
Fiscal 1998. As a percentage of sales, selling and administrative expenses
remained unchanged at 24.8% in Fiscal 1998 compared with Fiscal 1997.

         Depreciation and Amortization Expense. Depreciation and amortization
expense increased 8.7% (or $0.7 million) from $8.2 million in Fiscal 1997 to
$8.9 million in Fiscal 1998. The increase was due primarily to added
depreciation and amortization related to expenditures for the growth in the
Company's store base during Fiscal 1998, with store count growing from 210 at
the end of Fiscal 1997 to 221 at the end of Fiscal 1998.

         Interest Expense. Interest expense increased 55.0% (or $6.8 million)
from $12.4 million in Fiscal 1997 to $19.3 million in Fiscal 1998. The variance
in interest expense versus last year reflected the impact of increased debt due
to the Company's Recapitalization which took place in November of 1997. This
variance was partially offset by a decrease in the Company's average borrowings
under the CIT Credit Facility which totaled $20.9 million at the end of Fiscal
1998 versus $43.3 million at the end of Fiscal 1997.

         Income Taxes. There was an income tax provision of $4.7 million in
Fiscal 1998 versus $1.4 million in Fiscal 1997. Income tax expense in Fiscal
1998 and 1997 was impacted by a $0.2 million and $3.9 million, respectively,
reduction of the valuation allowance on the Company's deferred tax assets.

         Extraordinary Loss from Early Extinguishment of Debt. There was no
extraordinary loss reported for Fiscal 1998. In the fourth quarter of Fiscal
1997, an extraordinary loss of $1.6 million, net of taxes, was incurred in
connection with the repayment of the Company's previously outstanding
subordinated debt. The extraordinary loss consisted of a redemption premium of
$2.1 million and a $0.6 million write-off of unamortized deferred financing
fees.

         Net Income. Net income for Fiscal 1998 decreased $4.1 million from
$10.9 million in Fiscal 1997 to $6.8 million in Fiscal 1998. This variance
reflects higher operating income in Fiscal 1998 which was more than offset by
the impact of the Recapitalization on interest expense combined with increased
income tax expense recorded in Fiscal 1998.

         EBITDA. EBITDA increased 14.6% (or $5.0 million) from $34.5 million in
Fiscal 1997 to $39.5 million in Fiscal 1998. Strong sales along with improved
gross profit margins were the primary factors creating Fiscal 1998's positive
operating results versus Fiscal 1997.


FISCAL 1997 VERSUS FISCAL 1996

         Net sales. Net sales increased 9.7% (or $39.2 million) from $404.3
million in Fiscal 1996 to $443.5 million in Fiscal 1997. Same store sales
increased 6.6% compared with the same period last year, reflecting improved
economic conditions in the regions in which the Company operates, together with
continuing refinements in advertising and merchandising programs partially
resulting from improved utilization of the management tools derived from the
Company's information systems. Sales attributable to an increase in store count
from 196 in Fiscal 1996 to 210 in Fiscal 1997 constituted the remainder of the
9.7% increase for Fiscal 1997.

         Gross Profit. Gross profit increased 13.8% (or $17.5 million) from
$127.1 million in Fiscal 1996 to $144.6 million in Fiscal 1997, reflecting
increased sales (as discussed above) and improved gross profit margin. Gross
profit margin increased from 31.5% in Fiscal 1996 to 32.6% in Fiscal 1997. The
improvement is a result of positive comparisons of gross profit margins in the
majority of the Company's product categories and improved store inventory shrink
results, both of which were aided by the Company's enhanced information systems.

         Operating Expenses. Selling and administrative expenses increased 9.0%
(or $9.0 million) from $101.1 million in Fiscal 1996 to $110.1 million in Fiscal
1997. As a percentage of sales, selling and 


                                       12
<PAGE>   13
administrative expenses decreased from 25.0% in Fiscal 1996 to 24.8% in Fiscal
1997, reflecting management's continued focus on controlling expenses and its
leveraging fixed costs due to increased sales.

         Depreciation and Amortization Expense. Depreciation and amortization
expense decreased 14.6% (or $1.4 million) from $9.6 million in Fiscal 1996 to
$8.2 million in Fiscal 1997. The decrease reflected primarily a reduction in
leasehold improvements amortization resulting from the sale/leaseback of the
Company's Fontana distribution center in the prior year and an increase in the
amortization term of the Company's leasehold interests.

         Interest Expense. Interest expense increased 7.8% (or $0.9 million)
from $11.5 million in Fiscal 1996 to $12.4 million in Fiscal 1997. This increase
reflected the impact of the Company's Recapitalization which resulted in
increased debt levels in the fourth quarter of Fiscal 1997.

         Income Taxes. The Company recorded an income tax provision, net of a
$3.9 million reduction of the valuation allowance on the Company's deferred tax
assets, against operations of $1.4 million in Fiscal 1997 versus $1.0 million in
Fiscal 1996.

         Extraordinary Loss from Early Extinguishment of Debt. In the fourth
quarter of Fiscal 1997, an extraordinary loss of $1.6 million, net of taxes, was
incurred in connection with the repayment of the Company's previously
outstanding subordinated debt. The extraordinary loss consisted of a redemption
premium of $2.1 million and a $0.6 million write-off of the unamortized deferred
financing fees. During Fiscal 1996, an extraordinary loss of $1.3 million net of
taxes reflects prepayment premiums of $1.2 million and a $1.0 million write-off
of unamortized deferred financing fees related to the refinancing of its
indebtedness under a prior credit facility.

         Net Income (Loss). Net income for Fiscal 1997 increased $8.1 million
from income of $2.8 million in Fiscal 1996 to income of $10.9 million in Fiscal
1997. This improvement reflects the positive sales and gross profit results
achieved during Fiscal 1997.

         EBITDA. EBITDA increased 32.2% (or $8.4 million) from $26.1 million in
Fiscal 1996 to $34.5 million in Fiscal 1997. Increased same store sales, gross
profit margin and operating efficiencies were the primary factors contributing
to the significant improvement.


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 Company
amended its then-current Credit Facility effective November 13, 1997, to provide
for the CIT Credit Facility. The CIT Credit Facility is secured by the Company's
trade accounts receivable, merchandise inventories and general intangible
assets. 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.

         In October 1997, Parent, Robert W. Miller, Steven G. Miller and Green
Equity Investors, L.P. ("GEI") agreed to the Recapitalization Agreement. The
following transactions (collectively constituting the Recapitalization) were
effected pursuant to the Recapitalization Agreement: (i) the Company issued the
Senior Notes (as defined below) ($130.4 million gross proceeds); (ii) the
Company defeased and repaid all of its outstanding 13 5/8% Senior Subordinated
Notes due 2002 (the "Old Subordinated Notes"); (iii) Parent issued Senior
Discount Notes in an aggregate principal amount at maturity of $48.2 million
maturing on November 30, 2008 (the "Parent Discount Notes") with a warrant to
purchase approximately three percent of the Common Stock of Parent, par value
$.01 per share (the "Common Stock") at a nominal exercise price (the "Warrant")
($24.5 million proceeds); (iv) Parent accelerated vesting of substantially all
outstanding options and restricted stock held by management and employees of the
Company; (v) Parent redeemed for 


                                       13
<PAGE>   14

cash its existing Series A 9% Cumulative Redeemable Preferred Stock (the "Parent
Old Preferred") for approximately $21.9 million in the aggregate, including
accrued dividends; (vi) Parent paid a cash distribution of $15 per share on its
outstanding shares of Common Stock (approximately $63.2 million in the
aggregate); (vii) Parent repurchased from Pacific Enterprises ("PE") its warrant
respecting 397,644 shares of Common Stock and 16,667 shares of Parent Old
Preferred (the "PE Warrant") and approximately 2,737,310 shares of Common Stock
from the Selling Stockholders (as defined below) (of which GEI owned 86.8%) for
an aggregate of $17.6 million in cash and $35.0 million of Parent Senior
Exchangeable Preferred Stock (the "Parent New Preferred"); (viii) Parent sold
additional Common Stock to middle and senior level management of the Company
(approximately $2.3 million gross proceeds), increasing the beneficial ownership
of management and employees (and members of their families) from 14.0% to 55.3%
(in each instance on a fully diluted basis); and (ix) other transactions
occurred, including a distribution of $81.5 million from the Company to Parent,
so that the above referenced transactions could be effected. The
Recapitalization is accounted for as a recapitalization for accounting purposes.
As a result of the Recapitalization, existing management and employees of the
Company (and members of their families) beneficially own the majority of Parent.
Chairman and Chief Executive Officer Robert W. Miller, who co-founded the
Company in 1955, and his son Steven G. Miller, President and Chief Operating
Officer, who has been with the Company for 29 years, significantly increased
their ownership in Parent and control the Board of Directors of Parent and thus
the Company. See "Principal Stockholders."

         In connection with the Recapitalization, the Company issued $131.0
million in aggregate principal amount of 10 7/8% Senior Notes due 2007 (the
"Senior Notes"), requiring semi-annual interest payments. The Company has no
mandatory payments of principal on the Senior Notes prior to their final
maturity in 2007.

         As a result of borrowings relating to the Recapitalization, the
Company's interest expense increased from $12.4 million in Fiscal 1997 to $19.3
million in Fiscal 1998. The Company believes that cash flow from operations will
be sufficient to cover the interest expense arising from the CIT Credit Facility
and the Senior Notes. However, the Company's ability to meet its debt service
obligations depends upon its future performance, which, in turn, is subject to
general economic conditions and regional risks, and to financial, business and
other factors affecting the operations of the Company, including factors beyond
its control. Accordingly, there can be no assurance that cash flow from
operations will be sufficient to meet the Company's debt service obligations.

         Net cash provided by operating activities was $29.7 million in Fiscal
1998 versus $3.6 million in Fiscal 1997. The change between periods reflected
management's focus on working capital during Fiscal 1998. Inventory levels
improved during the year such that additional inventory levels were not required
to support increased store count, and in fact there was a total inventory per
store reduction of 5% when comparing January 3, 1999 to December 28, 1997. In
addition to inventories, management successfully managed payable levels to
improve the Company's working capital position. This payables increase added an
additional $9.6 million to net cash provided by operating activities during
Fiscal 1998.

         Net cash used in financing activities was $20.0 million in Fiscal 1998
versus $1.9 million in Fiscal 1997, reflecting the significant reduction in
borrowings under the CIT Credit Facility during Fiscal 1998. As of January 3,
1999, the Company had borrowings of $20.9 million and letter of credit
commitments of $3.7 million outstanding under the CIT Credit Facility compared
to $43.3 million and $4.5 million at December 28, 1997, with no cash and cash
equivalents at January 3, 1999 compared to $1.4 million at December 28, 1997.

         Capital expenditures for Fiscal 1998 were $8.5 million as the Company
opened a total of 12 new stores. Management expects capital expenditures for
Fiscal 1999 will range from $10 to $11 million and will be used primarily to
fund the opening of approximately 15 to 20 new stores as well as a one-time
expenditure of approximately $3.8 million for new point-of-sale hardware and
software. The Company's store format requires a low investment in fixtures and
equipment (approximately $275,000), working capital (approximately $500,000, of
which one-third is typically financed by vendors) and real estate (leased
"built-to-suit" locations).


                                       14
<PAGE>   15
         The CIT Credit Facility and the Senior Notes indenture contain various
covenants which impose certain restrictions on the Company, including the
incurrence of additional indebtedness, the payment of dividends, and the ability
to make acquisitions. In addition, the CIT Credit Facility requires compliance
with the maintenance of certain financial ratios and other financial covenants.
The Company is in compliance with all the covenants under the CIT Credit
Agreement and the Senior Notes indenture.

         The Company is not aware of any material environmental liabilities
relating to either past or current properties owned, operated or leased by it.
There can be no assurance that such liabilities do not currently exist or will
not exist in the future.


SEASONALITY

         The Company's business is seasonal in nature. As a result, the
Company's results of operations are likely to vary during its fiscal year.
Historically, the Company's revenues and income are highest during its fourth
quarter, due to industry wide 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.


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 majority of the Company's
applications that are not Year 2000 compliant have been, or will be replaced by
upgrades to existing systems. Making the remaining non-compliant applications
Year 2000 compliant will not result in incremental costs to the Company, but
rather will be accomplished by the redeployment of existing IT resources.
Accordingly, the Company does not expect its internal Year 2000 effort to have a
material impact on its results of operations, liquidity or financial condition,
although the Company cannot predict whether its outside vendors, suppliers and
support systems will be compliant and whether that might have an effect. In
addition, the Company has not deferred any other projects that will have a
material impact on its results of operations, liquidity or financial condition.

IT Systems

         During 1997, the Company began a study to determine the scope of its
Year 2000 exposure. Since the Company relies on outside software vendors for all
of its merchandise distribution and financial systems, the Company's first
efforts were to gain assurance that all systems were either compliant or
upgradable to a Year 2000 compliant version. After completion of its study in
March 1998, the Company found that all of its systems either were compliant, or
could be compliant with an upgrade to existing 


                                       15
<PAGE>   16
software. Certain of these outside software systems have customized add-on
features created by the Company's IT department. Therefore, the Company has
redeployed one full-time programmer to the Year 2000 project to update software
code that was customized by the Company and added on to its outside software
systems to make these custom changes compliant. These changes are expected to be
completed before the end of the second quarter of 1999.

         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
40% 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 expects to complete
assessment of its non-IT systems by the end of the first quarter of 1999.

         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 20% 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 as 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 December 1998,
was approximately $0.2 million directly related to Year 2000 remediation and
$2.0 million for projects which are not Year 2000 related but have some Year
2000 remediation benefits. The estimated future cost of completing the Year 2000
effort is estimated to be approximately $0.3 million. The Year 2000 effort is
funded primarily from the existing IT budget and has not forced the deferral or
cancellation of any budgeted IT projects.

Risks and Contingency Planning

         The Company has initiated contingency planning for possible Year 2000
issues including such outside factors as credit card processing, supply chain
and banking operations. Where needed, the Company will establish contingency
plans based on the Company's actual testing experience and assessment of outside
risks. The Company anticipates final contingency plans to be in place by June
1999. However, to the extent outside support systems (such as credit card
processors and suppliers) may not be Year 2000 compliant by the end of 1999,
such noncompliance could result in circumstances which could have a material
adverse effect on the Company's business, financial condition, and operating
results.

         Readers are cautioned that forward looking statements contained in the
Year 2000 Update should be read in conjunction with the Company's disclosures
under the heading "Forward-Looking Statements."


                                       16
<PAGE>   17
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

         The Financial Accounting Standards Board issued Statement No. 133,
(Accounting for Derivative Instruments and Hedging Activities) effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Management has
determined that the disclosure requirements from this statement will not impact
the financial statements of the Company.

         In 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 will adopt SOP 98-1 effective in fiscal 1999. Based on the
information currently available, the Company does not expect the adoption of SOP
98-1 to have a significant impact on its financial position or results of
operations.

         In April 1998, the AICPA Accounting Standards Executive Committee
issued Statement of Position 98-5 ("SOP 98-5"), Reporting on the Costs of
Start-up Activities. SOP 98-5 requires that costs of start-up activities,
including organization costs and store openings, be expensed as incurred. SOP
98-5 is effective for financial statements for fiscal years beginning after
December 15, 1998. Restatement of previously issued financial statements is not
permitted. In the fiscal year SOP 98-5 is first adopted, the application should
be reported as a cumulative effect of a change in accounting principle. The
Company has adopted the application of SOP 98-5 in Fiscal 1998 without a
material impact on the Company's financial position or results of operations.

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-K 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 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

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. (See
Note 3 of the accompanying financial statements.)


                                       17
<PAGE>   18
ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Information called for by this item is set forth in the Company's
financial statements contained in this report. Specific financial statements can
be found at the pages listed in the following index.

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S>                                                                                                         <C>
Index to Financial Statements ...........................................................................     F-1
Report of KPMG LLP,
         Independent Auditors ...........................................................................     F-2
Balance Sheets at January 3, 1999 and December 28, 1997 .................................................     F-3
Years Ended  January 3, 1999, December 28, 1997 and December 29, 1996
Statements of Operations ................................................................................     F-5
         Statements of Stockholder's Equity(Deficit) ....................................................     F-6
         Statements of Cash Flows .......................................................................     F-7
Notes to Financial Statements ...........................................................................     F-9

                                                                                                            Schedule
Financial Statement Schedule:
         Valuation and Qualifying Accounts ..............................................................     II-1
</TABLE>


ITEM 9:  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
         FINANCIAL DISCLOSURE.

         None.


                                       18
<PAGE>   19
                                    PART III


ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

EXECUTIVE OFFICERS AND DIRECTORS

         The following table sets forth certain information regarding the
current executive officers and directors of the Company. The Company's directors
are elected at each annual meeting of shareholders to serve for a period of one
year or until their successors are duly elected and qualified. The Company's
executive officers serve at the discretion of the Company's Board of Directors.


<TABLE>
<CAPTION>
NAME                           AGE                         POSITIONS
----                           ---                         ---------

<S>                            <C>               <C>
Robert W. Miller               75                Chief Executive Officer and
                                                 Chairman of the Board

Steven G. Miller               46                President, Chief Operating Officer and
                                                 Director

Charles P. Kirk                43                Senior Vice President and Chief
                                                 Financial Officer

Gary S. Meade                  52                Secretary, Vice President and
                                                 General Counsel

Richard A. Johnson             53                Senior Vice President,
                                                 Store Operations

Thomas J. Schlauch             54                Senior Vice President, Buying

Dr. Michael D. Miller          49                Director

John G. Danhakl                43                Director
</TABLE>


         ROBERT W. MILLER became Chairman of the Board of the Company in
September 1992. Mr. Miller has been the Company's Chief Executive Officer and
was President from 1973 to September, 1992.

         STEVEN G. MILLER became President, Chief Operating Officer and a
Director of the Company in September 1992. Mr. Miller is Robert W. Miller's son
and Dr. Michael D. Miller's brother. He had been the Company's Executive Vice
President, Administration, since 1988.

         CHARLES P. KIRK became Senior Vice President and Chief Financial
Officer of the Company in September 1992. Mr. Kirk had been Thrifty's Director
of Planning and Vice President of Planning and Treasury since October 1990.
Prior to joining Thrifty, Mr. Kirk had held various financial positions with
Thrifty's former parent, Pacific Enterprises ("PE"), since 1981.


                                       19
<PAGE>   20
         GARY S. MEADE became Secretary, Vice President and General Counsel of
the Company in August 1997. Mr. Meade had been Thrifty Payless, Inc.'s Vice
President, Secretary and General Counsel since September 1992 and Thrifty's Vice
President - Legal Affairs since 1979.

         RICHARD A. JOHNSON became Senior Vice President, Store Operations, for
the Company in July 1992. Mr. Johnson had been the Company's Vice President,
Store Operations, since 1986.

         THOMAS J. SCHLAUCH became Senior Vice President, Buying, for the
Company in July 1992. Mr. Schlauch had been the Company's Head of Buying since
1990 and Vice President, Buying, since 1982.

         MICHAEL D. MILLER, PH.D became a director of the Company in October
1997. Dr. Miller is a senior mathematician at RAND. Dr. Miller is Robert W.
Miller's son and Steven G. Miller's brother.

         JOHN G. DANHAKL became a director of the Company in October 1997. Mr.
Danhakl has been an executive officer and equity owner of LGP, a merchant
banking firm which manages GEI, since 1995. Mr. Danhakl had previously been a
Managing Director at Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ")
and had been with DLJ since 1990. Prior to joining DLJ, Mr. Danhakl was a Vice
President at Drexel Burnham Lambert Incorporated. Mr. Danhakl is also a director
of the Arden Group, Inc. and Twinlab Corporation.


                                       20
<PAGE>   21
ITEM 11: EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

         The following table sets forth the annual and long-term compensation of
the Company's Chief Executive Officer and four additional most highly
compensated executive officers whose annual salaries and bonus exceeded $100,000
in total during the fiscal year ended January 3, 1999.

<TABLE>
<CAPTION>
                                                                               ------------------------------------
                                                                                   LONG-TERM COMPENSATION AWARDS
                                      ---------------------------------------------------------------------------------------------
                                              ANNUAL COMPENSATION                       AWARDS              PAYOUTS
                                      ---------------------------------------------------------------------------------------------
                                                                                              Securities
     Name and                                                                  Restricted     Underlying
     Principal                                                 Other Annual      Stock           Stock        LTIP       All Other
     Position                Year      Salary        Bonus     Compensation      Awards      Options/SARs    Payouts   Compensation
                                        ($)           ($)           ($)            ($)            (1)          ($)          (2)
-----------------------------------------------------------------------------------------------------------------------------------
<S>                          <C>      <C>          <C>         <C>             <C>           <C>             <C>       <C> 
Robert W. Miller,            1998     $315,000     $475,000        $-0-           $-0-             -0-        $-0-           $-0-
Chief Executive Officer      1997      300,000      350,000         -0-            -0-             -0-         -0-        400,000
                             1996      290,000      275,000         -0-            -0-           6,400         -0-            -0-
                             ----     --------     --------        ----           ----           -----        ----        -------

Steven G. Miller,            1998     $270,000     $315,000        $-0-           $-0-             -0-        $-0-           $-0-
President and                1997      250,000      245,000         -0-            -0-             -0-         -0-        350,000
Chief Operating Officer      1996      210,000      175,000         -0-            -0-           6,400         -0-            -0-
                             ----     --------     --------        ----           ----           -----        ----        -------

Thomas J. Schlauch,          1998     $168,000     $104,000        $-0-           $-0-             -0-        $-0-           $-0-
Senior Vice President,       1997      160,000       82,000         -0-            -0-             -0-         -0-            -0-
Buying                       1996      150,000       60,000         -0-            -0-           3,600         -0-            -0-
                             ----     --------     --------        ----           ----           -----        ----        -------

Richard A. Johnson,          1998     $140,000     $ 85,000        $-0-           $-0-             -0-        $-0-           $-0-
Senior Vice President,       1997      130,000       65,000         -0-            -0-             -0-         -0-            -0-
Store Operations             1996      117,000       45,000         -0-            -0-           3,600         -0-            -0-
                             ----     --------     --------        ----           ----           -----        ----        -------

Charles P. Kirk              1998     $150,000     $ 75,000        $-0-           $-0-             -0-        $-0-           $-0-
Senior Vice President        1997      140,000       55,000         -0-            -0-             -0-         -0-            -0-
& Chief Financial Officer    1996      130,000       35,000         -0-            -0-           3,600         -0-            -0-
                             ----     --------     --------        ----           ----           -----        ----        -------
</TABLE>


(1)  Represents stock options issued under the Parent 1992 Management Equity
     Plan (the "Plan"). Options granted under the Plan had an exercise price
     equal to the fair market value of the Common Stock at the date of the grant
     as determined by Parent's Board of Directors. The options vested and became
     exercisable in cumulative 20% installments commencing one year from the
     date of grant, with full vesting on the fifth anniversary. Shares of Common
     Stock acquired pursuant to the exercise of options are generally subject to
     terms and conditions comparable to those contained in various Management
     Subscription and Stockholders Agreements pursuant to which members of
     management have previously acquired Common Stock. See "Principal
     Stockholders." Pursuant to the Recapitalization substantially all of such
     options became fully vested and were exercised (see "Management Stock
     Purchases") and the restrictions under such agreements (other than those
     relating to federal and state securities acts) became inapplicable.

(2)  Such compensation was to facilitate the named executives' Management Stock
     Purchases.


                                       21
<PAGE>   22
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1998 AND 1998 FISCAL YEAR-END OPTION
VALUE

     None.


EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL ARRANGEMENTS

         The Company and each of Steven G. Miller and Robert W. Miller
(collectively, the "Millers") have entered into employment agreements, dated as
of January 1, 1993, whereby Steven G. Miller is to continue to serve as
President and Chief Operating Officer and Robert W. Miller as Chairman of the
Board of Directors (the "Board") and Chief Executive Officer of the Company
until December 31, 1994 and for additional successive one-year periods
thereafter, unless any party gives timely notice to the other that the
employment term shall not be so extended. The agreements require the Company to
provide the Millers with a base salary and those benefits generally available to
the Company's senior executive officers, including health insurance, sick leave,
and profit sharing plan participation, and require the Board to make an annual
determination as to whether each is entitled to receive a bonus for such year
and an increase in base salary for the next year. Robert W. Miller's agreement
also provides for supplemental annual retirement benefits and health insurance
benefits for himself and his surviving spouse upon his retirement.

         Employment under both agreements is terminable by the Company at any
time, with or without cause, and, under Robert W. Miller's agreement, by him, if
for good reason (as defined in his employment agreement). If Steven G. Miller or
Robert W. Miller is terminated without cause or, in the case of Robert W.
Miller, by him for good reason, each is entitled to receive as severance pay his
base salary through the remainder of the employment term as then in effect. The
agreement of either of the Millers may be terminated if such person becomes
unable to render full services during certain prescribed periods of time. The
agreements contain covenants precluding the Millers from engaging in certain
competition with the Company and from soliciting certain employees of the
Company and its affiliates for a specified period following the termination of
employment, the basis of which depends upon the reason for the termination.


MANAGEMENT STOCK PURCHASES

         Pursuant to the Recapitalization, Parent accelerated the vesting
periods under substantially all outstanding employee option and restricted stock
agreements. Parent facilitated the exercise of such stock options by existing
employees by offering to such employees the option to pay the aggregate exercise
price of such outstanding options (in excess of the par value of the shares
being acquired upon exercise) by way of a personal recourse obligation secured
by such employee's existing Common Stock and the Common Stock issued pursuant to
the exercise of the options, and the proceeds thereof. Option holders who
exercised their stock options at the effective date of the Recapitalization
received the distributions on Common Stock described under the description of
the Recapitalization included under the heading "Liquidity and Capital
Resources". As a result thereof, there were outstanding 4,215,301 shares (or
4,612,945 shares on a fully diluted basis) of Common Stock immediately prior to
the Recapitalization.

         As part of the Recapitalization, and pursuant to Parent's newly adopted
1997 Management Equity Plan applicable to employees of Parent and its
subsidiaries, Parent sold to existing middle and senior level management
employees of the Company, 462,009 shares of Common Stock for $5 per share (the
"Management Stock Purchases"). Such shares were not entitled to the distribution
on Common Stock described above under the heading "Liquidity and Capital
Resources," although any current employees who owned shares otherwise entitled
to such distribution could pay all or a portion of the purchase price of the
shares being purchased by having Parent offset or withhold such amount from the
distribution. The agreements under the 1997 Management Equity Plan prohibit the
transfer of such Common Stock until the fifth anniversary of the issuance
thereof or the occurrence of any earlier specified event that terminates such
prohibition, with an exception for transfers of vested shares to "related
transferees" (as defined therein). Thereafter, such shares of Common Stock are
transferrable subject to a right of first refusal in favor of Parent. The
agreements also contain certain "call" options as to unvested shares of Common
Stock, 


                                       22
<PAGE>   23
exercisable, generally, upon termination of a management employee's employment
with the Company. As a result of the Management Stock Purchases, immediately
after the Recapitalization the continuing management and employees of the
Company (and members of their families) beneficially owned approximately 55.3%
of Parent on a fully diluted basis. Senior management (and members of their
families) beneficially own approximately 34.3% of the outstanding Common Stock
on a fully diluted basis.


COMPENSATION OF DIRECTORS

         Directors of the Company, as such, do not receive any compensation.
However, during the fiscal year ended January 3, 1999, the Company, on behalf of
Parent, paid Leonard Green & Associates, L.P. ("LGP"), a California limited
partnership, compensation for management services fees of $340,091 including
out-of-pocket expenses. In 1994 and 1996 the Company paid LGA an additional
$500,000 in fees for work performed in securing the Company's bank facility. In
addition, as a result of the consummation of the Recapitalization, LGA was paid
a fee of $4.3 million by the Parent in 1997. After the Recapitalization, Parent
and the Company entered into a new Management Services Agreement with a term of
seven and one-half years and pursuant to which Parent and the Company will pay
LGA a reduced annual fee for management services ($333,333) plus reasonable and
customary fees for financial advisory and investment banking services in
connection with major financial transactions (plus expenses and indemnities, if
any). LGA is an affiliate of LGP. Mr Danhakl and two former directors of the
Company are executive officers and equity owners of LGP. LGA is the sole general
partner and manager of GEI, a stockholder of Parent. The Company believes that
the terms of its agreement and arrangements with LGA are comparable to what
could be obtained from unrelated, but equally qualified, third parties.


                                       23
<PAGE>   24
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

PRINCIPAL STOCKHOLDERS

         The Company's outstanding capital stock is wholly owned by Parent.
Parent's outstanding equity securities consist of Common Stock and the Parent
New Preferred. The following table sets forth the ownership of Common Stock as
of March 31, 1999 by any person known to the Company to be the beneficial owner
of more than 5% of either class of Parent's securities, the Company's directors,
executive officers named in the Summary Compensation Table above, and all
executive officers and directors of the Company as a group.


<TABLE>
<CAPTION>
                                                                     COMMON STOCK
                  NAME AND ADDRESS (1)                   -------------------------------------
                  OF BENEFICIAL OWNER                    NUMBER OF SHARES     PERCENT OF CLASS
                  -------------------                    ----------------     ----------------
<S>                                                      <C>                  <C>  
Robert W. Miller (2)                                        350,809(3)             17.5%
Steven G. Miller (2)                                        200,000                10.0%
Dr. Michael D. Miller                                              (4)                  (4)
Thomas J. Schlauch                                           40,000                 2.0%
Richard A. Johnson                                           48,000                 2.4%
Charles P. Kirk                                              48,000                 2.4%
John G. Danhakl                                                    (5)                  (5)
Green Equity Investors, L.P. (2)                            723,580                36.2%
All Executive Officers and Directors as a Group           1,488,289(6)             74.4%
</TABLE>

(1)  The address for each stockholder is 2525 East El Segundo Boulevard, El
     Segundo, California 90245, except GEI and Mr. Danhakl for which the address
     is 11111 Santa Monica Boulevard, Suite 2000, Los Angeles, California 90025.

(2)  Pursuant to the Stockholders Agreement (as defined), each of GEI and the
     Millers has agreed to vote for the directors designated by the other. See
     "Parent Equity and Debt".

(3)  Includes shares of Common Stock owned by Dr. Miller over which Robert W.
     Miller has voting control.

(4)  Effective as of the Recapitalization, Dr. Miller granted voting control
     over his shares to Robert W. Miller, and such shares are included with
     Robert W. Miller's shares.

(5)  Mr. Danhakl is a general partner of LGP and may be deemed to be a
     beneficial owner of the shares of Common Stock and Parent New Preferred
     owned by GEI because of his interest in LGP, which is an affiliate of the
     sole general partner of GEI. GEI owns 273,423 shares of Parent New
     Preferred and an affiliate of GEI owns 35,070 shares of Parent New
     Preferred.

(6)  Includes the shares identified in note (5) above.


REPURCHASE OF COMMON STOCK AND PE WARRANT

         Pursuant to the Recapitalization Agreement, Parent redeemed all of the
issued and outstanding Parent Old Preferred, including shares owned by GEI, at
an aggregate redemption price of $15.0 million plus accrued and unpaid dividends
of approximately $6.9 million.

         Thereafter Parent made a distribution of $15 per share of Common Stock,
or approximately $63.2 million in the aggregate, to all holders of record of
Common Stock. Such holders included option holders whose vesting periods were
accelerated as described under "Executive Compensation - Management Stock
Purchases" and who exercised their outstanding stock options, but did not
include shares of Common Stock sold to existing middle and senior level
management as part of the Recapitalization.


                                       24
<PAGE>   25
         Following such distribution to the holders of Common Stock, Parent
repurchased (i) 2,737,310 shares of Common Stock, which were originally sold
together with shares of Parent Old Preferred, from the holders of such Common
Stock (including GEI) (the "Selling Stockholders"), and (ii) the PE Warrant. The
aggregate purchase price for the PE Warrant and the Common Stock repurchased
from the Selling Stockholders was approximately $17.6 million in cash and $35.0
million of liquidation value of Parent New Preferred.

         As a result of the Recapitalization, the Selling Stockholders'
ownership of Common Stock was reduced significantly. Their percentage ownership
was reduced from 77.4% (based on the number of fully diluted shares of Common
Stock immediately prior to the Recapitalization) to 41.7% (based on the number
of fully diluted shares of Common Stock immediately after the Recapitalization).
In addition, on a fully diluted basis, the 8.6% Common Stock interest of PE in
respect of the PE Warrant was eliminated in its entirety.


PARENT EQUITY AND DEBT

         Parent's certificate of incorporation contains restrictions on transfer
of its outstanding stock and grants to Parent, or Parent's assignee, a right of
first refusal in the event of a proposed sale by any stockholder of Parent. In
addition to the Common Stock, Parent has outstanding the Parent New Preferred
and the Warrant issued with the Parent Discount Notes. In connection with the
Recapitalization, Parent, the Millers and GEI entered into a stockholders
agreement (the "Stockholders Agreement") which, among other things, generally
provides that GEI will vote its Common Stock (and will cause its affiliates to
vote) in favor of the election of the Millers and an additional person
designated by them to be directors of Parent. Likewise, the Millers agreed to
vote their Common Stock (and will cause their affiliates to vote) in favor of
the election of two persons designated by GEI to be directors of Parent. The
Stockholders Agreement further provides that all such persons will cause Parent
to vote the common stock of the Company in favor of the election of the same
five persons as directors of the Company. The Stockholders Agreement and the
respective certificates of incorporation of Parent and the Company contain a
requirement for a supermajority director vote generally applicable to
transactions not in the ordinary course of business. The Stockholders Agreement
is generally for a term of ten years, subject to earlier termination upon the
occurrence of certain events, including if the Common Stock is listed or
admitted to trading on a national securities exchange or quoted on The Nasdaq
Stock Market's National Market.


ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

RELATIONSHIP WITH THRIFTY PAYLESS AND RITE AID CORPORATION

         Prior to September 1992, the Company was a wholly-owned subsidiary of
Thrifty, which was in turn a wholly-owned subsidiary of PE. In December 1996,
Thrifty was acquired by Rite Aid Corporation. References herein to "Rite Aid"
include Rite Aid Corporation and its subsidiaries, including Thrifty PayLess,
Inc. and Thrifty.

         As a result of the Company's prior relationship with Thrifty and its
affiliates, the Company continues to maintain certain relationships with Rite
Aid and PE. These relationships include continuing indemnification obligations
of PE to the Company for certain environmental matters; arrangements between the
Company and PE with respect to various tax matters and obligations under ERISA
(as defined), including the allocation of various tax obligations relating to
the inclusion of the Company and each member of the affiliated group of which
the Company is the common parent in certain consolidated and/or unitary tax
returns of PE; and the subleases described below.


                                       25
<PAGE>   26
         The Company previously subleased the building and improvements of its
Fontana, California distribution center from Thrifty Realty Company, a
California corporation and a wholly-owned subsidiary of Thrifty. See "Business -
Distribution." On March 5, 1996, as permitted by the terms of such sublease, the
Company purchased the facility from MLTC for a purchase price of $8.9 million,
thereby terminating such sublease. Concurrently with such purchase, the Company
entered into a sale/leaseback transaction with respect to the distribution
center.

         The Company subleases certain business equipment and other personal
property from Thrifty, including the Company's point of sale system (the
"Equipment"), pursuant to a Sublease (the "Sublease") dated as of September 25,
1992 between the Company and Thrifty, as subsequently amended. Thrifty currently
holds a leasehold interest in the Equipment pursuant to an Amended and Restated
Master Lease Agreement dated as of April 20, 1994 between MLTC, as lessor, and
Thrifty, as lessee (the "Master Lease"). The Master Lease contains a
non-disturbance and attornment agreement pursuant to which the Company's use and
enjoyment of the Equipment will not be disturbed as a result of any default
under the Master Lease provided that the Company is not in default under the
Sublease.

         The Master Lease provides Thrifty with an option to purchase the
Equipment, and the Sublease provides the Company with the same option. The
Company's option to purchase is exercisable notwithstanding any default under
the Master Lease provided the Company is not otherwise in default under the
Sublease; however, in the event a default exists under the Master Lease, the
Company's exercise of its purchase option requires the payment by the Company of
all amounts due and payable under the Master Lease at the time of the
consummation of the purchase pursuant to the exercise of such option. Such
amounts may include rent, fees and other expenses that are not allocable to the
Equipment (the "Excess Fees") if the same are due and payable but have not
otherwise been paid by Thrifty. To the extent the Company is required to pay
such Excess Fees, Thrifty is obligated under the Sublease to reimburse the
Company for the full amount of such Excess Fees.

         The Company believes that all other material terms of the Sublease,
including rent payments, are comparable to what could be obtained from an
unrelated third party.


POTENTIAL CONFLICTS OF INTEREST; PAST TRANSACTIONS WITH AFFILIATES

         Mr. Danhakl of LGP holds a seat on the Board of Directors of the
Company. Jonathan Sokoloff and Jonathan Seiffer, who previously served as
directors of the Company, hold two seats on the Board of Directors of Gart
Sports Company ("Gart"). Also, affiliates of LGA have a controlling interest in
Gart, and LGA and LGP are affiliates. Mr. Danhakl may have conflicts of interest
with respect to certain matters affecting the Company, such as potential
business opportunities and business dealings between the Company and LGP and its
affiliated companies.

         Gart completed a merger with Sportmart in January, 1998. Gart and
Sportmart compete with the Company. Although Gart and Sportmart currently pursue
different business strategies than the Company, they compete in some of the
Company's markets and offer some of the same or similar merchandise, and there
can be no assurance that the Company will not encounter increased competition
from Gart or Sportmart in the future or that actions by either will not inhibit
the Company's growth strategy. In addition, there can be no assurance that all
potential conflicts will be resolved in a manner that is favorable to the
Company, or that the Company will be offered business opportunities made
available to Gart or Sportmart. The Company believes it is impossible to predict
the precise circumstances under which future potential conflicts may arise and
therefore intends to address potential conflicts on a case-by-case basis. Under
Delaware law, directors have a fiduciary duty to act in good faith and in what
they believe to be in the best interest of the corporation and its stockholders.
Such duties include the duty to refrain from impermissible self-dealing and to
deal fairly with respect to transactions in which the directors, or other
companies with which such directors are affiliated, have an interest.


                                       26
<PAGE>   27
OWNERSHIP OF OLD SUBORDINATED NOTES BY AFFILIATES

         Certain of the Old Subordinated Notes that were defeased and repaid as
a result of the Recapitalization were owned by certain of the Selling
Stockholders and by affiliates of GEI.


CONSULTING FEES

        As consideration for the provision of ongoing management and financial
advisory services, the Company, on behalf of the Parent, pays LGA certain fees.
See "Executive Compensation - Compensation of Directors."


                                       27
<PAGE>   28
                                     PART IV


ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

            (A)         Documents filed as part of this report:

            (1)         Financial Statements. 
                        See Financial Statements Index included in Item 8 of
                        Part II of this Form 10-K.

            (2)         Financial Statement Schedule. 
                        See Financial Statements Index included in Item 8 of
                        Part II of this Form 10-K.

            (3)         Exhibits and Reports on Form 8-K.

        (a) Exhibits

            3.1(i)(1)   Restated Certificate of Incorporation of the Company

            3.1(ii)(1)  By-Laws of the Company, as amended October 27, 1997

            4.1(5)      Indenture dated as of November 13, 1997 between the
                        Company and First Trust National Association, as trustee

            4.2(5)      Form of the Company's Series B 10 7/8% Senior Notes due
                        2007 (included in Exhibit 4.1)

            10.1(a)(2)  Employment Agreement between the Company and Robert W.
                        Miller dated as of January 1, 1993

            10.1(b)(2)  Employment Agreement between the Company and Steven G.
                        Miller dated as of January 1, 1993

            10.1(c)(2)  Sublease between the Company and Thrifty dated as of
                        September 25, 1992

            10.2(a)(3)  Amended and Restated Indemnification Implementation
                        Agreement between the Company (formerly known as United
                        Merchandising Corp.) and Thrifty PayLess Holdings, Inc.
                        dated as of April 20, 1994

            10.2(b)(3)  Agreement and Release among Pacific Enterprises, Thrifty
                        PayLess Holdings, Inc., Thrifty PayLess, Inc., Thrifty
                        and the Company (formerly known as United Merchandising
                        Corp.) dated as of March 11, 1994

            10.3(a)(4)  Financing Agreement dated March 8, 1996 between The CIT
                        Group/Business Credit, Inc. and the Company

            10.3(b)(4)  Grant of Security Interest in and Collateral Assignment
                        of Trademarks and Licenses dated as of March 8, 1996 by
                        the Company in favor of The CIT Group/Business Credit,
                        Inc.

            10.3(c)(4)  Guarantee dated March 8, 1996 by Big 5 Corporation (now
                        known as Big 5 Holdings Corp.) in favor of The CIT
                        Group/Business Credit, Inc.

            10.4(a)(4)  Agreement on Purchase and Sale among the Company and the
                        State of Wisconsin dated as of February 13, 1996

            10.4(b)(4)  Lease among the Company (Lessee) and the State of
                        Wisconsin Investment Board (Lessor) dated as of March 5,
                        1996


                                       28
<PAGE>   29
            10.5(5)     Purchase Agreement, dated as of November 13, 1997, by
                        and among the Company and the Initial Purchasers named
                        therein

            10.6(5)     Registration Rights Agreement, dated as of November 13,
                        1997, by and among the Company and the Initial
                        Purchasers named therein

            10.7(5)     Management Services Agreement, dated as of November 13,
                        1997, by and between the Company, Big 5 Holdings Corp.
                        and Leonard Green & Associates, L.P.

            10.8(5)     Letter from The CIT Group/Business Credit, Inc. to the
                        Company dated November 13, 1997, amending the Financing
                        Agreement, dated March 8, 1996 between the Company
                        (formerly known as United Merchandising Corp.) and The
                        CIT Group/Business Credit, Inc.

            12.1        Ratio of Earnings to Fixed Charges

            27          Financial Data Schedule

----------

     (1)  Incorporated by reference to the Company's Current Report on Form 8-K
          filed November 26, 1997.

     (2)  Incorporated by reference to the Company's Registration Statement on
          Form S-4 (file no. 33-61096) effective as of June 29, 1993.

     (3)  Incorporated by reference to the Company's Annual Report on Form 10-K
          for the year ended January 1, 1995 

     (4)  Incorporated by reference to the Company's Annual Report on Form 10-K
          for the year ended December 31, 1995.

     (5)  Incorporated by reference to the Company's Registration Statement on
          Form S-4 (file no. 333-43129) filed with the Securities and Exchange
          Commission on December 23, 1997.


SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15 (d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT
TO SECTION 12 OF THE ACT.

The Company has not provided any annual report covering its last fiscal year nor
any proxy statement to security holders.


                                       29
<PAGE>   30
                                   SIGNATURES


Pursuant to the requirements of Section 15 (d) 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:  March 31, 1999                By:  /S/Robert W. Miller
       --------------------               ------------------------------
                                          Robert W. Miller
                                          Chairman of the Board of Directors and
                                          Chief Executive Officer of the Company


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
         Signatures                                   Title                            Date
         ----------                                   -----                            ----
<S>                                   <C>                                          <C>

     /S/Robert W. Miller              Chairman of the Board of Directors           March 31, 1999
------------------------------          and Chief Executive Officer of the
       Robert W. Miller                 Company (Principal Executive Officer)


     /S/Steven G. Miller              President, and Chief Operating Officer       March 31, 1999
------------------------------          and Director of the Company
       Steven G. Miller                                                            


     /S/Charles P. Kirk               Senior Vice President and Chief Financial    March 31, 1999
------------------------------          Officer (Principal Financial and
      Charles P. Kirk                   Accounting Officer)


     /S/Michael D. Miller             Director of the Company                      March 31, 1999
------------------------------
       Michael D. Miller


     /S/John G. Danhakl               Director of the Company                      March 31, 1999
------------------------------
       John G. Danhakl
</TABLE>


                                       30
<PAGE>   31
                                   BIG 5 CORP.


                          INDEX TO FINANCIAL STATEMENTS




<TABLE>
<S>                                                                                 <C>
Index to Financial Statements ..............................................          F-1
                                                                            
Report of KPMG LLP,                                                         
                Independent Auditors .......................................          F-2
                                                                            
Balance Sheets at January 3, 1999 and December 28, 1997 ....................          F-3
                                                                            
Years Ended January 3, 1999, December 28, 1997 and December 29, 1996        
                                                                            
          Statements of Operations .........................................          F-5
                                                                            
          Statements of Stockholder's Equity(Deficit) ......................          F-6
                                                                            
          Statements of Cash Flows .........................................          F-7
                                                                            
Notes to Financial Statements ..............................................          F-9
                                                                            
                                                                                    Schedule
                                                                                    --------
Financial Statement Schedule:                                               
                                                                            
          Valuation and Qualifying Accounts as of January 3, 1999,          
                 December 28, 1997 and December 29, 1996 ...................          II-1
</TABLE>


                                      F-1
<PAGE>   32
                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholder
Big 5 Corp.:


We have audited the accompanying balance sheets of Big 5 Corp. (formerly United
Merchandising Corp.) as listed in the accompanying index. In connection with our
audits of the financial statements, we also have audited the financial statement
schedule as listed in the accompanying index. These financial statements and
financial statement schedule II are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.


We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Big 5 Corp. as of January 3,
1999 and December 28, 1997 and the results of its operations and its cash flows
for each of the years ended January 3, 1999, December 28, 1997 and December 29,
1996 in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule II, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.


                                        KPMG LLP


Los Angeles, California
February 24, 1999


                                      F-2
<PAGE>   33
                                   BIG 5 CORP.

                                 Balance Sheets

                          (Dollar amounts in thousands)


<TABLE>
<CAPTION>
                                                                                       DECEMBER 28,       JANUARY 3,
                                                                                           1997              1999
                                                                                       ------------      ------------
<S>                                                                                    <C>                      <C>  
                                     ASSETS

Current assets:
    Cash and cash equivalents                                                          $      1,364                --
    Trade and other receivables, net of allowance for doubtful accounts of $118
      and $201, respectively                                                                  6,702             6,347
    Merchandise inventories                                                                 147,279           147,296
    Prepaid expenses                                                                          1,053             1,336
                                                                                       ------------      ------------

           Total current assets                                                             156,398           154,979
                                                                                       ------------      ------------

Property and equipment:
    Land                                                                                        186               186
    Buildings and improvements                                                               15,353            18,910
    Furniture and equipment                                                                  33,481            37,870
    Less accumulated depreciation and amortization                                          (21,719)          (27,428)
                                                                                       ------------      ------------

           Net property and equipment                                                        27,301            29,538
                                                                                       ------------      ------------

Deferred income taxes, net                                                                    6,257             6,158
Leasehold interest, net of accumulated amortization of $13,882 and $15,669,
    respectively                                                                             14,610            12,793
Other assets, at cost, less accumulated amortization of $975 and $995,
    respectively                                                                              6,336             8,773
Goodwill, less accumulated amortization of $1,124 and $1,371, respectively
                                                                                              5,420             5,174
                                                                                       ------------      ------------
                Total Assets                                                           $    216,322           217,415
                                                                                       ============      ============
</TABLE>


                                   (Continued)


                                      F-3
<PAGE>   34
                                   BIG 5 CORP.

                            Balance Sheets, Continued

                          (Dollar amounts in thousands)


<TABLE>
<CAPTION>
                                                                                       DECEMBER 28,       JANUARY 3,
                                                                                           1997              1999
                                                                                       ------------      ------------
<S>                                                                                    <C>                      <C>  

                      LIABILITIES AND STOCKHOLDER'S DEFICIT

Current liabilities:
    Accounts payable                                                                   $     44,089            53,710
    Accrued expenses                                                                         31,428            33,644
                                                                                       ------------      ------------

           Total current liabilities                                                         75,517            87,354

Deferred rent                                                                                 5,988             6,586
Long-term debt                                                                              173,660           151,352
                                                                                       ------------      ------------

           Total liabilities                                                                255,165           245,292
                                                                                       ------------      ------------

Commitments and contingencies

Stockholder's deficit:
    Common stock, $.01 par value.  Authorized 3,000 shares; issued and
      outstanding 1,000 shares at December 28, 1997 and January 3, 1999                          --                --
    Additional paid-in capital                                                               35,080            39,281
    Accumulated deficit                                                                     (73,923)          (67,158)
                                                                                       ------------      ------------

           Net stockholder's deficit                                                        (38,843)          (27,877)
                                                                                       ------------      ------------

                                                                                       $    216,322           217,415
                                                                                       ============      ============
</TABLE>


See accompanying notes to financial statements.


                                      F-4
<PAGE>   35
                                   BIG 5 CORP.

                            Statements of Operations

                          (Dollar amounts in thousands)


<TABLE>
<CAPTION>
                                                                YEAR ENDED        YEAR ENDED        YEAR ENDED
                                                               DECEMBER 29,      DECEMBER 28,       JANUARY 3,
                                                                   1996              1997              1999
                                                                (52 WEEKS)        (52 WEEKS)        (53 WEEKS)
                                                               ------------      ------------      ------------
<S>                                                            <C>               <C>               <C>    
Net sales                                                      $    404,265           443,541           491,430

Cost of goods sold, buying and occupancy                            277,116           298,893           330,243
                                                               ------------      ------------      ------------

           Gross profit                                             127,149           144,648           161,187
                                                               ------------      ------------      ------------

Operating expenses:
    Selling and administrative                                      101,053           110,131           121,643
    Depreciation and amortization                                     9,578             8,176             8,890
                                                               ------------      ------------      ------------

           Total operating expenses                                 110,631           118,307           130,533
                                                               ------------      ------------      ------------

           Operating income                                          16,518            26,341            30,654

Interest expense                                                     11,482            12,442            19,285
                                                               ------------      ------------      ------------

           Income before income taxes and extraordinary
              loss                                                    5,036            13,899            11,369

Income taxes                                                            970             1,436             4,604
                                                               ------------      ------------      ------------

           Income before extraordinary loss                           4,066            12,463             6,765

Extraordinary loss from early extinguishment of debt,
    net of income tax benefit                                        (1,285)           (1,597)               --
                                                               ------------      ------------      ------------

           Net income                                          $      2,781            10,866             6,765
                                                               ============      ============      ============
</TABLE>


See accompanying notes to financial statements.


                                      F-5
<PAGE>   36
                                   BIG 5 CORP.

                  Statements of Stockholder's Equity (Deficit)

      Years ended December 29, 1996, December 28, 1997 and January 3, 1999

                          (Dollar amounts in thousands)


<TABLE>
<CAPTION>
                                                                           ADDITIONAL                            NET
                                                             COMMON         PAID-IN         ACCUMULATED     STOCKHOLDER'S
                                                              STOCK         CAPITAL           DEFICIT      EQUITY/(DEFICIT)
                                                             ------        ----------       -----------    ----------------
<S>                                                         <C>            <C>              <C>            <C>   
Balance at December 31, 1995                                $ 35,080               --          (6,006)          29,074

Net income for the year ended December 29, 1996                   --               --           2,781            2,781
                                                            --------         --------        --------         --------

Balance at December 29, 1996                                  35,080               --          (3,225)          31,855

Dividend to Parent Company                                        --               --         (81,564)         (81,564)

Recapitalization - reclassification in excess of par
    value                                                    (35,080)          35,080              --               --

Net income for the year ended December 28, 1997                   --               --          10,866           10,866
                                                            --------         --------        --------         --------

Balance at December 28, 1997                                      --           35,080         (73,923)         (38,843)

Forgiveness of tax payable to Parent (Note 2)                     --            4,201              --            4,201

Net income for the year ended January 3, 1999                     --               --           6,765            6,765
                                                            --------         --------        --------         --------

Balance at January 3, 1999                                  $     --           39,281         (67,158)         (27,877)
                                                            ========         ========        ========         ========
</TABLE>

See accompanying notes to financial statements.


                                      F-6
<PAGE>   37
                                   BIG 5 CORP.

                            Statements of Cash Flows

                          (Dollar amounts in thousands)


<TABLE>
<CAPTION>
                                                                        YEAR ENDED           YEAR ENDED           YEAR ENDED
                                                                       DECEMBER 29,         DECEMBER 28,          JANUARY 3,
                                                                           1996                 1997                 1999
                                                                        (52 WEEKS)           (52 WEEKS)           (53 WEEKS)
                                                                       ------------         ------------         ------------
<S>                                                                    <C>                  <C>                  <C>  

Cash flows from operating activities:
    Net income                                                         $      2,781               10,866                6,765
    Adjustments to reconcile net income to net cash
      provided by operating activities:
        Depreciation and amortization                                         9,578                8,176                8,890
        Amortization of deferred finance charges and
          discounts                                                             621                  716                  948
        Deferred tax provision (benefit)                                     (1,700)              (4,557)                  99
        Forgiveness of tax payable to Parent                                     --                   --                4,201
        Extraordinary loss from early extinguishment of
          debt                                                                2,222                2,707                   --
        Changes in assets and liabilities:
          Merchandise inventories                                             2,626              (12,393)                 (17)
          Trade and other accounts receivable, net                             (677)              (2,648)                 355
          Prepaid expenses and other assets                                     342                 (413)                (993)
          Income taxes                                                        1,733               (1,733)                  --
          Accounts payable                                                    1,427                 (150)               9,621
          Accrued expenses                                                      845                3,060                 (170)
                                                                       ------------         ------------         ------------

                  Net cash provided by operating
                    activities                                               19,798                3,361               29,699
                                                                       ------------         ------------         ------------

Cash flows from investing activities:
    Purchases of property and equipment                                      (3,453)              (5,151)              (8,500)
    Purchase of assets pending sale and leaseback (note 12)                  (8,910)                  --                   --
    Proceeds from sale of property and equipment                             13,902                   --                   --
    Purchase of long-term investments                                            --                   --               (2,606)
                                                                       ------------         ------------         ------------
                  Net cash provided by (used in)
                    investing activities                                      1,539               (5,151)             (11,106)
                                                                       ------------         ------------         ------------
</TABLE>


                                   (Continued)


                                      F-7
<PAGE>   38
                                  BIG 5 CORP.

                      Statements of Cash Flows, Continued

                         (Dollar amounts in thousands)


<TABLE>
<CAPTION>
                                                                        YEAR ENDED           YEAR ENDED           YEAR ENDED
                                                                       DECEMBER 29,         DECEMBER 28,          JANUARY 3,
                                                                           1996                 1997                 1999
                                                                        (52 WEEKS)           (52 WEEKS)           (53 WEEKS)
                                                                       ------------         ------------         ------------
<S>                                                                    <C>                  <C>                  <C>  

Cash flows from financing activities:
    Net repayments under revolving credit facilities, and other        $    (17,144)              (6,749)             (19,957)
    Repayment of long-term debt                                                  --              (36,450)                  --
    Issuance of long-term debt                                                   --              130,409                   --
    Debt issuance costs                                                      (1,434)              (5,431)                  --
    Debt prepayment premiums                                                 (1,160)              (2,128)                  --
    Dividend paid to Parent Company                                              --              (81,564)                  --
                                                                       ------------         ------------         ------------

                  Net cash provided (used in) financing
                    activities                                              (19,738)              (1,913)             (19,957)
                                                                       ------------         ------------         ------------

                  Net increase (decrease) in cash and
                    cash equivalents                                          1,599               (3,433)              (1,364)



Cash and cash equivalents at beginning of year                                3,198                4,797                1,364
                                                                       ------------         ------------         ------------

Cash and cash equivalents at end of year                               $      4,797                1,364                   --
                                                                       ============         ============         ============


Supplemental disclosures of cash flow information:
      Interest paid                                                    $     11,285               11,807               18,044
      Income taxes paid                                                          --                6,593                   --
                                                                       ============         ============         ============
</TABLE>


See accompanying notes to financial statements.


                                      F-8
<PAGE>   39
                                   BIG 5 CORP.

                          Notes to Financial Statements

                      January 3, 1999 and December 28, 1997

                          (Dollar amounts in thousands)


(1)    BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

       The accompanying financial statements for the fiscal years ended January
       3, 1999 and December 28, 1997 represent the financial position and
       results of operations of Big 5 Corp. In connection with the November 13,
       1997 Recapitalization (as discussed below), the Company was
       reincorporated in Delaware and changed its name to Big 5 Corp. Prior to
       this reincorporation, the Company was incorporated in California as
       United Merchandising Corp. The accompanying financial statements for the
       fiscal year ended December 29, 1996 represent the financial position and
       results of operations of United Merchandising Corp. As used herein, the
       Company means Big 5 Corp. when discussing the financial position and
       results of operations subsequent to the Recapitalization and United
       Merchandising Corp. when discussing the financial position or results of
       operations prior to the Recapitalization. The Company is a wholly owned
       subsidiary of Big 5 Holdings 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 221 stores at January 3,
       1999 in California, Washington, Arizona, Oregon, Texas, New Mexico,
       Nevada, Utah and Idaho.

       In October 1997, Big 5 Holdings Corp. (the Parent), Robert W. Miller and
       Green Equity Investors, L.P. (GEI) agreed to a Plan of Recapitalization
       and Stock Repurchase Agreement (the Recapitalization Agreement). On
       November 13, 1997, the following transactions (collectively referred to
       as the Recapitalization) were effected pursuant to the Recapitalization
       Agreement: (i) the Company issued 10 7/8% Senior Notes due 2007 (the
       Senior Notes) ($130,409 gross proceeds); (ii) the Company defeased and
       repaid all of its outstanding 13 5/8% Senior Subordinated Notes due 2002;
       (iii) Parent issued its Senior Discount Notes in an aggregate principal
       amount at maturity of $48.2 million maturing on November 30, 2008 (the
       Parent Discount Notes) with a warrant to purchase approximately 3% of the
       Common Stock of Parent, par value $.01 per share at a nominal exercise
       price (the Warrant) ($24,500 proceeds); (iv) Parent accelerated vesting
       of substantially all outstanding options and restricted stock held by
       management and employees of the Company; (v) Parent redeemed for cash its
       existing Series A 9% Cumulative Redeemable Preferred Stock (the Parent
       Old Preferred) for approximately $21.9 million in the aggregate,
       including accrued dividends; (vi) Parent paid a cash distribution of $15
       per share on its outstanding shares of Common Stock (approximately $63.2
       million in the aggregate); (vii) Parent repurchased from Pacific
       Enterprises (PE) its warrant respecting 397,644 shares of Common Stock
       and 16,667 shares of Parent Old Preferred the (PE Warrant) and
       approximately 2,737,310 shares of Common Stock from the Selling
       Stockholders (of which GEI owned 86.8%) for an aggregate of $17.6 million
       in cash and $35.0 million of Parent Senior Exchangeable Preferred Stock
       (the Parent New Preferred); (viii) Parent sold additional Common Stock to
       middle and senior level management of the Company (approximately $2.3
       million gross proceeds), increasing the beneficial ownership of
       management and employees (and members of their families) from 14.0% to
       55.3% (in each instance on a fully diluted basis); and (ix) other
       transactions occurred, including a distribution from the Company to
       Parent, aggregating $81.5 million, so that the above-referenced
       transactions could be effected.


                                      F-9
<PAGE>   40
(2)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       REPORTING PERIOD

       The Company reports on a 52-53 week fiscal year ending on the Sunday
       nearest December 31. Information presented for the year ended January 3,
       1999 represents a 53-week fiscal year, while information presented for
       the years ended December 28, 1997 and December 29, 1996 represent 52-week
       fiscal years.

       REVENUE RECOGNITION

       The Company's revenue is received from retail sales of merchandise
       through the Company's stores. Revenue is recognized when merchandise is
       received by the customer and is shown net of returns. The costs of
       distribution center operations are included in cost of sales, buying and
       occupancy.

       EARNINGS PER SHARE

       Earnings per share data are not presented as they are not meaningful to
       the financial statements.

       CASH EQUIVALENTS

       The Company considers all highly liquid investments with original
       maturities of three months or less to be cash equivalents.

       OTHER RECEIVABLES

       Other receivables consist principally of amounts due from vendors for
       certain co-op advertising and amounts due from credit card companies. An
       allowance for doubtful accounts is provided when accounts are determined
       to be uncollectible.

       MERCHANDISE INVENTORIES

       The Company values its merchandise inventories using the lower of average
       cost (which approximates the first-in, first-out cost) or market method.
       Average cost includes the direct purchase price of merchandise inventory
       and overhead costs associated with the Company's distribution center.
       
       PROPERTY AND EQUIPMENT

       Property and equipment are stated at cost and depreciated over the
       estimated useful lives or lease terms, using the straight-line method.

       The estimated useful lives are 40 years for buildings, 7 to 10 years for
       fixtures and equipment and the shorter of the lease term or 10 years for
       leasehold improvements. Maintenance and repairs are charged to expense as
       incurred.

       LEASEHOLD INTEREST

       Upon acquisition of the Company by management in conjunction with Leonard
       Green & Partners L.P. in 1992, certain assets were recorded for the net
       fair value of favorable operating lease agreements. The leasehold
       interest asset is being amortized on a straight-line basis. During the
       year ended December 28, 1997, the Company revised its estimated average
       useful life from 10 years to 13.5 years. The 


                                      F-10
<PAGE>   41
       unamortized balance attributable to leases terminated since the
       acquisition has been reflected as a component of the gain or loss upon
       disposition of the underlying properties.

       GOODWILL

       Goodwill, which represents the excess of purchase price over fair value
       of net assets acquired, is amortized on a straight-line basis over
       periods ranging from 15 to 30 years.

       OTHER ASSETS

       Other assets consist principally of deferred financing costs and
       long-term investments. Deferred financing costs are amortized straight
       line over the terms of the respective debt.

       SELF-INSURANCE RESERVES

       The Company maintains self-insurance programs for workers' compensation
       and general liability risks. The Company is self-insured up to specified
       per-occurrence limits and maintains insurance coverage for losses in
       excess of specified amounts. Estimated costs under these programs,
       including incurred but not reported claims, are recorded as expenses
       based upon actuarially determined historical experience and trends of
       paid and incurred claims.

       PREOPENING EXPENSES

       New store preopening expenses are charged against operations as incurred.

       ADVERTISING EXPENSES

       The Company recognizes advertising costs the first time the advertising
       takes place. Advertising expenses amounted to $22,990 for the year ended
       December 29, 1996, $24,937 for the year ended December 28, 1997, and
       $28,465 for the year ended January 3, 1999. Advertising expense is
       included in selling and administrative.

       INCOME TAXES

       The Company accounts for income taxes under the asset and liability
       method whereby deferred tax assets and liabilities are recognized for the
       future tax consequences attributable to differences between financial
       statement carrying amounts of existing assets and liabilities and their
       respective tax bases. Deferred tax assets and liabilities are measured
       using tax rates expected to apply to taxable income in the years in which
       those temporary differences are expected to be recovered or settled. The
       effect on deferred tax assets and liabilities of a change in tax rates is
       recognized in income in the period that includes the enactment date. The
       realizability of deferred tax assets is assessed throughout the year and
       a valuation allowance is established accordingly.

       The Company files a consolidated tax return with its Parent, however, tax
       expense is recorded based on the stand alone operations of the Company.
       In 1998, the Company was not required to make any tax payments to Parent
       in settlement of the Company's tax liabilities.

       USE OF ESTIMATES

       Management of the Company has made a number of estimates and assumptions
       relating to the reporting of assets and liabilities and the disclosure of
       contingent assets and liabilities at the date of the financial statements
       and reported amounts of revenues and expenses during the reporting period
       to prepare these financial statements in conformity with generally
       accepted accounting principles. Actual results could differ from these
       estimates.


                                      F-11
<PAGE>   42
       CONCENTRATION OF CREDIT RISK

       The Company's deposits are with various high-quality financial
       institutions. Customer purchases are generally transacted using cash or
       credit cards. In certain instances, the Company grants credit to schools
       and youth-oriented organizations, under normal trade terms. Trade
       accounts receivable were approximately $437 and $462 at December 28, 1997
       and January 3, 1999, respectively. Credit losses have historically been
       within management's expectations.

       RECLASSIFICATIONS

       Certain prior year balances in the accompanying financial statements have
       been reclassified to conform to current year presentation.

       IMPAIRMENT OF LONG-LIVED ASSETS AND
       LONG-LIVED ASSETS TO BE DISPOSED OF

       The Company reviews its long-lived assets and certain identifiable
       intangibles for impairment whenever events or changes in circumstances
       indicate that the carrying amount of an asset may not be recoverable.
       Recoverability of assets to be held and used is measured by a comparison
       of the carrying amount of an asset to future undiscounted net cash flows
       expected to be generated by the asset. If such assets are considered to
       be impaired, the impairment to be recognized is measured by the amount by
       which the carrying amount of the assets exceeds the fair value of the
       assets. Assets to be disposed of are reported at the lower of the
       carrying amount or fair value, less costs to sell.


(3)    FAIR VALUES OF FINANCIAL INSTRUMENTS

       The following methods and assumptions were used to estimate the fair
       value of each class of financial instruments for which it is practicable
       to estimate that value:

              Cash and cash equivalents, trade and other receivables, trade
              accounts payable and accrued expenses: The carrying amounts
              approximate the fair values of these instruments due to their
              short-term nature.

              The fair value of the Company's Senior notes at January 3, 1999
              approximated $131,748 based on recent market prices as quoted by
              Donaldson, Lufkin & Jenrette. The carrying amount of the revolving
              credit facility reflects the fair value based on current rates
              available to the Company for debt with the same remaining
              maturities.


(4)    LONG-TERM DEBT

       Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                             DECEMBER 28,         JANUARY 3,
                                                                                 1997                1999
                                                                             ------------        ------------
<S>                                                                          <C>                 <C>   
       Revolving credit facility                                             $     43,251              20,908
       10 7/8% Senior Notes, net of unamortized discount, $131
       million face amount due in 2007 with an effective interest                 130,409             130,444
       rate of 10.95%
                                                                             ------------        ------------

Total long-term debt                                                         $    173,660             151,352
                                                                             ============        ============
</TABLE>


                                      F-12
<PAGE>   43
       In connection with the Recapitalization, the Company issued $131 million
       face amount, 10 7/8% Senior Notes due 2007 (Senior Notes), less
       unamortized discount of $591 based on an imputed interest rate of 10.95%.
       The notes require semiannual interest payments on each May 15 and
       November 15, commencing on May 15, 1998. The Company has no mandatory
       payments of principal on the Senior Notes prior to their maturity in
       2007. The notes may be redeemed in whole or in part, at the option of the
       Company, at any time on or after November 15, 2002, at the redemption
       prices set forth below with respect to the indicated redemption date,
       together with any accrued and unpaid interest to such redemption date.

       If redeemed during the 12-month period beginning November 15:

<TABLE>
<CAPTION>
                      YEAR                    PERCENTAGE
       -----------------------------------    ----------
<S>                                           <C>     
       2002                                     105.475%
       2003                                     103.650
       2004                                     101.825
       2005 and thereafter                      100.000
                                              ==========
</TABLE>

       The Company used the proceeds from the issuance of the Senior Notes, to
       redeem, at a premium of 5.838%, all of the then outstanding unsecured
       Senior Subordinated Notes, including all accrued and unpaid interest.
       Accordingly, the Company incurred a charge of $2,707, consisting of
       $2,128 in prepayment penalties and $579 related to a write-off of
       deferred finance costs related to the unsecured Senior Subordinated
       Notes. The total charge is reflected as an extraordinary loss from early
       extinguishment of debt (net of income taxes of $1,110) of $1,597 in the
       statement of operations for the year ended December 28, 1997.

       In connection with the Recapitalization, the Company amended its
       then-current credit agreement facility with the CIT Group. The amended
       agreement provides the Company with a five year, non-amortizing $125
       million revolving credit (the CIT Credit Facility), expiring in November
       2002. The original agreement became effective March 8, 1996, when the
       Company entered into a credit agreement (the CIT Credit Agreement) among
       the Company and the CIT Group. The CIT Credit Agreement provided the
       Company with a three-year nonamortizing $100 million revolving debt
       facility (the CIT Facility). Proceeds from the initial funding under the
       CIT Facility were used to repay in full all of the Company's outstanding
       obligations under its then existing revolving credit facility with
       General Electric Capital Corporation (the GECC Facility).

       Pursuant to the refinancing of its revolving credit facility in 1996, the
       Company incurred a charge of $2,222, consisting of $1,160 in prepayment
       penalties and $1,062 related to a write-off of deferred finance costs
       related to the GECC Facility. The total charge is reflected as an
       extraordinary loss from early extinguishment of debt (net of income taxes
       of $937) of $1,285 in the statement of operations for the year ended
       December 29, 1996.

       The CIT Credit Facility bears interest at various rates based on the
       Company's performance, with a floor of LIBOR plus 1.5% or the Chase
       Manhattan prime lending rate and a ceiling of LIBOR plus 2.5% or the
       Chase Manhattan prime lending rate plus 0.75% and are secured by trade
       accounts receivable, merchandise inventory and general intangible assets
       (including trademarks and tradenames) of the Company. At January 3, 1999,
       loans under the CIT Credit Facility currently bear interest at a rate of
       LIBOR (5.1% at January 3, 1999) plus 1.75% or the Chase Manhattan prime
       lending rate (7.75% at 


                                      F-13
<PAGE>   44
       January 3, 1999) plus 0.0%. A monthly fee of 0.325% per annum is assessed
       on the unused portion of the facility. On January 3, 1999, the Company
       had $20,908 in LIBOR and prime lending rate borrowings and letters of
       credit of $3,773 outstanding. The Company's maximum eligible borrowing
       available under the facility is limited to 70% of the aggregate value of
       eligible inventory during November through February and 65% of the
       aggregate value of eligible inventory during the remaining months of the
       year. Available borrowings over and above actual LIBOR and prime rate
       borrowings and letters of credit outstanding on the CIT Credit Facility
       amounted to $71,074 at January 3, 1999.

       The various debt agreements contain covenants restricting the ability of
       the Company to, among other things, incur additional debt, pay dividends,
       merge or consolidate with or invest in other companies, sell, lease or
       transfer all or substantially all of its properties or assets, or make
       certain payments with respect to its outstanding capital stock, and
       engage in certain transactions with affiliates. In addition, the Company
       must comply with certain financial covenants. The Company was in
       compliance with such covenants at January 3, 1999.


(5)    LEASES

       The Company currently leases certain stores, distribution facilities,
       vehicles and equipment under noncancelable operating leases that expire
       through the year 2019. These leases generally contain renewal options for
       periods ranging from 5 to 15 years and require the Company to pay all
       executory costs such as maintenance and insurance. Certain leases contain
       options to purchase the leased assets.

       Certain leases contain escalation clauses and provide for contingent
       rentals based on percentages of sales. The Company recognizes rental
       expense on a straight-line basis over the terms of the underlying leases,
       without regard to when rentals are paid. The accrual of the current
       noncash portion of this rental expense has been included in depreciation
       and amortization in the accompanying statements of operations and cash
       flows and deferred rent in the accompanying balance sheets.

       Rental expense for operating leases consisted of the following:

<TABLE>
<CAPTION>
                                           YEAR ENDED         YEAR ENDED         YEAR ENDED 
                                          DECEMBER 29,       DECEMBER 28,        JANUARY 3,
                                              1996               1997               1999
                                          ------------       ------------       ------------
<S>                                       <C>                <C>                <C>   
       Cash rental payments               $     23,670             23,119             25,711
       Noncash rentals                             973              1,552                546
       Contingent rentals                        1,038              1,259              1,506
                                          ------------       ------------       ------------
                Rental expense            $     25,681             25,930             27,763
                                          ============       ============       ============
</TABLE>


       Future minimum lease payments (cash rentals) under noncancelable
       operating leases (with initial or remaining lease terms in excess of one
       year) as of January 3, 1999 are:

<TABLE>
<S>                                   <C>
       Year ending:
           1999                       $  26,762
           2000                          26,153
           2001                          24,687
           2002                          23,836
           2003                          23,814
           Thereafter                   141,607
                                      =========
</TABLE>


                                      F-14
<PAGE>   45
(6)    ACCRUED EXPENSES

       Accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                               DECEMBER 28,        JANUARY 3,
                                                   1997               1997
                                               ------------       ------------
<S>                                            <C>                <C>  
       Payroll and related expenses            $      9,851             10,132
       Self-insurance reserves                        3,692              3,439
       Sales tax                                      5,466              5,569
       Other                                         12,419             14,504
                                               ------------       ------------

                                               $     31,428             33,644
                                               ============       ============
</TABLE>

(7)    INCOME TAXES

       Total income tax expense consists of the following:

<TABLE>
<CAPTION>
                                                  DECEMBER 29,        DECEMBER 28,         JANUARY 3,
                                                      1996                1997                1999
                                                  ------------        ------------        ------------
<S>                                               <C>                 <C>                 <C>  
       Income before extraordinary loss           $        970               1,436               4,604
       Extraordinary item                                 (937)             (1,110)                 --
                                                  ------------        ------------        ------------

           Total income tax expense               $         33                 326               4,604
                                                  ============        ============        ============


                                                     CURRENT            DEFERRED              TOTAL
                                                  ------------        ------------        ------------

       1998:
           Federal                                $      3,991                (275)              3,716
           State                                           514                 374                 888
                                                  ------------        ------------        ------------

                                                  $      4,505                  99               4,604
                                                  ============        ============        ============

       1997:
           Federal                                $      5,117              (3,890)              1,227
           State                                           876                (667)                209
                                                  ------------        ------------        ------------

                                                  $      5,993              (4,557)              1,436
                                                  ============        ============        ============

       1996:
           Federal                                $      2,273              (1,445)                828
           State                                           397                (255)                142
                                                  ------------        ------------        ------------

                                                  $      2,670              (1,700)                970
                                                  ============        ============        ============
</TABLE>


                                      F-15
<PAGE>   46
       The provision for income taxes differs from the amounts computed by
       applying the Federal statutory tax rate of 35% to earnings before income
       taxes and extraordinary item, as follows:


<TABLE>
<CAPTION>
                                                                   YEAR ENDED          YEAR ENDED          YEAR ENDED
                                                                  DECEMBER 29,        DECEMBER 28,         JANUARY 3,
                                                                      1996                1997                1999
                                                                  ------------        ------------        ------------
<S>                                                               <C>                 <C>                 <C>  
       Tax expense at statutory rate                              $      1,763               4,865               3,979
       State taxes, net of Federal benefit                                 307                 835                 551
       Increase (decrease) in valuation allowance, net
           of IRS adjustment in 1997                                    (1,215)             (3,937)               (157)
       Other                                                               115                (327)                231
                                                                  ------------        ------------        ------------

                                                                  $        970               1,436               4,604
                                                                  ============        ============        ============
</TABLE>


       Deferred tax assets and liabilities consist of the following tax-effected
temporary differences:

<TABLE>
<CAPTION>
                                                                     DECEMBER 28,        JANUARY 3,
                                                                         1997                1999
                                                                     ------------        ------------
<S>                                                                  <C>                 <C>  
       Deferred assets:
           Self-insurance reserves                                   $      1,515               1,476
           Employee benefits                                                1,376               1,243
           State taxes                                                        190                 180
           Noncash rentals                                                  2,458               2,634
           Amortization of tangible and intangible assets                   1,189                 969
           Other                                                            1,178                 473
                                                                     ------------        ------------

                  Gross deferred tax assets                                 7,906               6,975

           Valuation allowance                                               (157)                 --
                                                                     ------------        ------------

                  Net deferred tax assets                            $      7,749               6,975
                                                                     ------------        ------------

       Deferred liabilities - basis in fixed assets                  $      1,492                 817
                                                                     ------------        ------------

                  Total deferred tax assets                          $      6,257               6,158
                                                                     ============        ============
</TABLE>


       In 1996, 1997 and 1998, the Company reduced the valuation allowance to
       reflect realizability of its deferred tax assets. In doing so, management
       considers whether it is more likely than not that some portion or all of
       the deferred tax assets will be realized. The ultimate realization of
       deferred tax assets is dependent upon the generation of future taxable
       income during the periods in which those temporary differences become
       deductible. Management considers the scheduled reversals of deferred tax
       liabilities, projected future taxable income and tax planning strategies
       in making this assessment. Based upon the level of historical taxable
       income and projections of future taxable income over the periods during
       which the deferred tax assets are deductible, management believes it is
       more likely than not that the Company will realize the benefits of these
       deductible differences. The amount of the deferred tax 


                                      F-16
<PAGE>   47
       asset considered realizable, however, could be reduced in the near term
       if estimates of future taxable income during the carryforward period are
       reduced.


(8)    EMPLOYEE BENEFIT PLANS

       Effective January 4, 1993, the Company established a 401(k) plan to cover
       all eligible employees. All employees' contributions may be supplemented
       by Company contributions. The Company contributed $1,017 for the year
       ended December 29, 1996, $1,269 for the year ended December 28, 1997 and
       $1,411 for the year ended January 3, 1999 in employer matching and profit
       sharing contributions.

       The Company has no other significant postretirement or postemployment
       benefits.

(9)    RELATED PARTY TRANSACTIONS

       Prior to September 1992, the Company was a wholly owned subsidiary of
       Thrifty, which was in turn a wholly owned subsidiary of Pacific
       Enterprises (PE). In December 1996, Thrifty was acquired by Rite Aid
       Corporation.

       As a result of the Company's prior relationship with Thrifty and its
       affiliates, the Company continues to maintain certain relationships with
       Rite Aid and PE. These relationships include continuing indemnification
       obligations of PE to the Company for certain environmental matters;
       agreements between the Company and PE with respect to various tax matters
       and obligations under ERISA, including the allocation of various tax
       obligations relating to the inclusion of the Company and each member of
       the affiliated group of which the Company was a subsidiary in certain
       consolidated and/or unitary tax returns of PE; and subleases described as
       follows.

       The Company leases certain property and equipment from Thrifty, which
       leases this property and equipment from an outside party. Charges related
       to these leases totaled $1,008 for the year ended December 29, 1996,
       totaled $655 for the year ended December 28, 1997, $435 for the year
       ended January 3, 1999.

       During the year ended January 3, 1999, the Company, on behalf of the
       Parent, paid $340, plus expenses (included in other assets), to an
       advisor group of one of its investors. An individual of the investor
       advisor group that is a shareholder of the Parent is a member of the
       Company's Board of Directors. In 1996, the Company paid this advisor
       group an additional $500 for services related to securing of the CIT
       Facility. In 1997, the Company, and the Parent, entered into a new
       Management Services Agreement with a term of seven and one-half years for
       which $333, plus expenses, will be paid annually for financial advisory
       and investment banking services.

       The 1997 Management Equity Plan (the "1997 Plan") provides for the
       granting of incentive stock options or nonqualified options to officers,
       directors and selected key employees of the Company to purchase shares of
       the Parent's common stock. The 1997 Plan is administered by the Board of
       Directors of the Parent and the granting of awards under the Plan is
       discretionary with respect to the individuals to whom and the times at
       which awards are made, the number of options awarded, and the vesting and
       exercise period of such awards. The options granted under the Plan must
       have an exercise price that is no less than 85% of the market value of
       the Parent common stock at the time the stock option is granted. The
       aggregate number of Parent common shares that may be allocated to awards
       under the Plan is 560,000 shares.


                                      F-17
<PAGE>   48
       The Company has elected to follow Accounting Principles Board Opinion No.
       25, Accounting for Stock Issued to Employees (APB 25) and related
       interpretation in accounting for its employee stock options under the
       Plan. No awards have been granted under the Plan as of January 3, 1999.


(10)   CONTINGENCIES

       The Company is involved in various claims and legal actions arising in
       the ordinary course of business. In the opinion of management, the
       ultimate disposition of these matters will not have a material adverse
       effect on the Company's financial position, results of operations or
       liquidity.


(11)   BUSINESS CONCENTRATIONS

       The Company operates specialty sporting goods retail stores located
       principally in the Western states of the United States. The Company is
       subject to regional risks such as the local economies, weather conditions
       and natural disasters and government regulations. If the region were to
       suffer an economic downturn or if other adverse regional events were to
       occur, there could be a significant adverse effect on management's
       estimates and an adverse impact on the Company's performance. The retail
       industry is impacted by the general economy. Changes in the marketplace
       may significantly affect management's estimates and the Company's
       performance.


(12)   SALE LEASEBACK

       On March 5, 1996, the Company entered into a sale and leaseback agreement
       (the transaction) with regard to its warehouse facility located in
       Fontana, California. Prior to this transaction, the Company owned the
       land associated with the facility and leased the buildings and
       improvements. In contemplation of the transaction, the Company purchased
       the building and improvements at a purchase price of $8,910. The
       transaction was then completed with the sale of the land, building and
       improvements at a sale price of $13,900. The gain on the transaction was
       insignificant and will be amortized on a straight-line basis over the
       related lease term. The net cash proceeds after expenses totaled $4,728
       which was used to repay a portion of the GECC Facility.

       Under the leaseback agreement, the Company has committed to lease the
       facility for ten years under a noncancelable operating lease. The future
       minimum lease payments are reflected in the future minimum lease payments
       under noncancelable operating leases.

       On October 31, 1996, the Company entered into a sale and leaseback
       agreement with regard to its store located in Culver City, California.
       The sale amount of the property was $817 resulting in a $214 loss for the
       Company which is included in the statements of operations. The Company
       has committed to lease the property for 15 years under a noncancelable
       operating lease. The future minimum lease payments are reflected in the
       future minimum lease payments under noncancelable leases.


                                      F-18
<PAGE>   49
                                   BIG 5 CORP.
                 Schedule II - Valuation and Qualifying Accounts
                          (Dollar amounts in thousands)


<TABLE>
<CAPTION>
                                                       BALANCE AT       ADDITIONS      DEDUCTIONS         BALANCE
                                                       BEGINNING       CHARGES TO         FROM           AT END OF 
                                                        OF YEAR        OPERATIONS      ALLOWANCE           YEAR
                                                      ------------    ------------    ------------     ------------
<S>                                                   <C>             <C>             <C>              <C>
December 29, 1996

        Allowance for doubtful receivables                     267             601            (404)             464


December 28, 1997

        Allowance for doubtful receivables                     464              61            (407)             118


January 3, 1999

        Allowance for doubtful receivables                     118             120             (37)             201
</TABLE>


                                      II-1