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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
   FORM 10-K  FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 (Mark One)x
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the fiscal year ended December 28, 2003 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
 For the transition period from to Commission File Number: 333-43129 BIG 5 CORP. 
 Delaware
    
    95-1854273(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)
 2525 East El Segundo BoulevardEl Segundo, California
    
    90245(Address of Principal Executive Offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (310) 536-0611 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 o




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|                                                     |                                                                                               |  |  |  |  |  |  | 
|---------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                              
|                                                     | ITEM 1: BUSINESS                                                                             
|                                                     | ITEM 2: PROPERTIES                                                                           
|                                                     | ITEM 3: LEGAL PROCEEDINGS                                                                    
|                                                     | ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II                                             
|                                                     | ITEM 5: MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                
|                                                     | ITEM 6: SELECTED FINANCIAL AND OTHER DATA                                                    
|                                                     | ITEM 7: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                     | ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|                                                     | ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|                                                     | ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III                                            
|                                                     | ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|                                                     | ITEM 11: EXECUTIVE COMPENSATION                                                              
|                                                     | ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|                                                     | ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|                                                     | ITEM 14: CONTROLS AND PROCEDURES                                                             
|                                                     | ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                    
|SIGNATURES                                          
|MANAGEMENTS RESPONSIBILITY FOR FINANCIAL STATEMENTS
|Independent Auditors Report                        
|Balance Sheets                                      
|Statements of Operations                            
|Statements of Stockholders Equity (Deficit)        
|Statements of Cash Flows                            
|Notes to Financial Statements                       
|Valuation and Qualifying Accounts                   
|EXHIBIT 31.1                                        
|EXHIBIT 31.2                                        
|EXHIBIT 32.1                                        
|EXHIBIT 32.2                                        



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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 on Regulation S-K is not contained herein, and will not be contained, to
the best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or in any
amendment to this Form 10-K. x Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes o No x The registrants voting stock is wholly owned by Big 5 Sporting Goods
Corporation, a Delaware corporation, and is not publicly traded. There were 1,000 shares of common stock with a par value of $0.01 per
share outstanding at March 5, 2004. DOCUMENTS INCORPORATED BY REFERENCE: Part III of thisForm 10-Kincorporates by reference certain information
from the definitive proxy statement of Big 5 Sporting Goods Corporation, the
registrants parent company, for its annual meeting of stockholders to be held
on June 3, 2004. The registrant meets the conditions set forth in General Instruction I
1(a) and (b) of Form 10-K and is therefore filing this form with the reduced
disclosure format. 2




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PART I 
 ITEM 1: BUSINESS General We are the leading sporting goods retailer in the western United States,
operating 293 stores in 10 states under the Big 5 Sporting Goods name at
December 28, 2003. We provide a full-line product offering in a traditional
sporting goods store format that averages approximately 11,000 square feet.
Our product mix includes athletic shoes, apparel and accessories, as well as a
broad selection of outdoor and athletic equipment for team sports, fitness,
camping, hunting, fishing, tennis, golf, snowboarding and in-line skating. We believe that over the past 49 years we have developed a reputation with
the competitive and recreational sporting goods customer as a convenient
neighborhood sporting goods retailer that consistently delivers value on
quality merchandise. Our stores carry a wide range of products at competitive
prices from well-known brand name manufacturers, including Nike, Reebok,
adidas, New Balance, Wilson, Spalding and Columbia. We also offer brand name
merchandise produced exclusively for us, private label merchandise and specials
on quality items we purchased through opportunistic buys of vendor over-stock
and close-out merchandise. We reinforce our value reputation through weekly
print advertising in major and local newspapers and mailers designed to
generate customer traffic, drive net sales and build brand awareness. Robert W. Miller co-founded our company in 1955 with the establishment of
five retail locations in California. We sold World War II surplus items until
1963, when we began focusing exclusively on sporting goods and changed our
trade name to Big 5 Sporting Goods. In 1971, we were acquired by Thrifty
Corporation, which was subsequently purchased by Pacific Enterprises. In 1992,
management bought our company in conjunction with Green Equity Investors, L.P.,
an affiliate of Leonard Green & Partners, L.P. In 1997, Robert W. Miller,
Steven G. Miller and Green Equity Investors, L.P. recapitalized our company so
that the majority of our common stock would be owned by our management and
employees. In June 2002, our parent, Big 5 Sporting Goods Corporation, completed an
initial public offering (IPO) of 8.1 million shares of common stock, of which
1.6 million shares were sold by selling stockholders. In July 2002, the
underwriters exercised their right to purchase an additional 1.2 million shares
through their over-allotment option, of which 0.5 million shares were sold by
selling stockholders. With net proceeds of $76.1 million from the offering and
total net proceeds of $84.0 million after exercise of the underwriters
over-allotment option, and together with distributions from us from borrowings
under our credit facility, our parent redeemed all of its outstanding 13.45%
senior discount notes due 2008 and 13.45% senior exchangeable preferred stock,
paid bonuses to executive officers and directors, which were funded by a
reduction in the redemption price of our parents preferred stock, and
repurchased 0.5 million shares of its common stock from non-executive
employees. Our accumulated management experience and expertise in sporting goods
merchandising, advertising, operations and store development have enabled us to
generate consistent, profitable growth. As of December 28, 2003, we have
realized 32 consecutive quarterly increases in same store sales over comparable
prior periods. All but one of our stores has generated positive store-level
operating profit in each of the past five fiscal years. In fiscal 2003, we
generated net sales of $709.7 million, operating income of $58.7 million and
net income of $26.3 million. For the past four fiscal years, our net sales and
operating income increased at compounded annual growth rates of 8.4% and 16.2%,
respectively. We believe our success can be attributed to one of the most
experienced management teams in the sporting goods industry, a value-based and
execution-driven operating philosophy, a controlled growth strategy and a
proven business model. We were incorporated in Delaware on October 27, 1997 and are a wholly
owned subsidiary of Big 5 Sporting Goods Corporation. As of the beginning of
fiscal 2004, we conduct our gift card operations through Big 5 Services Corp.,
a wholly owned subsidiary incorporated in Virginia on December 19, 2003. 3




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Expansion and Store Development Throughout our operating history, we have sought to expand our business
with the addition of new stores through a disciplined strategy of controlled
growth. Our expansion within and beyond California has been systematic and
designed to capitalize on our name recognition, economical store format and
economies of scale related to distribution and advertising. Over the past five
fiscal years, we have opened 79 stores, an average of 16 new stores annually,
of which 72% were outside of California. The following table illustrates the
results of our expansion program during the periods indicated: Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    Number of StoresYear
    
    California
    
    Markets
    
    Total
    
    Stores Relocated
    
    Stores Closed
    
    at Period End1999
    
    
    3
    
    
    
    12
    
    
    
    15
    
    
    
    (1
    )
    
    
    (1
    )
    
    
    2342000
    
    
    5
    
    
    
    10
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    2492001
    
    
    3
    
    
    
    12
    
    
    
    15
    
    
    
    (4
    )
    
    
    
    
    
    
    2602002
    
    
    6
    
    
    
    9
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    2752003
    
    
    5
    
    
    
    14
    
    
    
    19
    
    
    
    
    
    
    
    (1
    )
    
    
    293
 Our format enables us to have substantial flexibility regarding new store
locations. We have successfully operated stores in major metropolitan areas
and in areas with as few as 60,000 people. Our 11,000 square foot store format
differentiates us from superstores that typically average over 35,000 square
feet, require larger target markets, are more expensive to operate and require
higher net sales per store for profitability. New store openings represent attractive investment opportunities due to
the relatively low investment required and the relatively short time necessary
before our stores become profitable. Our store format requires investments of
approximately $0.4 million in fixtures and equipment and approximately $0.4
million in net working capital with limited pre-opening and real estate
expenses related to leased locations that are built to our specifications. We
seek to maximize new store performance by staffing new store management with
experienced personnel from our existing stores. Based on our operating
experience, a new store typically achieves store-level return on investment of
approximately 40% in its first full fiscal year of operation. Our in-house store development personnel, who have opened an average of 16
stores during each of the past 5 fiscal years, analyze new store locations with
the assistance of real estate firms that specialize in retail properties. We
have identified numerous expansion opportunities to further penetrate our
established markets, develop recently entered markets and expand into new,
contiguous markets with attractive demographic, competitive and economic
profiles. We opened 19 new stores and closed one store in fiscal 2003 and
expect to open 15 to 20 new stores in fiscal 2004. Management Experience We believe the experience, commitment and tenure of our professional staff
drive our superior execution and strong operating performance and give us a
substantial competitive advantage. The table below describes the tenure of our
professional staff in some of our key functional areas as of December 28, 2003: AverageNumber of
    
    Number ofEmployees
    
    Years With UsSenior
Management
    
    
    6
    
    
    
    26Vice
Presidents
    
    
    8
    
    
    
    23Buyers
    
    
    13
    
    
    
    19Store District /
Division
Supervisors
    
    
    32
    
    
    
    19Store
Managers
    
    
    293
    
    
    
    9
 Merchandising We target the competitive and recreational sporting goods customer with a
full-line product offering at a wide variety of price points. We offer a
product mix that includes athletic shoes, apparel and accessories, as well as a
broad selection of outdoor and athletic equipment for team sports, fitness,
camping, hunting, fishing, tennis, golf, 4




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snowboarding and in-line skating. As a key element of our long history of
success, we offer consistent value to consumers by offering a distinctive
merchandise mix that includes a combination of well-known brand name
merchandise, merchandise produced exclusively for us under a manufacturers
brand name, private label merchandise and specials on quality items we
purchased through opportunistic buys of vendor over-stock and close-out
merchandise. We believe we enjoy significant advantages in making opportunistic buys of
vendor over-stock and close-out merchandise because of our strong vendor
relationships and rapid decision-making process. Although vendor over-stock
and close-out merchandise typically represent only approximately 15% of our net
sales, our weekly advertising highlights these items together with merchandise
produced exclusively for us under a manufacturers brand name in order to
reinforce our reputation as a retailer that offers attractive values to our
customers. The following table illustrates our mix of hard goods, which are durable
items such as fishing rods and golf clubs, and soft goods, which are
non-durable items such as shirts and shoes, as a percentage of net sales: Fiscal Year2000
    
    2001
    
    2002
    
    2003Soft GoodsAthletic and sport
apparel
    
    
    16.2
    %
    
    
    16.5
    %
    
    
    15.9
    %
    
    
    16.1
    %Athletic and sport
footwear
    
    
    29.8
    
    
    
    30.3
    
    
    
    30.8
    
    
    
    30.4Total soft
goods
    
    
    46.0
    
    
    
    46.8
    
    
    
    46.7
    
    
    
    46.5Hard
goods
    
    
    54.0
    
    
    
    53.2
    
    
    
    53.3
    
    
    
    53.5Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 We purchase our popular 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 we carry: adidas
Asics
Bausch & Lomb
Browning
Bushnell
Casio
Coleman
Columbia
    
    Crosman
Easton
Everlast
Fila
Footjoy
Franklin
Head
Hillerich & Bradsby
    
    Icon (Proform)
JanSport
K2
Lifetime
Mizuno
New Balance
Nike
Prince
    
    Rawlings
Razor
Reebok
Remington
Rockport
Rollerblade
Russell Athletic
Saucony
    
    Shimano
Spalding
Speedo
Timex
Titleist
Under Armour
Wilson
Zebco
 We also offer a variety of private label merchandise to complement our
branded product offerings. Our private label items include shoes, apparel,
golf equipment, binoculars, camping equipment and fishing supplies. Private
label merchandise is sold under the labels Fives, Court Casuals, Sport
Essentials, Rugged Exposure, Golden Bear, Pacifica, South Bay and Kemper, the
last of which is licensed from a third party. Through our 49 years of experience across different demographic, economic
and competitive markets, we have refined our merchandising strategy to increase
net sales by offering a selection of products that meets customer demands while
effectively managing inventory levels. In terms of category selection, we
believe our merchandise offering compares favorably to our competitors,
including the superstores. Our edited selection of products enables customers
to comparison shop without being overwhelmed by a large number of different
products in any one category. We further tailor our merchandise selection on a
store-by-store basis in order to satisfy each regions specific needs and
seasonal buying habits. Our 13 buyers, who average 19 years of experience with us, work closely
with senior management to determine the product selection, promotion and
pricing of our merchandise mix. Management utilizes an integrated
merchandising, distribution, point-of-sale and financial information system to
continuously refine our merchandise mix, pricing strategy, advertising
effectiveness and inventory levels to best serve the needs of our customers. 5




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Advertising Through years of targeted advertising, we have solidified our reputation
for offering quality products at attractive prices. We have advertised almost
exclusively through weekly print advertisements since 1955. We typically
utilize four-page color advertisements to highlight promotions across our
merchandise categories. We believe our print advertising, which includes the
weekly distribution of over 13 million newspaper inserts or mailers,
consistently reaches more households in our established markets than that of
our full-line sporting goods competitors. The consistency and reach of our
print advertising programs drive sales and create high customer awareness of
the name Big 5 Sporting Goods. We use our professional in-house advertising staff rather than an outside
advertising agency to generate our advertisements, including design, layout,
production and media management. Our in-house advertising department provides
management the flexibility to react quickly to merchandise trends and to
maximize the effectiveness of our weekly inserts and mailers. We are able to
effectively target different population zones for our advertising expenditures.
We place inserts in over 150 newspapers throughout our markets, supplemented
in many areas by mailer distributions to create market saturation. Vendor Relationships We have developed strong vendor relationships over the past 49 years. In
fiscal 2003, no single vendor represented greater than 6.1% of total purchases.
We believe current relationships with our vendors are good. We benefit from
the long-term working relationships that our senior management and our buyers
have carefully nurtured throughout our history. Management Information Systems We have fully integrated management information systems that track, on a
daily basis, individual sales transactions at each store, inventory receiving
and distribution, merchandise movement and financial information. The
management information system also includes a local area network that connects
all corporate users to electronic mail, scheduling and the host system. The
host system and our stores are linked by a network that provides satellite
communications for credit card, in-house tender authorization, and daily
polling of sales and merchandise movement at the store level. Our in-store point-of-sale system tracks all sales by stock keeping unit
and allows management to compare the current performance of each stock keeping
unit against historical performance on a daily basis. The point-of-sale system
uses satellite communications to verify credit cards and checks and to provide
corporate data exchange. We believe our management information systems are
efficiently supporting our current operations and provide a foundation for
future growth. Distribution We maintain a 440,000 square foot leased distribution center in Fontana,
California that services all of our stores. The distribution center is fully
integrated with our management information systems that provide warehousing and
distribution capabilities. The distribution center was constructed in 1990 and
warehouses the majority of the merchandise carried in our stores. We estimate
that 98% of all store merchandise is received from this distribution center.
We distribute merchandise from the distribution center to our stores at least
once a week, Monday through Saturday, using a fleet of 34 leased and two owned
tractors, as well as contract carriers. Our lease for the distribution center
has an initial term that expires in 2006 and includes three additional
five-year renewal options. In August 2002, we leased an additional 136,000
square foot satellite distribution center to handle seasonal merchandise and
returns. Based on our expected net sales and store growth, we plan to replace
our existing distribution center during the next 12 to 24 months at a cost of
approximately $15 million. 6




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Industry and Competition The retail market for sporting goods is highly competitive. In general,
our competitors tend to fall into the following five basic categories: Traditional Sporting Goods Stores.This category consists of traditional
sporting goods chains, including us. 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
Hibbetts and Modells. Mass Merchandisers.This category includes discount retailers such as
Wal-Mart, Target and Kmart and department stores such as JC Penney, Sears and
Kohls. These stores range in size from approximately 50,000 to 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 The Athletes Foot. 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. 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 freestanding locations. These stores
emphasize high volume sales and a large number of stock keeping units.
Examples include Sport Chalet and The Sports Authority, Inc., as well as its
other operating units, Oshmans, Sportmart and Gart Sports Company. Internet Retailers. This category consists of numerous retailers that
sell a broad array of new and used sporting goods products via the internet. We compete successfully with each of the competitors discussed above by
focusing on what we believe are the primary factors of competition in the
sporting goods retail industry. These factors include experienced and
knowledgeable personnel; customer service; 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. Employees We manage our stores through regional, district and store-based personnel.
Our Senior Vice President of Store Operations has general oversight
responsibility for all of our stores. Field supervision is led by five
regional supervisors who report directly to the Vice President of Store
Operations and who oversee 27 district supervisors. The district supervisors
are each responsible for an average of 11 stores. Each of our stores has a
store manager who is responsible for all aspects of store operations and who
reports directly to a district supervisor. In addition, each store has at
least two assistant managers, at least one full-time cashier, at least one
management trainee and a complement of full and part-time associates. As of December 28, 2003, we had approximately 7,123 full and part-time
employees. The Steel, Paper House, Chemical Drivers & Helpers, Local Union
578, affiliated with the International Brotherhood of Teamsters, currently
represents 449 hourly employees in our distribution center and some of our
retail personnel in our stores. In September 2000, we negotiated two contracts
with Local 578 covering these employees. These contracts expire on August 31,
2005. We have not had a strike or work stoppage in the last 23 years. We
believe we provide working conditions and wages that are comparable to those
offered by other retailers in the sporting goods industry and that our employee
relations are good. 7




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Employee Training We have developed a comprehensive training program that is tailored for
each store position. All employees are given an orientation and reference
materials that stress excellence in customer service and selling skills. All
full-time employees, including salespeople, cashiers and management trainees,
receive additional training specific to their job responsibilities. Our tiered
curriculum includes seminars, individual instruction and performance
evaluations to promote consistency in employee development. The manager
trainee schedule provides seminars on operational responsibilities such as
merchandising strategy, loss prevention and inventory control. Ongoing store
management training includes topics such as advanced merchandising, delegation,
personnel management, scheduling, payroll control and loss prevention. We also provide unique opportunities for our employees to gain knowledge
about our products. These opportunities include hands-on training seminars
and a sporting goods product expo. At the sporting goods product expo, our
vendors set up booths where full-time store employees from every store
receive intensive training on the products we carry. We believe this event is
a successful program for both training and motivating our employees. Description of Service Marks and Trademarks We use the Big 5 and Big 5 Sporting Goods names as service marks in
connection with our business operations and have registered these names as
federal service marks. These service marks are due for renewal in 2005 and
2013, respectively. We have also registered Court Casuals, Golden Bear,
Pacifica, Rugged Exposure and South Bay as federal trademarks under which we
sell a variety of merchandise. The renewal dates for these trademark
registrations range from 2004 to 2013. We believe we will be successful in
renewing the trademark registrations scheduled for renewal in 2004. 
 ITEM 2: PROPERTIES Properties We lease all but one of our store sites. Most of our long-term leases
contain fixed-price renewal options and the average lease expiration term from
inception of our existing leases, taking into account renewal options, is
approximately 25 years. Of the total store leases we have, only 15 are due to
expire in the next five years without renewal options. Our Stores Throughout our history, we have focused on operating traditional,
full-line sporting goods stores. Our stores generally range from 8,000 to
15,000 square feet and average approximately 11,000 square feet. Our typical
store is located in either a free-standing street location or a multi-store
shopping center. Our numerous convenient locations and accessible store format
encourage frequent customer visits. In fiscal 2003, we processed approximately
22.8 million sales transactions and our average transaction size was
approximately $31. Our store format has resulted in productivity levels that we believe are
among the highest of any full-line sporting goods retailer, with net sales per
gross square foot of approximately $227 for fiscal 2003. Our high net sales
per square foot combined with our efficient store-level operations and low
store maintenance costs allow us to generate consistently strong store-level
returns. All but one of our stores open at least a year have generated
positive store-level operating profit in each of the past five fiscal years.
In addition, we have never closed a store due to poor performance. The
following table details our store locations as of December 28, 2003: 8




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Year
    
    Number
    
    Percentage of TotalRegions
    
    Entered
    
    of Stores
    
    Number of StoresCalifornia:Southern California
    
    
    1955
    
    
    
    92
    
    
    
    31.4
    %Northern California
    
    
    1972
    
    
    
    77
    
    
    
    26.3Total California
    
    
    
    
    
    
    169
    
    
    
    57.7Washington
    
    
    1984
    
    
    
    35
    
    
    
    11.9Arizona
    
    
    1993
    
    
    
    22
    
    
    
    7.5Oregon
    
    
    1995
    
    
    
    16
    
    
    
    5.5Texas
    
    
    1995
    
    
    
    10
    
    
    
    3.4Nevada
    
    
    1978
    
    
    
    10
    
    
    
    3.4Utah
    
    
    1997
    
    
    
    10
    
    
    
    3.4New Mexico
    
    
    1995
    
    
    
    9
    
    
    
    3.1Idaho
    
    
    1994
    
    
    
    8
    
    
    
    2.7Colorado
    
    
    2001
    
    
    
    4
    
    
    
    1.4Total
    
    
    
    
    
    
    293
    
    
    
    100.0
    %
 
 ITEM 3: LEGAL PROCEEDINGS We are from time to time involved in routine litigation incidental to the
conduct of our business. We regularly review all pending litigation matters in
which we are involved and establish reserves deemed appropriate under generally
accepted accounting principles for such litigation matters. We believe no
litigation currently pending against us will have a material adverse effect on
our business, financial position or results of operations. 
 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The information required by this Item is omitted pursuant to General
Instruction I 1(a) and (b). 9




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PART II 
 ITEM 5: MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. We are a wholly owned subsidiary of Big 5 Sporting Goods Corporation. Our
parents common stock, $0.01 par value per share, has traded on the Nasdaq
National Market under the symbol BGFV since June 25, 2002. The agreement governing our credit facility and the indenture governing
our 10.875% senior notes due 2007 impose restrictions on our ability to declare
or pay dividends on our common stock, other than to enable our parent to pay
operating and overhead expenses and certain other limited types of expenses.
For example, our ability to pay dividends or make other distributions depends
upon, among other things, our level of indebtedness at the time of the proposed
dividend or distribution, whether we are in default under our financing
agreements and the amount of dividends or distributions made in the past. Our
ability to pay dividends or make other distributions also will depend on the
requirements of any future financing agreements to which we may be a party and
other factors considered relevant by our board of directors, including the
General Corporation Law of the State of Delaware, which provides that dividends
are only payable out of surplus or current net profits. We do not have any securities authorized for issuance under equity
compensation plans. 
 ITEM 6: SELECTED FINANCIAL AND OTHER DATA The selected data presented below under the captions Statements of
Operations Data and Balance Sheet Data for, and as of the end of the fiscal
years ended December 31, 2000, December 30, 2001, December 29, 2002 and
December 28, 2003 are derived from our audited financial statements, which
financial statements have been audited by KPMG LLP, independent auditors. The
selected data presented below under the captions Statement of Operations and
Balance Sheet Data for, and as of the end of the fiscal year ended January 2,
2000 have been derived from our financial statements and have been reclassified
to conform with the adoption of Statement of Financial Accounting Standards No.
145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections. The financial statements as of
December 29, 2002 and December 28, 2003 and for each of the years ended
December 30, 2001, December 29, 2002 and December 28, 2003 and the report
thereon are included elsewhere in this report. The information presented below
under the captions Store Data and Other Financial Data is unaudited. You
should read the following tables in conjunction with the financial statements
and accompanying notes and Managements Discussion and Analysis of Financial
Condition and Results of Operations appearing elsewhere in this report. Fiscal Year (1)1999
    
    2000
    
    2001
    
    2002
    
    2003(dollar amounts in thousands)Statement of Operations Data:Net sales
    
    $
    514,324
    
    
    $
    571,476
    
    
    $
    622,481
    
    
    $
    667,469
    
    
    $
    709,740Cost of goods sold, buying and
occupancy
    
    
    341,852
    
    
    
    377,040
    
    
    
    407,679
    
    
    
    429,858
    
    
    
    453,814Gross profit
    
    
    172,472
    
    
    
    194,436
    
    
    
    214,802
    
    
    
    237,611
    
    
    
    255,926Operating expenses:Selling and administrative
    
    
    130,833
    
    
    
    144,323
    
    
    
    159,667
    
    
    
    171,801
    
    
    
    186,801Litigation settlement
    
    
    
    
    
    
    
    
    
    
    2,515
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    9,479
    
    
    
    9,340
    
    
    
    10,031
    
    
    
    9,966
    
    
    
    10,412Total operating expenses
    
    
    140,312
    
    
    
    153,663
    
    
    
    172,213
    
    
    
    181,767
    
    
    
    197,213Operating income
    
    
    32,160
    
    
    
    40,773
    
    
    
    42,589
    
    
    
    55,844
    
    
    
    58,713Premium (discount) and unamortized
financing fees related to redemption of debt
    
    
    621
    
    
    
    (148
    )
    
    
    
    
    
    
    (8
    )
    
    
    3,434Interest expense, net
    
    
    17,461
    
    
    
    17,035
    
    
    
    15,541
    
    
    
    13,720
    
    
    
    11,405Income before income taxes
    
    
    14,078
    
    
    
    23,886
    
    
    
    27,048
    
    
    
    42,132
    
    
    
    43,874Income taxes
    
    
    5,604
    
    
    
    9,499
    
    
    
    10,922
    
    
    
    16,515
    
    
    
    17,586Net income
    
    $
    8,474
    
    
    $
    14,387
    
    
    $
    16,126
    
    
    $
    25,617
    
    
    
    26,288
 10




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##### Table of Contents



Fiscal Year (1)1999
    
    2000
    
    2001
    
    2002
    
    2003(dollar amounts in thousands)Store Data:Same store sales increase (2)
    
    
    2.0
    %
    
    
    6.6
    %
    
    
    4.9
    %
    
    
    4.0
    %
    
    
    2.2
    %Net sales per gross square foot (3)
    
    $
    203
    
    
    $
    217
    
    
    $
    224
    
    
    $
    227
    
    
    $
    227End of period stores
    
    
    234
    
    
    
    249
    
    
    
    260
    
    
    
    275
    
    
    
    293Average net sales per store (4)
    
    $
    2,285
    
    
    $
    2,405
    
    
    $
    2,448
    
    
    $
    2,541
    
    
    $
    2,546Other Financial Data:Gross margin
    
    
    33.5
    %
    
    
    34.0
    %
    
    
    34.5
    %
    
    
    35.6
    %
    
    
    36.1
    %Capital expenditures
    
    $
    13,075
    
    
    $
    11,602
    
    
    $
    10,510
    
    
    $
    10,207
    
    
    $
    10,482Inventory turns (5)
    
    
    2.1x
    
    
    
    2.2x
    
    
    
    2.4x
    
    
    
    2.5x
    
    
    
    2.5xBalance Sheet Data:Cash and cash equivalents
    
    $
    5,091
    
    
    $
    3,753
    
    
    $
    7,865
    
    
    $
    8,560
    
    
    $
    8,980Working capital (6)
    
    $
    72,081
    
    
    $
    70,503
    
    
    $
    67,035
    
    
    $
    62,907
    
    
    $
    74,648Total assets
    
    $
    238,437
    
    
    $
    257,125
    
    
    $
    257,940
    
    
    $
    271,192
    
    
    $
    275,964Total debt
    
    $
    151,309
    
    
    $
    141,089
    
    
    $
    128,806
    
    
    $
    125,131
    
    
    $
    99,686Stockholders equity (deficit)
    
    $
    (19,994
    )
    
    $
    (5,607
    )
    
    $
    3,831
    
    
    $
    7,911
    
    
    $
    34,199
 (Notes to table on previous page and this page)   (1)
    
    Our fiscal year is the 52 or 53-week reporting period ending on the
Sunday closest to the calendar year end. All years presented consisted of
52 weeks.(2)
    
    Same store sales data for a fiscal year presented reflects stores open
throughout that fiscal year and the prior fiscal year.(3)
    
    Net sales per gross square foot is calculated by dividing net sales for
stores open the entire period by the total gross square footage for those
stores.(4)
    
    Average net sales per store is calculated by dividing net sales for
stores open the entire period by total store count for stores open the
entire period.(5)
    
    Inventory turns equal fiscal year cost of goods sold, buying and
occupancy costs divided by fiscal year four-quarter average FIFO (first
in, first out) inventory balances.(6)
    
    Working capital is defined as current assets less current liabilities. 
 ITEM 7: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Throughout this section, our fiscal years ended December 30, 2001,
December 29, 2002 and December 28, 2003 are referred to as fiscal 2001, fiscal
2002 and fiscal 2003, respectively. The following discussion and analysis of
our financial condition and results of operations for fiscal 2001, fiscal 2002
and fiscal 2003 should be read in conjunction with the financial statements and
related notes included elsewhere in this report. Some of the information
contained in this discussion and analysis or set forth elsewhere in this
report, including information with respect to our plans and strategies for our
business, includes forward-looking statements that involve risk and
uncertainties. You should review the Risk Factors set forth elsewhere in
this report for a discussion of important factors that could cause actual
results in future periods to differ materially from the results contemplated by
the forward- looking statements contained herein. Overview We are the leading sporting goods retailer in the western United States,
operating 293 stores in 10 states under the name Big 5 Sporting Goods at
December 28, 2003. We provide a full-line product offering in a 11




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traditional sporting goods store format that averages 11,000 square feet. Our
product mix includes athletic shoes, apparel and accessories, as well as a
broad selection of outdoor and athletic equipment for team sports, fitness,
camping, hunting, fishing, tennis, golf, snowboarding and in-line skating. We
believe over the past 49 years we have developed a reputation with the
competitive and recreational sporting goods customer as a convenient
neighborhood sporting goods retailer that delivers consistent value on quality
merchandise. Throughout our 49-year history, we have emphasized controlled growth. The
following table summarizes our store count for the periods presented: Fiscal Year2001
    
    2002
    
    2003Big 5 Sporting Goods storesBeginning of
period
    
    
    249
    
    
    
    260
    
    
    
    275New stores
(1)
    
    
    15
    
    
    
    15
    
    
    
    19Stores
relocated
    
    
    (4
    )
    
    
    
    
    
    
    Stores
closed
    
    
    
    
    
    
    
    
    
    
    (1
    )End of
period
    
    
    260
    
    
    
    275
    
    
    
    293
   (1)
    
    Stores that are relocated during any period are classified as new stores. Basis of Reporting Net Sales Net sales consist of sales from all stores operated during the period
presented, net of merchandise returns. Same store sales for a period reflect
net sales from stores operated throughout that period as well as the
corresponding prior period. New store sales for a period reflect net sales from
stores opened in that period as well as net sales from stores opened during the
prior fiscal year. Stores that are relocated during any period are treated as
new stores. Gross Profit Gross profit is comprised of net sales less all costs of sales, including
the cost of merchandise, inventory markdowns, inventory shrinkage, inbound
freight, distribution and warehousing, payroll for our buying personnel and
store and corporate office occupancy costs. Store and corporate office
occupancy costs include rent, contingent rents, common area maintenance, real
estate property taxes and property insurance. Selling and Administrative Selling and administrative includes store management and corporate
expenses, including non-buying personnel payroll, employment taxes, employee
benefits, management information systems, advertising, insurance other than
property insurance, legal, store pre-opening expenses and other corporate level
expenses. Store pre-opening expenses include store-level payroll, grand opening
event marketing, travel, supplies and other store opening expenses. Depreciation and Amortization Depreciation and amortization consists primarily of the depreciation of
leasehold improvements, fixtures and equipment owned by us, amortization of
leasehold interest and goodwill (for periods prior to fiscal 2002) and non-cash
rent expense. 12




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Discussion of Critical Accounting Policies In the ordinary course of business, we have made a number of estimates and
assumptions relating to the reporting of results of operations and financial
condition in the preparation of our financial statements in conformity with
accounting principles generally accepted in the United States. Actual results
could differ significantly from those estimates under different assumptions and
conditions. We believe that the following discussion addresses our critical
accounting policies, which are those that are most important to the portrayal
of our financial condition. Valuation of Inventory We value our inventories at the lower of cost or market using the weighted
average cost method that approximates the first-in, first-out (FIFO) method.
Management has evaluated the current level of inventories in comparison to
planned sales volume and other factors and, based on this evaluation, has
recorded adjustments to inventory and cost of goods sold for estimated
decreases in inventory value. These adjustments are estimates, which could vary
significantly, either favorably or unfavorably, from actual results if future
economic conditions, consumer demand and competitive environments differ from
our expectations. We are not aware of any events or changes in demand or price
that would indicate to us that our inventory valuation may be materially
inaccurate at this time. Valuation of Long-Lived Assets Long-lived assets and certain identifiable intangibles are reviewed 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 the
assets to future net cash flows estimated by us to be generated by these
assets. If such assets are considered to be impaired, the impairment to be
recognized is the amount by which the carrying amount of the assets exceeds the
fair value of the assets. We are not aware of any events or changes in
circumstances that would indicate to us that our long-lived assets are impaired
or that would require an impairment consideration at this time. Results of Operations The following table sets forth selected items from our statements of
operations as a percentage of our net sales for the periods indicated: Fiscal Year2001
    
    2002
    
    2003Statement of Operations Data:Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs of sales
    
    
    65.5
    
    
    
    64.4
    
    
    
    63.9Gross profit
    
    
    34.5
    
    
    
    35.6
    
    
    
    36.1Selling and administrative
    
    
    25.7
    
    
    
    25.7
    
    
    
    26.3Litigation settlement
    
    
    0.4
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    1.6
    
    
    
    1.5
    
    
    
    1.5Operating income
    
    
    6.8
    
    
    
    8.4
    
    
    
    8.3Premium (discount) and unamortized financing
fees related to redemption of debt
    
    
    
    
    
    
    
    
    
    
    0.5Interest expense, net
    
    
    2.5
    
    
    
    2.1
    
    
    
    1.6Income before income tax expense
    
    
    4.3
    
    
    
    6.3
    
    
    
    6.2Income tax expense
    
    
    1.7
    
    
    
    2.5
    
    
    
    2.5Net income
    
    
    2.6
    %
    
    
    3.8
    %
    
    
    3.7
    %
 Fiscal 2003 Compared to Fiscal 2002 Net Sales.Net sales increased by $42.3 million, or 6.3%, to $709.7
million in fiscal 2003 from $667.5 million in fiscal 2002. This growth
reflected an increase of $14.3 million in same store sales and an increase of
$28.4 million in new store sales, which resulted from the opening of 19 new
stores during fiscal 2003 and 15 new stores during fiscal 2002. The remaining
variance was attributable to net sales from closed stores. Same store sales 13




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increased 2.2% for fiscal 2003 versus fiscal 2002. The increase in same store
sales was primarily attributable to higher sales in each of our three major product categories of footwear, hard
goods and apparel. Store count at the end of fiscal 2003 was 293 versus 275 at
the end of fiscal 2002 as we opened 19 new stores and closed one store. We
achieved positive same store sales of 3.6% during the fourth quarter of fiscal
2003, representing the thirty-second consecutive quarter of positive quarterly
same store sales results. Gross Profit.Gross profit increased by $18.3 million, or 7.7%, to $255.9
million in fiscal 2003 from $237.6 million in fiscal 2002. Gross profit margin
was 36.1% in fiscal 2003 compared to 35.6% in fiscal 2002. We were able to
achieve higher gross profit margins primarily due to improved selling margins
in each of our three major product categories, partially offset by a 0.3%
increase in occupancy and distribution center costs when measured as a
percentage of sales. Selling and Administrative.Selling and administrative expenses increased
by $15.0 million, or 8.7%, to $186.8 million in fiscal 2003 from $171.8 million
in fiscal 2002. The increase was driven by a $9.2 million increase in
store-related expenses primarily resulting from the need to support our store
growth, increased employee health benefit costs, increased workers
compensation costs and higher credit and debit card fees related to increased
use of credit and debit cards by our customers. Our advertising expenses
increased by $2.9 million due to our store growth and a printing cost credit
recorded in the third quarter of fiscal 2002. When measured as a percentage of
net sales, selling and administrative expenses were 26.3% in fiscal 2003 versus
25.7% in fiscal 2002. Depreciation and Amortization. Depreciation and amortization expense
increased by $0.4 million in fiscal 2003 compared to fiscal 2002 primarily due
to the increase in store count to 293 stores at the end of fiscal 2003 from 275
stores at the end of fiscal 2002. Premium (Discount) and Unamortized Financing Fees Related to Redemption of
Debt. Premium (discount) and unamortized financing fees related to redemption
of debt were $3.4 million in fiscal 2003 versus ($8) thousand in fiscal 2002.
The $3.4 million charge in fiscal 2003 resulted from a $2.4 million premium
related to the redemption of $55.0 million face value of our 10.875% senior
notes and the related carrying value of applicable deferred financing costs and
original issue discount which totaled $1.0 million in fiscal 2003. The ($8)
thousand gain in fiscal 2002 resulted from the repurchase of $1.0 million face
value of our 10.875% senior notes in fiscal 2002. Interest Expense, net.Interest expense, net decreased by $2.3 million, or
16.9%, to $11.4 million in fiscal 2003 from $13.7 million in fiscal 2002. This
decrease reflected lower average daily debt balances and lower average interest
rates on our credit facility in fiscal 2003 versus fiscal 2002, as well as
lower average interest costs associated with using borrowings from our credit
facility to redeem $55.0 million of our 10.875% senior notes in fiscal 2003. Income Taxes.Provision for income taxes was $17.6 million for fiscal 2003
and $16.5 million for fiscal 2002. The Company accrues taxes at the statutory
tax rate, which is reevaluated on an ongoing basis by management. In fiscal
2003 we determined the Companys effective tax rate to be 40.1% up from 39.2%
in fiscal 2002. Fiscal 2002 Compared to Fiscal 2001 Net Sales.Net sales increased by $45.0 million, or 7.2%, to $667.5
million in fiscal 2002 from $622.5 million in fiscal 2001. This growth
reflected an increase of $24.0 million in same store sales and an increase of
$23.8 million in new store sales, which reflected the opening of 15 new stores
during each of fiscal 2002 and fiscal 2001. The remaining variance was
attributable to net sales from relocated stores. Same store sales increased
4.0% for fiscal 2002 versus fiscal 2001. The increase in same store sales was
primarily attributable to higher sales in the majority of our merchandise
categories. Store count at the end of fiscal 2002 was 275 versus 260 at the
end of fiscal 2001 as we opened 15 new stores. We achieved positive same store
sales of 0.4% during the fourth quarter of fiscal 2002. Gross Profit.Gross profit increased by $22.8 million, or 10.6%, to $237.6
million in fiscal 2002 from $214.8 million in fiscal 2001. Gross profit margin
was 35.6% in fiscal 2002 compared to 34.5% in fiscal 2001. We were able to
achieve higher gross profit margins primarily due to improved selling margins
in the majority of our product categories, including favorable comparisons
throughout our footwear and apparel categories. Improved 14




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margins in our skate
category after the sale of excess scooter inventory in fiscal 2001 was the
primary factor resulting in improved margins in our hard goods categories. Selling and Administrative.Selling and administrative expenses increased
by $12.1 million, or 7.6%, to $171.8 million in fiscal 2002 from $159.7 million
in fiscal 2001. The increase was primarily due to a $8.9 million increase in
store-related expenses associated with supporting increased sales, new store
openings and increased employee health benefit costs and increased expenses due
to electric utility rate increases in our California markets. Other factors
impacting the increase included an increase of $1.2 million in advertising
costs that resulted primarily from advertising expenditures for the 15 new
stores opened in 2002 and the 15 new stores opened in 2001. When measured as a
percentage of net sales, selling and administrative expenses were 25.7% for
both fiscal 2002 and fiscal 2001. Depreciation and Amortization. Depreciation and amortization expense
decreased by $0.1 million in fiscal 2002 compared to fiscal 2001 as a result of
the implementation of SFAS No. 142, Goodwill and Other Intangible Assets,
effective December 31, 2001, which reduced amortization expense by $0.1 million
in 2002. Premium (Discount) and Unamortized Financing Fees Related to Redemption of
Debt. Premium (discount) and unamortized financing fees related to redemption
of debt were ($8) thousand in fiscal 2002 versus none in fiscal 2001. The ($8)
thousand gain in fiscal 2002 resulted from the repurchase of $1.0 million face
value of our 10.875% senior notes in fiscal 2002. Interest Expense, net.Interest expense, net decreased by $1.8 million, or
11.7%, to $13.7 million in fiscal 2002 from $15.5 million in fiscal 2001. This
decrease reflected lower average daily debt balances and lower average interest
rates on our credit facility in fiscal 2002 versus fiscal 2001. Our debt
balances consisted of borrowings under our revolving credit facility and our
10.875% senior notes. Income Taxes.Provision for income taxes was $16.5 million for fiscal 2002
and $10.9 million for fiscal 2001. Our effective income tax rate was 39.2% for
fiscal 2002 and 40.4% for fiscal 2001. The effective rate is subject to
ongoing evaluation by management. Liquidity and Capital Resources Our principal liquidity requirements are for working capital and capital
expenditures. We fund our liquidity requirements with cash flow from
operations and borrowings under our credit facility. Net cash provided by operating activities for fiscal 2003, fiscal 2002 and
fiscal 2001 was $32.7 million, $35.6 million and $31.5 million, respectively.
The decrease for fiscal 2003 versus fiscal 2002 primarily reflected increased
net income after adjustments to reconcile net income to net cash provided by
operating activities which was offset by increased working capital requirements
between periods. The increase for fiscal 2002 versus fiscal 2001 primarily
reflected increased net income after adjustments to reconcile net income to net
cash provided by operating activities which was partially offset by increased
working capital requirements between periods. Capital expenditures for fiscal 2003, fiscal 2002 and fiscal 2001 were
$10.5 million, $10.2 million, and $10.5 million, respectively. We expect
capital expenditures for fiscal 2004 to range from $22.0 to $24.0 million. We
expect to spend $12.0 to $13.0 million primarily to fund the opening of
approximately 15 to 20 new stores, store improvements and remodelings,
warehouse and headquarters improvements and computer hardware and software
expenditures. In addition, we anticipate spending approximately $10.0 to $11.0
million of the anticipated $15.0 million of total capital spending requirements
for our planned new distribution center, which is expected to be operational in
12 to 24 months. Net cash used in financing activities in fiscal 2003 was $22.6 million
versus net cash used in financing activities of $18.4 million in fiscal 2002
and $10.2 million in fiscal 2001. As of December 28, 2003, we had borrowings
of $51.7 million and letter of credit commitments of $0.2 million outstanding
under our revolving credit facility and $48.1 million of our 10.875% senior
notes outstanding. These balances compare to borrowings of $22.3 million and
letter of credit commitments of $4.3 million outstanding under our credit
facility and $102.9 million of our 10.875% senior notes outstanding as of
December 29, 2002. As of December 30, 2001, we had borrowings of 15




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$25.0 million
and letter of credit commitments of $3.4 million outstanding under our credit
facility and $103.8 million of our 10.875% senior notes outstanding. We
redeemed $20.0 million face value of our 10.875% senior
notes in the first quarter of fiscal 2003 and $35.0 million face value in
the fourth quarter of fiscal 2003 using borrowings under our revolving credit
facility. We repurchased $0.5 million face value of our 10.875% senior notes
and purchased $2.8 million face value of our parents senior discount notes
using borrowings under our credit facility in the first quarter of 2002. In
the third quarter of 2002, we distributed approximately $19.0 million to our
parent, funded by a draw under our line of credit, which funds were used by our
parent along with net proceeds from our parents initial public offering and
subsequent exercise of the underwriters over-allotment option, to redeem in
full our parents senior discount notes for $27.5 million, redeem in full our
parents preferred stock for $67.9 million, repurchase common stock from our
non-executive employees for $6.9 million and pay special bonuses to our
executive officers and directors of $2.0 million. We repurchased an additional
$0.5 million face value of our 10.875% senior notes during the last quarter of
fiscal 2002. During fiscal 2001, we purchased $12.5 million face value of our
parents senior discount notes using borrowings under
our credit facility. We had cash of $9.0 million, $8.6 million and $7.9
million at December 28, 2003, December 29, 2002, and December 30, 2001,
respectively. We believe we will be able to fund our future cash requirements for
operations from operating cash flows, cash on hand and borrowings under our
credit facility. We believe these sources of funds will be sufficient to
continue our operations and planned capital expenditures and satisfy our
scheduled payments under debt obligations for at least the next twelve months.
However, our ability to satisfy such obligations depends upon our future
performance, which in turn is subject to general economic conditions and
regional risks, and to financial, business and other factors affecting our
operations, including factors beyond our control. See Risk Factors. Our principal future obligations and commitments as of December 28, 2003,
excluding periodic interest payments, include the following: Payments Due by Period2-3
    
    4-5
    
    After 5Total
    
    1 Year
    
    Years
    
    Years
    
    Years(in thousands)Long-term debt
    
    $
    48,030
    
    
    
    
    
    
    
    
    
    
    $
    48,030
    
    
    
    Operating lease commitments
    
    
    270,047
    
    
    
    41,024
    
    
    
    70,748
    
    
    
    58,179
    
    
    
    100,096Revolving credit facility
    
    
    51,656
    
    
    
    
    
    
    
    51,656
    
    
    
    
    
    
    
    Letters of credit
    
    
    152
    
    
    
    152
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    369,885
    
    
    $
    41,176
    
    
    $
    122,404
    
    
    $
    106,209
    
    
    $
    100,096
 Long-term debt consists of our 10.875% senior notes that mature on
November 13, 2007. We expect to repay our 10.875% senior notes by the maturity
date using a combination of drawings under our credit facility, an expansion or
replacement of our credit facility and the issuance of debt or equity
securities. The 10.875% senior notes are general unsecured obligations, which
rank senior in right of payment to all of our existing and future subordinated
indebtedness and pari passuin right of payment with all of our current and
future unsubordinated indebtedness, subject to the security interests that have
been granted in substantially all of our assets in connection with our credit
facility. Operating lease commitments consist principally of leases for our retail
store facilities, distribution center and corporate offices. These leases
frequently include options which permit us to extend the terms beyond the
initial fixed lease term. We intend to renegotiate those leases as they
expire. Payments for these lease commitments are provided for by cash flows
generated from operations. We had a non-amortizing $125.0 million revolving credit facility, which
was amended and restated in the first quarter of fiscal 2003 to a three-year,
non-amortizing $140.0 million revolving credit facility. The credit facility
may be terminated by the lenders by giving at least 90 days prior written
notice before any anniversary date, commencing with its anniversary date on
March 20, 2006. We may terminate the credit facility by giving at least 30 days
prior written notice, provided that if we terminate prior to March 20, 2006, we
must pay an early termination fee. Unless it is terminated, the credit facility
will continue on an annual basis from anniversary date to anniversary date
beginning on March 21, 2006. The facility is secured by a first priority
security interest in substantially all of our assets and is guaranteed by our
parent company. 16




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The credit facility bears interest at various rates based on our
performance, with a floor of LIBOR plus 1.50% or the JP Morgan Chase Bank prime
lending rate and a ceiling of LIBOR plus 2.50% or the JP Morgan Chase
Bank prime lending rate plus 0.75% and is secured by trade accounts
receivable, merchandise inventory and general intangible assets (including
trademarks and trade names). At December 28, 2003, loans under the credit
facility bear interest at a rate of LIBOR (1.15% at December 28, 2003) plus
1.50% or the JP Morgan Chase Bank prime lending rate (4.00% at December 28,
2003). An annual fee of 0.325%, payable monthly, is assessed on the unused
portion of the amended and restated credit facility. On December 28, 2003, we
had $51.7 million in LIBOR and prime lending rate borrowings and letters of
credit of $0.2 million outstanding. Our maximum eligible borrowing available
under the credit 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 borrowing
capacity over and above actual borrowings and letters of credit outstanding on
the credit facility amounted to $72.9 million at December 28, 2003. Our credit facility and the indenture governing our 10.875% senior notes
contain various financial and other covenants, including covenants that require
us to maintain various financial ratios, restrict our ability to incur
indebtedness or to create various liens and restrict the amount of capital
expenditures that we may incur. Our credit facility and the indenture
governing our 10.875% senior notes also restrict our ability to engage in
mergers or acquisitions, sell assets or pay dividends. We are currently in
compliance with all covenants under our credit facility and the indenture
governing our 10.875% senior notes. If we fail to make any required payment under our credit facility or the
indenture governing our 10.875% senior notes or if we otherwise default under
these instruments, our debt may be accelerated under these instruments. This
acceleration could also result in the acceleration of other indebtedness that
we may have outstanding at that time. If we are unable to generate sufficient cash flow from operations to meet
our obligations and commitments, we will be required to refinance or
restructure our indebtedness or raise additional debt or equity capital.
Additionally, we may be required to sell material assets or operations or delay
or forego expansion opportunities. We might not be able to effect these
alternative strategies on satisfactory terms, if at all. Seasonality We experience seasonal fluctuations in our net sales and operating
results. In fiscal 2003, we generated 27.0% of our net sales and 35.2% of our
operating income in the fourth fiscal quarter, which includes the holiday
selling season as well as the peak winter sports selling season. As a result,
we incur significant additional expenses in the fourth fiscal quarter due to
higher purchase volumes and increased staffing. If we miscalculate the demand
for our products generally or for our product mix during the fourth fiscal
quarter, our net sales could decline, resulting in excess inventory, which
could harm our financial performance. Because a substantial portion of our
operating income is derived from our fourth fiscal quarter net sales, a
shortfall in expected fourth fiscal quarter net sales could cause our annual
operating results to suffer significantly. 17




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Impact of Inflation We do not believe that inflation has a material impact on our earnings
from operations. Impact of New Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46 (FIN No. 46), Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51, which addresses consolidation by
business enterprises of variable interest entities (VIEs) either: (1) that do
not have sufficient equity investment at risk to permit the entity to finance
its activities without additional subordinated financial support, or (2) in
which the equity investors lack an essential characteristic of a controlling
financial interest. In December 2003, the FASB completed deliberations of
proposed modifications to FIN No. 46 (Revised Interpretations) resulting in
multiple effective dates based on the nature as well as the creation date of
the VIE. VIEs created after January 31, 2003, but prior to January 1, 2004, may
be accounted for either based on the original interpretation or the Revised
Interpretations. VIEs created after January 1, 2004 must be accounted for
under the Revised Interpretations. Special Purpose Entities (SPEs) created
prior to February 1, 2003 may be accounted for under the original or revised
interpretations provisions. Non-SPEs created prior to February 1, 2003 should
be accounted for under the Revised Interpretations provisions. The Revised
Interpretations are effective for periods after June 15, 2003 for VIEs in which
the Company holds a variable interest it acquired before February 1, 2003. For
entities acquired or created before February 1, 2003, the Revised
Interpretations are effective no later than the end of the first reporting
period that ends after March 15, 2004, except for those VIEs that are
considered to be special-purpose entities, for which the effective date is no
later that the end of the first reporting period that ends after December 31,
2003. The adoption of FIN No. 46 and the Revised Interpretations has not and is
not expected to have an impact on our financial statements. In December 2003, the Securities and Exchange Commission (the SEC)
issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition(SAB No.
104), which codifies, revises and rescinds certain sections of SAB No. 101,
Revenue Recognition, in order to make this interpretive guidance consistent
with current authoritative accounting and auditing guidance and SEC rules and
regulations. The changes noted in SAB No. 104 did not have a material effect on
our results of operations, financial position or cash flows. In May 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS No. 150 establishes
standards for the classification and measurement of certain instruments with
characteristics of both liabilities and equity. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. SFAS No. 150 requires the classification of any financial
instruments with a mandatory redemption feature, an obligation to repurchase
equity shares, or a conditional obligation based on the issuance of a variable
number of its equity shares, as a liability. The adoption of SFAS No. 150 did
not have a material effect on our financial statements. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, effective for contracts entered
into or modified after June 30, 2003. This amendment clarifies when a contract
meets the characteristics of a derivative, clarifies when a derivative contains
a financing component, and amends certain other existing pronouncements. The
adoption of SFAS No. 149 did not have a material effect on our financial
statements. In November 2002, the FASB issued Interpretation No. 45 (FIN No. 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others,which addresses the disclosure
to be made by a guarantor in its interim and annual financial statements about
its obligations under guarantees. The disclosure requirements are effective for
interim and annual financial statements ending after December 15, 2002. The
Company does not have any material guarantees that require disclosure under FIN
No. 45. FIN No. 45 also requires the recognition of a liability by a guarantor at
the inception of certain guarantees. FIN No. 45 requires the guarantor to
recognize a liability for the non-contingent component of a guarantee, which is
the obligation to stand ready to perform in the event that specified triggering
events or conditions occur. The initial measurement of this liability is the
fair value of the guarantee at inception. The recognition of the liability is
required even if it is not probable that payments will be required under the
guarantee or if the guarantee 18




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was issued with a premium payment or as part of a transaction with
multiple elements. The initial recognition and measurement provisions are
effective for all guarantees within the scope of FIN No. 45 issued or modified
after December 28, 2002. As noted above the Company has adopted the disclosure requirements of FIN
No. 45 and will apply the recognition and measurement provisions for all
guarantees entered into or modified after December 31, 2002. For the year ended
December 31, 2003, the Company has not entered into any guarantees within the
scope of FIN No. 45. Forward-Looking Statements This document includes certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements relate to, among other things, our financial
condition, our results of operations, our growth strategy and the business of
our company generally. In some cases, you can identify such statements by
terminology such as may, will, should, expects, plans, anticipates,
believes, intends or other such terminology. These forward-looking
statements involve risks, uncertainties and other factors that may cause our
actual results in future periods to differ materially from forecasted results.
These risks and uncertainties include, without limitation, the risk factors set
forth below and elsewhere in this report and other risks and uncertainties more
fully described in our other filings with the Securities and Exchange
Commission. We caution that the risk factors set forth in this report are not
exclusive. We disclaim any obligation to revise or update any forward-looking
statement that may be made from time to time by us or on our behalf. Risk Factors Set forth below and elsewhere in this report and in other documents we
file with the Securities and Exchange Commission are risks and uncertainties
that could cause actual results to differ materially from the results
contemplated by the forward-looking statements contained in this report. Risks Related to Our Business We are highly leveraged, future cash flows may not be sufficient to meet our
obligations and we might have difficulty obtaining more financing. We have a substantial amount of debt. As of December 28, 2003, the
aggregate principal amount of our outstanding indebtedness was approximately
$99.7 million. Our highly leveraged financial position means:  
    
    a substantial portion of our cash flow from operations will
be required to service our indebtedness;
    
    our ability to obtain financing in the future for working
capital, capital expenditures and general corporate purposes might
be impeded; and
    
    we are more vulnerable to economic downturns and our ability
to withstand competitive pressures is limited. If our business declines, our future cash flow might not be sufficient to
meet our obligations and commitments. If we fail to make any required payment under our credit facility or
indenture, our debt may be accelerated under these instruments. In addition,
in the event of bankruptcy or insolvency or a material breach of any covenant
contained in one of our debt instruments, our debt may be accelerated. This
acceleration could also result in the acceleration of other indebtedness that
we may have outstanding at that time. If we are unable to generate sufficient cash flow from operations to meet
our obligations and commitments, we will be required to refinance or
restructure our indebtedness or raise additional debt or equity capital.
Additionally, we may be required to sell material assets or operations or delay
or forego expansion opportunities. These alternative strategies might not be
effected on satisfactory terms, if at all. 19




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The terms of our debt instruments impose operating and financial restrictions
on us, which may impair our ability to respond to changing business and
economic conditions. The terms of our debt instruments impose operating and financial
restrictions on us, including, among other things, restrictions on our ability
to incur additional indebtedness, create or allow liens, pay dividends, engage
in mergers, acquisitions or reorganizations or make specified capital
expenditures. For example, our ability to engage in the foregoing transactions
will depend upon, among other things, our level of indebtedness at the time of
the proposed transaction and whether we are in default under our financing
agreements. As a result, our ability to respond to changing business and
economic conditions and to secure additional financing, if needed, may be
significantly restricted, and we may be prevented from engaging in transactions
that might further our growth strategy or otherwise benefit us without
obtaining consent from our lenders. In addition, our credit facility is
secured by a first priority security interest in our trade accounts receivable,
merchandise inventories, service marks and trademarks and other general
intangible assets, including trade names. In the event of our insolvency,
liquidation, dissolution or reorganization, the lenders under our debt
instruments would be entitled to payment in full from our assets before
distributions, if any, were made to our stockholders. If we are unable to successfully implement our controlled growth strategy or
manage our growing business, our future operating results could suffer. One of our strategies includes opening profitable stores in new and
existing markets. Our ability to successfully implement our growth strategy
could be negatively affected by any of the following:  
    
    suitable sites may not be available for leasing;
    
    we may not be able to negotiate acceptable lease terms;
    
    we might not be able to hire and retain qualified store personnel; and
    
    we might not have the financial resources necessary to fund our expansion plans. In addition, our expansion in new and existing markets may present
competitive, distribution and merchandising challenges that differ from our
current challenges. These potential new challenges include competition among
our stores, added strain on our distribution center, additional information to
be processed by our management information systems and diversion of management
attention from ongoing operations. We face additional challenges in entering
new markets, including consumers lack of awareness of us, difficulties in
hiring personnel and problems due to our unfamiliarity with local real estate
markets and demographics. New markets may also have different competitive
conditions, consumer tastes and discretionary spending patterns than our
existing markets. To the extent that we are not able to meet these new
challenges, our net sales could decrease and our operating costs could
increase. Because our stores are concentrated in the western United States, we are subject to regional risks. Our stores are located in the western United States. Because of this, we
are subject to regional risks, such as the economy, weather conditions, power
outages, electricity costs and earthquakes and other natural disasters specific
to the states in which we operate. For example, particularly in southern
California where we have a high concentration of stores, seasonal factors such
as unfavorable snow conditions, such as those that occurred in the winter of
2002-2003, inclement weather or other localized conditions such as flooding,
fires (such as the major fires in 2003), earthquakes or electricity blackouts
could harm our operations. State and local regulatory compliance, such as the
recent rise in Californias workers compensation costs, also can impact our
financial results. If the region were to suffer an economic downturn or other
adverse regional event, our net sales and profitability and our ability to
implement our planned expansion program could suffer. Several of our
competitors operate stores across the United States and thus are not as
vulnerable to these regional risks. If we lose key management or are unable to attract and retain the talent
required for our business, our operating results could suffer. Our future success depends to a significant degree on the skills,
experience and efforts of Steven G. Miller, our Chairman, President and Chief
Executive Officer, and other key personnel who are not obligated to stay with
us. The loss of the services of any of these individuals could harm our
business and operations. In addition, as our business grows, we will need to
attract and retain additional qualified personnel in a timely manner and
develop, train and manage an increasing number of management level sales
associates and other employees. Competition for 20




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qualified employees could require us to pay higher wages and benefits to
attract a sufficient number of employees, and increases in the federal minimum
wage or other employee benefits costs could increase our operating expenses.
If we are unable to attract and retain personnel as needed in the future, our
net sales growth and operating results may suffer. Our hardware and software systems are vulnerable to damage that could harm our business. Our success, in particular our ability to successfully manage inventory
levels, largely depends upon the efficient operation of our computer hardware
and software systems. We use management information systems to track inventory
information at the store level, communicate customer information and aggregate
daily sales information. These systems and our operations are vulnerable to
damage or interruption from:  
    
    earthquake, fire, flood and other natural disasters;
    
    power loss, computer systems failures, internet and
telecommunications or data network failure, operator negligence,
improper operation by or supervision of employees, physical and
electronic loss of data or security breaches, misappropriation and
similar events; and
    
    computer viruses. Any failure that causes an interruption in our operations or a decrease in
inventory tracking could result in reduced net sales and profitability. If our suppliers do not provide sufficient quantities of products, our net
sales and profitability could suffer. We purchase merchandise from over 750 vendors. Although we did not rely
on any single vendor for more than 6.1% of our total purchases during the
fiscal year ended December 28, 2003, our dependence on principal suppliers
involves risk. Our 20 largest vendors collectively accounted for 36.2% of our
total purchases during the fiscal year ended December 28, 2003. If there is a
disruption in supply from a principal supplier or distributor, we may be unable
to obtain merchandise that we desire to sell and that consumers desire to
purchase. In addition, a significant portion of the products that we purchase,
including those purchased from domestic suppliers, are manufactured abroad. A
vendor could discontinue selling products to us at any time for reasons that
may or may not be in our control. Our net sales and profitability could
decline if we are unable to promptly replace a vendor who is unwilling or
unable to satisfy our requirements with a vendor providing equally appealing
products. Because all of our stores rely on a single distribution center, any disruption
could reduce our net sales. We currently rely on a single distribution center in Fontana, California.
Any natural disaster or other serious disruption to this distribution center
due to fire, earthquake or any other cause could damage a significant portion
of our inventory and could materially impair both our ability to adequately
stock our stores and our net sales and profitability. If the security measures
used at our distribution center do not prevent inventory theft, our gross
margin may significantly decrease. In August 2002, we entered into a two-year
lease for an additional 136,000 square foot satellite distribution center to
handle seasonal merchandise and returns. We recently extended the lease on the
satellite distribution center until the end of February 2005. In addition,
because of limited capacity at the current distribution center, we will need to
build a replacement distribution center in the next 12 to 24 months. Any
disruption to, or delay in, this process could harm our future operations. Because equity owners of a significant stockholder of one of our competitors
serve on our parents board of directors and the board of directors of such
competitor, there may be conflicts of interest. Green Equity Investors, L.P., an affiliate of Leonard Green & Partners,
L.P., holds approximately 7.8% of the outstanding common stock of The Sports
Authority, Inc., one of our competitors. John G. Danhakl, an equity owner of
Leonard Green & Partners, L.P., currently serves on our parents board of
directors. Jonathan D. Sokoloff, an equity owner of Leonard Green & Partners,
L.P. and a former member of our parents board of directors, currently serves
on The Sports Authority, Inc.s board of directors. Mr. Danhakl may have
conflicts of interest with respect to certain matters affecting us, including
the pursuit of certain business opportunities presented to Leonard Green &
Partners, L.P. All potential conflicts may not be resolved in a manner that is
favorable to us. We believe it is impossible to predict the precise
circumstances under which future potential conflicts may arise and therefore 21




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intend 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. Recently enacted and proposed changes in securities laws and regulations are
likely to increase our costs. The Sarbanes-Oxley Act of 2002 (the Act) that became law in July 2002,
as well as new rules and regulations subsequently implemented by the Securities
and Exchange Commission (the SEC), have required and will require changes in
some of our corporate governance practices. The Act also requires the SEC to
promulgate additional new rules on a variety of subjects. In addition to final
rules and rule proposals already made by the SEC, Nasdaq has proposed revisions
to its requirements for companies that are quoted on The Nasdaq Stock Market,
Inc.s National Market. We expect these new rules and regulations to increase
our legal and financial compliance costs and to make some activities more
difficult, time consuming and/or costly. We also expect these new rules and
regulations to make it more difficult and more expensive for us to obtain
director and officer liability insurance, and we may be required to accept
reduced coverage or incur substantially higher costs to obtain coverage. These
new rules and regulations could also make it more difficult for us to attract
and retain qualified members of our board of directors, particularly to serve
on our audit committee, and qualified executive officers. Risks Related to Our Industry A downturn in the economy may affect consumer purchases of discretionary items,
which could reduce our net sales. In general, our sales represent discretionary spending by our customers.
Discretionary spending is affected by many factors, including, among others,
general business conditions, interest rates, inflation, consumer debt levels,
the availability of consumer credit, taxation, electricity power rates,
unemployment trends and other matters that influence consumer confidence and
spending. Our customers purchases of discretionary items, including our
products, could decline during periods when disposable income is lower or
periods of actual or perceived unfavorable economic conditions. If this
occurs, our net sales and profitability could decline. Seasonal fluctuations in the sales of sporting goods could cause our annual
operating results to suffer significantly. We experience seasonal fluctuations in our net sales and operating
results. In fiscal 2003, we generated 27.0% of our net sales and 35.2% of our
operating income in the fourth fiscal quarter, which includes the holiday
selling season as well as the peak winter sports selling season. As a result,
we incur significant additional expenses in the fourth fiscal quarter due to
higher purchase volumes and increased staffing. If we miscalculate the demand
for our products generally or for our product mix during the fourth fiscal
quarter, our net sales could decline, resulting in excess inventory, which
could harm our financial performance. Because a substantial portion of our
operating income is derived from our fourth fiscal quarter net sales, a
shortfall in expected fourth fiscal quarter net sales could cause our annual
operating results to suffer significantly. Intense competition in the sporting goods industry could limit our growth and
reduce our profitability. The retail market for sporting goods is highly fragmented and intensely
competitive. We compete directly or indirectly with the following categories
of companies:  
    
    other traditional sporting goods stores and chains;
    
    mass merchandisers, discount stores and department stores,
such as Wal-Mart, Kmart, Target, Kohls, JC Penney, and Sears;
    
    specialty sporting goods shops and pro shops, such as The
Athletes Foot and Foot Locker;
    
    sporting goods superstores, such as The Sports Authority,
Inc., and its other operating units, Oshmans, Sportmart and Gart
Sports Company; and 22




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
    
    internet retailers. Some of our competitors have a larger number of stores and greater
financial, distribution, marketing and other resources than we have. Two of
our major competitors, The Sports Authority, Inc. and Gart Sports Company
(including its other operating units, Oshmans and Sportmart), completed a
merger in August 2003 and now operate under the name The Sports Authority, Inc.
In addition, if our competitors reduce their prices, it may be difficult for us
to reach our net sales goals without reducing our prices. As a result of this
competition, we may also need to spend more on advertising and promotion than
we anticipate. If we are unable to compete successfully, our operating results
will suffer. We may incur costs from litigation or increased regulation relating to products
that we sell, particularly firearms. We sell products manufactured by third parties, some of which may be
defective. If any product that we sell were to cause physical injury or injury
to property, the injured party or parties could bring claims against us as the
retailer of the product. Our insurance coverage may not be adequate to cover
every claim that could be asserted against us. If a successful claim were
brought against us in excess of our insurance coverage, it could harm our
business. Even unsuccessful claims could result in the expenditure of funds
and management time and could have a negative impact on our business. In
addition, our products are subject to the Federal Consumer Product Safety Act,
which empowers the Consumer Product Safety Commission to protect consumers from
hazardous sporting goods and other articles. The Consumer Product Safety
Commission has the authority to exclude from the market certain consumer
products that are found to be hazardous. Similar laws exist in some states and
cities in the United States. If we fail to comply with government and industry
safety standards, we may be subject to claims, lawsuits, fines and negative
publicity that could harm our operating results. In addition, we sell firearms and ammunition, products associated with an
increased risk of injury and related lawsuits. Sales of firearms and
ammunition have historically represented less than 5% of our annual net sales.
We may incur losses due to lawsuits relating to our performance of background
checks on firearms purchases as mandated by state and federal law or the
improper use of firearms sold by us, including lawsuits by municipalities or
other organizations attempting to recover costs from firearms manufacturers and
retailers relating to the misuse of firearms. In addition, in the future there
may be increased federal, state or local regulation, including taxation, of the
sale of firearms in both our current markets as well as future markets in which
we may operate. Commencement of these lawsuits against us or the establishment
of new regulations could reduce our net sales and decrease our profitability. If we fail to anticipate changes in consumer preferences, we may experience
lower net sales, higher inventory markdowns and lower margins. Our products must appeal to a broad range of consumers whose preferences
cannot be predicted with certainty. These preferences are also subject to
change. Our success depends upon our ability to anticipate and respond in a
timely manner to trends in sporting goods merchandise and consumers
participation in sports. If we fail to identify and respond to these changes,
our net sales may decline. In addition, because we often make commitments to
purchase products from our vendors up to six months in advance of the proposed
delivery, if we misjudge the market for our merchandise, we may over-stock
unpopular products and be forced to take inventory markdowns that could have a
negative impact on profitability. Terrorism and the uncertainty of war may harm our operating results. Terrorist attacks or acts of war may cause damage or disruption to us and
our employees, facilities, information systems, vendors, and customers, which
could significantly impact our net sales, costs and expenses and financial
condition. The threat of terrorist attacks since September 11, 2001 continues
to create many economic and political uncertainties. The potential for future
terrorist attacks, the national and international responses to terrorist
attacks and other acts of war or hostility may cause greater uncertainty and
cause our business to suffer in ways that we currently cannot predict.
Military action taken by the United States and its allies in Iraq or elsewhere
could have a short or long term negative economic impact upon the financial
markets and our business in general. 23




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ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are subject to risks resulting from interest rate fluctuations since
interest on our borrowings under our revolving credit facility are based on
variable rates. If the LIBOR rate were to increase 1.0% in 2004 as compared to
the rate at December 28, 2003, our interest expense for 2004 would increase
$0.5 million based on the outstanding balance of our revolving credit facility
at December 28, 2003. We do not hold any derivative instruments and do not
engage in hedging activities. 
 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and the supplementary financial information
required by this Item and included in this report are listed in the Index to
Financial Statements beginning on page F-1. 
 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 24




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PART III 
 ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT We have adopted a code of ethics that applies to our directors, executive
officers and employees. A copy of our code of ethics is incorporated by
reference to this report. The remaining information required by this Item has been omitted and will
be incorporated herein by reference, when filed, to our parents proxy
statement, which is expected to be filed not later than 120 days after the end
of its fiscal year ended December 28, 2003. 
 ITEM 11: EXECUTIVE COMPENSATION The information required by this Item has been omitted and will be
incorporated herein by reference, when filed, to our parents proxy statement,
which is expected to be filed not later than 120 days after the end of its
fiscal year ended December 28, 2003. 
 ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT All of our outstanding capital stock is owned by our parent. Our parents
outstanding equity securities consist of common stock. A table reflecting
ownership of our parents common stock can be found in the Annual Report on
Form 10-K filed by our parent for the fiscal year ended December 28, 2003. 
 ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item has been omitted and will be
incorporated herein by reference, when filed, to our parents proxy statement,
which is expected to be filed not later than 120 days after the end of its
fiscal year ended December 28, 2003. 
 ITEM 14: CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure
that (1) information required to be disclosed by us in the reports we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized, and reported within the time periods specified by the Securities
and Exchange Commission and (2) this information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. Disclosure controls and procedures, no matter how well designed and
implemented, can provide only reasonable assurance of achieving an entitys
disclosure objectives. The likelihood of achieving such objectives is affected
by limitations inherent in disclosure controls and procedures. These include
the fact that human judgment in decision-making can be faulty and that
breakdowns in internal control can occur because of human failures such as
simple errors or mistakes or intentional circumvention of the established
process. Under the supervision and review of our Chief Executive Officer and
Chief Financial Officer, we conducted an evaluation of the effectiveness of our
disclosure controls and procedures as of December 28, 2003. Based on that
evaluation, our Chief Executive Officer and our Chief Financial Officer have
concluded that our disclosure controls and procedures are effective in alerting
them in a timely manner to material information regarding us that is required
to be included in our periodic reports. In addition, there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls since December 28, 2003, the date as of
which our disclosure controls and procedures were last evaluated. 25




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PART IV 
 ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K  (A)
    
    Documents filed as part of this report:  (1)
    
    Financial Statements.See Index to Financial Statements on page F-1 hereof.(2)
    
    Financial Statement Schedule.See Index to Financial Statements on page F-1 hereof.(3)
    
    Exhibits and Reports on Form 8-K.  (a)
    
    Exhibits  3.1
    
    Amended and Restated Certificate of
Incorporation of Big 5 Corp. (7)3.2
    
    Amended and Restated Bylaws. (7)4.1
    
    Indenture dated as of November 13,
1997 between Big 5 Corp. and First Trust National
Association, as trustee. (1)4.2
    
    Form of Big 5 Corp. 10.875% Series
B Senior Notes due 2007 (included in Exhibit 4.2). (1)10.1
    
    Management Services Agreement dated
as of November 13, 1997 by and among Big 5 Sporting
Goods Corporation, Big 5 Corp. and Leonard Green &
Associates, L.P. (1)10.2
    
    Form of Amended and Restated
Employment Agreement between Robert W. Miller and Big 5
Sporting Goods Corporation. (4)10.3
    
    Form of Amended and Restated
Employment Agreement between Steven G. Miller and Big 5
Sporting Goods Corporation (4)10.4
    
    Amended and Restated
Indemnification Implementation Agreement between Big 5
Corp. (successor to United Merchandising Corp.) and
Thrifty PayLess Holdings, Inc. dated as of April 20,
1994. (7)10.5
    
    Agreement and Release among
Pacific Enterprises, Thrifty PayLess Holdings, Inc.,
Thrifty PayLess, Inc., Thrifty and Big 5 Corp.
(successor to United Merchandising Corp.) dated as of
March 11, 1994. (7)10.6
    
    Financing Agreement dated March
8, 1996 between The CIT Group/ Business Credit, Inc.
and Big 5 Corp. (7)10.7
    
    Grant of Security Interest in and
Collateral Assignment of Trademarks and Licenses dated
as of March 8, 1996 by Big 5 Corp. in favor of The CIT
Group/ Business Credit, Inc. (7)10.8
    
    Letter agreement from The CIT Group/
Business Credit, Inc. to Big 5 Corp. dated November 13,
1997, amending the Financing Agreement dated March 8,
1996 between Big 5 Corp. (successor to United
Merchandising Corp.) and The CIT Group/ Business Credit,
Inc. (1)10.9
    
    Letter agreement from The CIT
Group/ Business Credit, Inc. to Big 5 Corp. dated
December 16, 1997, amending the Financing Agreement
dated March 8, 1996 between Big 5 Corp. (successor to
United Merchandising Corp.) and The CIT Group/ Business
Credit, Inc. (2)10.10
    
    Fifth Amendment to Financing
Agreement, dated March 21, 2000, by and among Big 5
Corp. and The CIT Group/ Business Credit, Inc.,
amending the Financing Agreement, dated March 8, 1996,
between Big 5 Corp. (successor to United Merchandising
Corp.) and The CIT Group/ Business Credit, Inc. (2)10.11
    
    Sixth Amendment to Financing
Agreement, dated February 27, 2002, by and among Big 5
Corp. and The CIT Group/ Business Credit, Inc.,
amending the 26




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##### Table of Contents



Financing Agreement, dated March 8, 1996, between Big 5
Corp. (successor to United Merchandising Corp.) and The
CIT Group/ Business Credit, Inc. (3)10.12
    
    Seventh Amendment to Financing
Agreement, dated April 30, 2002, by and among Big 5
Corp. and The CIT Group/Business Credit, Inc., amending
the Financing Agreement, dated March 8, 1996, between
Big 5 Corp. (successor to United Merchandising Corp.)
and The CIT Group/Business Credit, Inc. (5)10.13
    
    Form of Indemnification
Agreement. (4)10.14
    
    Form of Termination Agreement by
and among Big 5 Sporting Goods Corporation, Big 5 Corp.
and Leonard Green & Associates, L.P. (4)10.15
    
    Letter agreement from The CIT
Group/Business Credit, Inc. to Big 5 Corp. dated April
17, 1996, amending the Financing Agreement dated March
8, 1996, between Big 5 Corp. (successor to United
Merchandising Corp.) and The CIT Group/Business Credit,
Inc. (4)10.16
    
    Letter agreement from The CIT
Group/Business Credit, Inc. to Big 5 Corp. dated August
11, 1997, amending the Financing Agreement dated March
8, 1996, between Big 5 Corp. (successor to United
Merchandising Corp.) and The CIT Group/Business Credit,
Inc. (4)10.17
    
    Letter agreement from The CIT
Group/Business Credit, Inc. to Big 5 Corp. dated June
13, 2002, under the Financing Agreement dated March 8,
1996, between Big 5 Corp. (successor to United
Merchandising Corp.) and The CIT Group/Business Credit,
Inc. (5)10.18
    
    Amended and Restated Financing
Agreement dated March 20, 2003 between The CIT Group/
Business Credit, Inc., the Lenders and Big 5 Corp. (7)10.19
    
    First Amendment to Financing
Agreement dated October 31, 2003, amending the
Financing Agreement dated March 20, 2003 between The
CIT Group/Business Credit, Inc., the Lenders and Big 5
Corp. (9)10.20
    
    Joinder Agreement, dated as of
January 28, 2004, by and among Big 5 Corp., Big 5
Services Corp., the Lenders (as defined therein) and
The CIT Group/Business Credit, Inc. (9)10.21
    
    Co-Obligor Agreement, dated as of
January 28, 2004, made by Big 5 Corp. and Big 5
Services Corp. in favor of The CIT Group/Business Credit,
Inc. as agent for the Lenders (as defined therein) (9)14.1
    
    Code of Business Conduct and Ethics. (9)31.1
    
    Rule 13-a14(a) Certification of Chief Executive Officer. (10)31.2
    
    Rule 13-a14(a) Certification of Chief Financial Officer. (10)32.1
    
    Section 1350 Certification of Chief Executive Officer. (10)32.2
    
    Section 1350 Certification of Chief Financial Officer. (10)(1)
    
    Incorporated by reference to Big 5
Corp.s Registration Statement on Form S-4 (File No.
333-43129) filed with the Securities and Exchange
Commission on December 23, 1997.(2)
    
    Incorporated by reference to the
Registration Statement on Form S-1 (File No. 333-68094)
filed by Big 5 Sporting Goods Corporation on August 21,
2001.(3)
    
    Incorporated by reference to
Amendment No. 1 to the Registration Statement on Form
S-1 filed by Big 5 Sporting Goods Corporation on March
18, 2002.(4)
    
    Incorporated by reference to
Amendment No. 2 to the Registration Statement on Form
S-1 filed by Big 5 Sporting Goods Corporation on June 5,
2002. 27




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##### Table of Contents



(5)
    
    Incorporated by reference to
Amendment No. 4 to the Registration Statement on Form
S-1 filed by Big 5 Sporting Goods Corporation on June
24, 2002.(6)
    
    Incorporated by reference to
Amendment No. 5 to the Registration Statement on Form
S-1 filed by Big 5 Sporting Goods Corporation on June
25, 2002.(7)
    
    Incorporated by reference to the
Annual Report on Form 10-K (File No. 000-49850) filed by
Big 5 Sporting Goods Corporation on March 31, 2003.(8)
    
    Incorporated by reference to the
Annual Report on Form 10-K (File No. 000-49847) filed by
Big 5 Corp. on March 31, 2003.(9)
    
    Incorporated by reference to the
Annual Report on Form 10-K (File No. 000-49850) filed by
Big 5 Sporting Goods Corporation on March 12, 2004.(10)
    
    Filed herewith. (b) Reports on Form 8-K  None. 28




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SIGNATURES Pursuant to the requirements of Section 13 or 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 CorporationDate: March 29, 2004
    By:
    /S/Steven G. MillerSteven G. MillerChairman of the Board of Directors,
President and Chief Executive Officer 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: Signatures
    
    Title
    
    Date/S/Steven G. Miller

Steven G. Miller
    
    Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
    
    March 29, 2004/S/Charles P. Kirk

Charles P. Kirk
    
    Director, Senior Vice President
and Chief Financial Officer (Principal
Financial and Accounting Officer)
    
    March 29, 2004/S/Gary S. Meade

Gary S. Meade
    
    Director, Senior Vice President,
General Counsel and Secretary
    
    March 29, 2004
 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. We have not provided, and do not intend to provide, any annual report covering
our last fiscal year or any proxy statement, form of proxy or other proxy
soliciting materials to security holders. 29




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BIG 5 CORP. INDEX TO FINANCIAL STATEMENTS Index to Financial Statements
    
    
    F-1Managements Responsibility for Financial Statements
    
    
    F-2Independent Auditors Report
    
    
    F-3Balance Sheets at December 29, 2002 and December 28, 2003
    
    
    F-4Statements of Operations for the fiscal years ended December 30, 2001, December 29, 2002 and December 28,
2003
    
    
    F-5Statements of Stockholders Equity (Deficit) for the fiscal years ended December 30,
2001, December 29, 2002 and December 28, 2003
    
    
    F-6Statements of Cash Flows for the fiscal years ended December
30, 2001, December 29, 2002 and December 28, 2003
    
    
    F-7Notes to Financial Statements
    
    
    F-8
 Financial Statement Schedule:
    
    ScheduleValuation and Qualifying Accounts as of December 30, 2001,
December 29, 2002 and December 28, 2003
    
    II-1
 F-1




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MANAGEMENTS RESPONSIBILITY FOR FINANCIAL STATEMENTS We are responsible for the preparation of our financial statements and
related information appearing in this Annual Report. We believe that the
financial statements fairly reflect the form and substance of transactions and
that the financial statements reasonably present our financial position and
results of operations in conformity with generally accepted accounting
principles. We also have included in our financial statements amounts that are
based on estimates and judgments which we believe are reasonable under the
circumstances. The independent auditors audit our financial statements in accordance with
generally accepted auditing standards and provide an objective, independent
review of the fairness of reported operating results and financial position. /s/ Steven G. Miller
    
    /s/ Charles P. KirkSteven G. Miller
    
    Charles P. KirkChairman of the Board, President
    
    Senior Vice President& Chief Executive Officer
    
    & Chief Financial OfficerEl Segundo, CaliforniaMarch 29, 2004
 F-2




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INDEPENDENT AUDITORS REPORT The Board of Directors and Stockholder
Big 5 Corp.: We have audited the financial statements of Big 5 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 the financial statement
schedule are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 December 29,
2002 and December 28, 2003 and the results of its operations and its cash flows
for each of the fiscal years ended December 30, 2001, December 29, 2002 and
December 28, 2003 in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein. As discussed in note 14 to the financial statements, effective December 31,
2001, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets. KPMG LLP
 Los Angeles, California
February 11, 2004 F-3




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##### Table of Contents



BIG 5 CORP.
Balance Sheets
(dollars in thousands) 
 December 29,
    
    December 28,2002
    
    2003AssetsCurrent assets:Cash
    
    $
    8,560
    
    
    
    8,980Trade and other receivables, net of allowances for doubtful
accounts of $729 and $520, respectively
    
    
    9,057
    
    
    
    11,522Merchandise inventories
    
    
    169,529
    
    
    
    179,555Prepaid expenses
    
    
    2,385
    
    
    
    5,016Total current assets
    
    
    189,531
    
    
    
    205,073Property and equipment:Land
    
    
    186
    
    
    
    186Buildings and improvements
    
    
    36,861
    
    
    
    38,666Furniture and equipment
    
    
    55,930
    
    
    
    64,341Less accumulated depreciation and amortization
    
    
    (47,873
    )
    
    
    (56,241
    )Net property and equipment
    
    
    45,104
    
    
    
    46,952Deferred income taxes, net
    
    
    10,349
    
    
    
    9,628Leasehold interest, net of accumulated amortization of $23,053 and
$28,842, respectively
    
    
    5,811
    
    
    
    4,022Other assets, at cost, less accumulated amortization of $4,974 and
$2,281, respectively
    
    
    2,557
    
    
    
    1,865Due from parent
    
    
    13,408
    
    
    
    3,991Goodwill
    
    
    4,433
    
    
    
    4,433Total assets
    
    $
    271,193
    
    
    
    275,964Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    67,938
    
    
    
    76,005Accrued expenses
    
    
    58,688
    
    
    
    54,420Total current liabilities
    
    
    126,626
    
    
    
    130,425Deferred rent
    
    
    11,525
    
    
    
    11,654Long-term debt
    
    
    125,131
    
    
    
    99,686Total liabilities
    
    
    263,282
    
    
    
    241,765Commitments and contingenciesStockholders equity:Common stock, $.01 par value. Authorized 3,000 shares;
issued and outstanding 1,000 shares at December 29, 2002
and December 28, 2003
    
    
    
    
    
    
    Additional paid-in capital
    
    
    40,639
    
    
    
    40,639Accumulated deficit
    
    
    (32,728
    )
    
    
    (6,440
    )Net stockholders equity
    
    
    7,911
    
    
    
    34,199Total liabilities and stockholders equity
    
    $
    271,193
    
    
    
    275,964
 See accompanying notes to financial statements. F-4




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##### Table of Contents



BIG 5 CORP.
Statements of Operations
(dollars in thousands) 
 Year ended
    
    Year ended
    
    Year endedDecember
    
    December
    
    December30, 2001
    
    29, 2002
    
    28, 2003Net sales
    
    $
    622,481
    
    
    
    667,469
    
    
    
    709,740Cost of goods sold, buying and occupancy,
excluding depreciation and amortization
shown separately below
    
    
    407,679
    
    
    
    429,858
    
    
    
    453,814Gross profit
    
    
    214,802
    
    
    
    237,611
    
    
    
    255,926Operating expenses:Selling and administrative
    
    
    159,667
    
    
    
    171,801
    
    
    
    186,801Litigation settlement (note 11)
    
    
    2,515
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    10,031
    
    
    
    9,966
    
    
    
    10,412Total operating expenses
    
    
    172,213
    
    
    
    181,767
    
    
    
    197,213Operating income
    
    
    42,589
    
    
    
    55,844
    
    
    
    58,713Premium (discount) and unamortized
financing fees related to redemption of
debt
    
    
    
    
    
    
    (8
    )
    
    
    3,434Interest expense, net
    
    
    15,541
    
    
    
    13,720
    
    
    
    11,405Income before income taxes
    
    
    27,048
    
    
    
    42,132
    
    
    
    43,874Income taxes
    
    
    10,922
    
    
    
    16,515
    
    
    
    17,586Net income
    
    $
    16,126
    
    
    
    25,617
    
    
    
    26,288
 See accompanying notes to financial statements. F-5




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##### Table of Contents



BIG 5 CORP.
Statements of Stockholders Equity (Deficit)
Years ended December 30, 2001, December 29, 2002 and December 28, 2003
(dollars in thousands) Additional
    
    
    
    
    
    Netpaid-in
    
    Accumulated
    
    Stockholderscapital
    
    Deficit
    
    Equity (Deficit)Balance at December 31, 2000
    
    $
    40,639
    
    
    
    (46,246
    )
    
    
    (5,607
    )Net income for the year ended December 30, 2001
    
    
    
    
    
    
    16,126
    
    
    
    16,126Dividends
 forgiveness of parent senior
discount notes
    
    
    
    
    
    
    (6,688
    )
    
    
    (6,688
    )Balance at December 30, 2001
    
    $
    40,639
    
    
    
    (36,808
    )
    
    
    3,831Net income for the year ended December 29, 2002
    
    
    
    
    
    
    25,617
    
    
    
    25,617Dividend
    
    
    
    
    
    
    (19,000
    )
    
    
    (19,000
    )Dividends
 forgiveness of parent senior
discount notes
    
    
    
    
    
    
    (2,535
    )
    
    
    (2,535
    )Balance at December 29, 2002
    
    $
    40,639
    
    
    
    (32,728
    )
    
    
    7,911Net income for the year ended December 28, 2003
    
    
    
    
    
    
    26,288
    
    
    
    26,288Balance at December 28, 2003
    
    $
    40,639
    
    
    
    (6,440
    )
    
    
    34,199
 See accompanying notes to financial statements. F-6




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BIG 5 CORP.
Statements of Cash Flows
(dollars in thousands) 
 Year ended
    
    Year ended
    
    Year endedDecember 30,
    
    December 29,
    
    December 28,2001
    
    2002
    
    2003Cash flows from operating activities:Net income
    
    $
    16,126
    
    
    
    25,617
    
    
    
    26,288Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization
    
    
    10,031
    
    
    
    9,966
    
    
    
    10,412Amortization of deferred finance charges and
discounts
    
    
    (157
    )
    
    
    699
    
    
    
    594Deferred tax provision (benefit)
    
    
    1,021
    
    
    
    (1,554
    )
    
    
    721Loss on disposal of equipment and leasehold interest
    
    
    43
    
    
    
    6
    
    
    
    140Premium (discount) and unamortized financing fees
related to redemption of debt
    
    
    
    
    
    
    (8
    )
    
    
    3,434Changes in assets and liabilities:Merchandise inventories
    
    
    5,301
    
    
    
    (5,849
    )
    
    
    (10,026
    )Trade and other accounts receivable, net
    
    
    (800
    )
    
    
    (828
    )
    
    
    (2,465
    )Prepaid expenses and other assets
    
    
    (1,336
    )
    
    
    (566
    )
    
    
    (3,444
    )Accounts payable
    
    
    (4,204
    )
    
    
    1,329
    
    
    
    2,708Accrued expenses
    
    
    5,495
    
    
    
    6,788
    
    
    
    4,361Net cash provided by operating activities
    
    
    31,520
    
    
    
    35,600
    
    
    
    32,723Cash flows from investing activities:Purchases of property and equipment
    
    
    (10,510
    )
    
    
    (10,207
    )
    
    
    (10,482
    )Purchase of parent senior discount notes
    
    
    (6,688
    )
    
    
    (2,535
    )
    
    
    Borrowings from (loan repayments to) parent
    
    
    
    
    
    
    (3,747
    )
    
    
    787Net cash used in investing activities
    
    
    (17,198
    )
    
    
    (16,489
    )
    
    
    (9,695
    )Cash flows from financing activities:Net borrowings (repayments) under revolving credit
facilities, and other
    
    
    (10,210
    )
    
    
    1,579
    
    
    
    34,735Dividend to parent
    
    
    
    
    
    
    (19,000
    )
    
    
    Repurchase of 10.875% senior notes
    
    
    
    
    
    
    (995
    )
    
    
    (57,343
    )Net cash used in financing activities
    
    
    (10,210
    )
    
    
    (18,416
    )
    
    
    (22,608
    )Net increase in cash
    
    
    4,112
    
    
    
    695
    
    
    
    420Cash at beginning of year
    
    
    3,753
    
    
    
    7,865
    
    
    
    8,560Cash at end of year
    
    $
    7,865
    
    
    
    8,560
    
    
    
    8,980Non-cash financing activities:Dividend
 forgiveness of parent senior
discount notes
    
    $
    6,688
    
    
    
    2,535
    
    
    
    Supplemental disclosures of cash flow information:Interest paid
    
    $
    14,690
    
    
    
    13,066
    
    
    
    11,505Income taxes paid
    
    
    13,820
    
    
    
    11,850
    
    
    
    14,908
 See accompanying notes to financial statements. F-7




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##### Table of Contents



BIG 5 CORP.
Notes to Financial Statements
December 29, 2002 and December 28, 2003
(dollars in thousands) 
  (1)
    
    Basis of Presentation and Description of BusinessThe accompanying financial statements as of December 29, 2002 and December
28, 2003 and for the years ended December 30, 2001, December 29, 2002 and
December 28, 2003 represent the financial position and results of
operations of Big 5 Corp. The Company operates in one business segment, as
a sporting goods retailer under the Big 5 Sporting Goods name carrying a
broad range of hardlines, softlines and footwear, operating 293 stores at
December 28, 2003 in California, Washington, Arizona, Oregon, Texas, New
Mexico, Nevada, Utah, Idaho and Colorado.(2)
    
    Initial Public OfferingIn the second quarter of 2002, the Companys parent completed an initial
public offering of 8.1 million shares of common stock, of which 1.6 million
shares were sold by selling stockholders. In the third quarter of 2002,
the parents underwriters exercised their right to purchase an additional
1.2 million shares through their over-allotment option, of which 0.5
million shares were sold by selling stockholders. With net proceeds of
$76.1 million from the offering and total net proceeds of $84.0 million
after exercise of the underwriters over-allotment option, and together
with a distribution from the Company from borrowings under its credit
facility, the parent redeemed all of its outstanding senior discount notes
for $27.5 million and preferred stock for $67.9 million, paid bonuses to
executive officers and directors of $2.0 million which were funded by a
reduction in the redemption price of the parents preferred stock and
repurchased 0.5 million shares of the parents common stock from
non-executive employees for $6.9 million. All uses of proceeds, other than
the payment of a portion of the bonuses related to the initial public
offering and certain initial public offering costs, occurred in the third
quarter of fiscal 2002.(3)
    
    Summary of Significant Accounting PoliciesReporting PeriodThe Company reports on the 52-53 week fiscal year ending on the Sunday
nearest December 31. Information presented for the years ended December
30, 2001, December 29, 2002 and December 28, 2003 represents 52-week fiscal
years.Revenue RecognitionThe 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 estimated returns.Trade and Other ReceivablesTrade accounts receivable consist primarily of third party credit card
receivables. Other receivables consist principally of net amounts due from
vendors for certain co-op advertising. Accounts receivable have not
historically resulted in any material credit losses. An allowance for
doubtful accounts is provided when accounts are determined to be
uncollectible. F-8




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##### Table of Contents



Merchandise InventoriesThe Company values merchandise inventories using the lower of weighted
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 EquipmentProperty 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 InterestUpon acquisition of the Company by management and others in 1992, an asset
was recognized for the net fair value of favorable operating lease
agreements. The leasehold interest asset is being amortized on a
straight-line basis over 13.5 years. The unamortized balance attributable
to leases terminated subsequent to the acquisition has been reflected as a
component of the gain or loss upon disposition of the underlying
properties.GoodwillGoodwill, which represents the excess of purchase price over fair value of
net assets acquired, was historically amortized on a straight-line basis
over periods ranging from 15 to 30 years. In fiscal 2002, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets,which requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually. Upon adoption of SFAS No.
142, the Company was required to evaluate its existing goodwill for
impairment. To accomplish this, the Company was required to identify its
reporting units and determine the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units as of December 31, 2001. The
Company has determined that it has one reporting unit under SFAS No. 142.
The Company was then required to determine the fair value of the reporting
unit and compare it to the carrying amount of the reporting unit within six
months of December 31, 2001 to determine if further impairment analysis was
required. The results of this analysis did not require the Company to
recognize an impairment loss upon adoption or upon the annual impairment
test. Prior to the adoption of SFAS No. 142, the amount of goodwill and
other intangible asset impairment, if any, was measured based upon
projected discounted future operating cash flows using a discount rate
reflecting the Companys average cost of funds. The Company performed its
annual impairment test as of December 28, 2003, and goodwill was not
considered impaired.Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed OfThe 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. F-9




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##### Table of Contents



Other AssetsOther assets consist principally of deferred financing costs and are
amortized straight-line over the terms of the respective debt, which
approximates the effective interest method.Self-Insurance ReservesThe 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. Self-insurance reserves amount to $5.9 million and $6.5
million at December 29, 2002 and December 28, 2003, respectively, and are
included in accrued liabilities.Preopening ExpensesNew store preopening expenses are charged against operations as incurred.Advertising ExpensesThe Company expenses advertising costs the first time the advertising takes
place. Advertising expenses amounted to $36.0 million for the year ended
December 30, 2001, $37.1 million for the year ended December 29, 2002, and
$39.9 million for the year ended December 28, 2003. Advertising expense is
included in selling and administrative expenses in the accompanying
statements of operations. There are no amounts related to advertising
reported as assets in the balance sheets presented. The Company receives
cooperative advertising allowances from manufacturers in order to subsidize
qualifying advertising and similar promotional expenditures made relating
to vendors products. These advertising allowances are recognized as a
reduction to selling and administrative expense when the Company incurs the
advertising eligible for the credit. The Company recognized cooperative
advertising allowances of $5.4 million, $6.0 million, and $6.3 million for
the fiscal years ended December 30, 2001, December 29, 2002 and December
28, 2003, respectively.Rent ExpenseThe Company leases the majority of store locations under operating leases
that provide for annual payments that increase over the life of the leases.
The aggregate of the minimum annual payments are expensed on a
straight-line basis over the term of the related lease. The amount by
which straight-line rent expense exceeds actual lease payment requirements
in the early years of the leases is accrued as deferred rent liability and
reduced in later years when the actual cash payment requirements exceed the
straight-line expense. F-10




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##### Table of Contents



Income TaxesThe 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 recorded if necessary to reduce net deferred tax
assets to an amount whose realization is more likely than not. The Company
files a consolidated tax return with its parent; however, tax expense is
recorded based on the stand alone operations of the Company.Use of EstimatesManagement 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.Repurchase of DebtIn January 2003, the Company adopted the provisions of SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections.SFAS No. 145 provides that the
gain or loss recognized upon early debt extinguishment may no longer be
classified as extraordinary, but rather must be recognized as a component
of net income before extraordinary items, unless the debt extinguishment
meets certain criteria set forth in the APB Opinion No. 30, Reporting the
Results of Operations: Reporting the Effects of Disposal of a Segment of a
Business and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions(APB No. 30). These criteria, which include that the debt
extinguishment be unusual in nature and occur infrequently, are expected to
be satisfied infrequently. SFAS No. 145 requires enterprises to reclassify
prior period items that do not meet the extraordinary item classification
criteria in APB No. 30 upon adoption. Upon adoption of SFAS No. 145, the
Company has retroactively reclassified extraordinary gains and losses
related to the redemption of debt for all prior periods presented.(4)
    
    Long-Term DebtLong-term debt consists of the following: December 29, 2002
    
    December 28, 2003Revolving credit facility
    
    $
    22,280
    
    
    
    51,65610.875% senior notes due 2007,
net of unamortized discount,
$48.1 million face amount at
December 28, 2003
    
    
    102,851
    
    
    
    48,030Total long-term debt
    
    $
    125,131
    
    
    
    99,686
  In 1997, the Company issued $131.0 million face amount, 10.875% senior
notes due 2007, less a discount of $0.6 million based on an imputed
interest rate of 10.95%. The 10.875% senior notes require semiannual
interest payments on each May 15 and November 15, commencing on May 15,
1998. The F-11




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##### Table of Contents



Company has no mandatory payments of principal on the 10.875% senior notes
prior to their maturity in 2007. The 10.875% senior 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. The 10.875% senior notes are unsecured
obligations that rank senior in right of payment to all existing and future
indebtedness that is subordinated to the 10.875% senior notes and rank pari
passuin right of payment with all current and future unsubordinated
indebtedness, subject to restrictions due to the securitization of certain
assets. During the fiscal year ended December 29, 2002, the Company
repurchased $1.0 million face value of 10.875% senior notes for a
repurchase price of $1.0 million. During the fiscal year ended December
28, 2003, the Company repurchased an additional $55.0 million face value
for a repurchase price of $58.0 million.If redeemed during the 12-month period beginning November 15 the redemption
prices of the 10.875% senior notes before accrued and unpaid interest are
as follows: Year
    

Percentage2003
    
    
    103.650
    %2004
    
    
    101.8252005 and thereafter
    
    
    100.000
  The Company had a non-amortizing $125.0 million revolving credit facility,
which was amended and restated to a three-year, non-amortizing $140.0
million revolving credit facility in the first quarter of 2003. The amended
and restated credit facility may be terminated by the lenders by giving at
least 90 days prior written notice before any anniversary date, commencing
with its third anniversary date on March 20, 2006. The Company may
terminate the credit facility by giving at least 30 days prior written
notice, provided that if the Company terminates prior to March 20, 2006, it
must pay an early termination fee. Unless it is terminated, the credit
facility will continue on an annual basis from anniversary date to
anniversary date beginning on March 21, 2006. The credit facility bears
interest at various rates based on the Companys performance, with a floor
of LIBOR plus 1.50% or the JP Morgan Chase Bank prime lending rate and a
ceiling of LIBOR plus 2.50% or the JP Morgan Chase Bank prime lending rate
plus 0.75% and is secured by trade accounts receivable, merchandise
inventory and general intangible assets (including trademarks and trade
names). At December 28, 2003, loans under the credit facility bear interest
at a rate of LIBOR (1.15% at December 28, 2003) plus 1.50% or the JP Morgan
Chase Bank prime lending rate (4.00% at December 28, 2003). An annual fee
of 0.325%, payable monthly, is assessed on the unused portion of the credit
facility. On December 28, 2003, the Company had $51.7 million in LIBOR and
prime lending rate borrowings and letters of credit of $0.2 million
outstanding. The Companys maximum eligible borrowing available under the
credit 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
borrowing capacity over and above actual borrowings and letters of credit
outstanding on the credit facility amounted to $72.9 million at December
28, 2003.The various debt agreements contain covenants restricting the ability of
the Company to, among other things, incur additional debt, create or allow
liens, 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, issue preferred stock and engage in certain
transactions with affiliates. In addition, the Company must comply with
certain financial covenants. The Company was in compliance with all such
covenants at December 28, 2003. F-12




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##### Table of Contents



(5)
    
    Fair Values of Financial InstrumentsThe fair value of cash, trade and other receivables, trade accounts payable
and accrued expenses approximate the fair values of these instruments due
to their short-term nature. The fair value of the 10.875% senior notes at
December 28, 2003 approximated $50.5 million based upon recent market
prices. The carrying amount of the credit facility reflects the fair value
based on current rates available to the Company for debt with the same
remaining maturities.(6)
    
    LeasesThe 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 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
non-cash 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: Year ended
    
    Year ended
    
    Year endedDecember 30,
    
    December 29,
    
    December 28,2001
    
    2002
    
    2003Cash rental payments
    
    $
    31,602
    
    
    
    33,693
    
    
    
    36,768Noncash rentals
    
    
    258
    
    
    
    195
    
    
    
    129Contingent rentals
    
    
    1,710
    
    
    
    1,730
    
    
    
    1,730Rental expense
    
    $
    33,570
    
    
    
    35,618
    
    
    
    38,627
  Future minimum lease payments (cash rentals) under noncancelable operating
leases (with initial or remaining lease terms in excess of one year) as of
December 28, 2003 are: Year ending:2004
    
    $
    41,0242005
    
    
    37,7022006
    
    
    33,0462007
    
    
    30,2962008
    
    
    27,883Thereafter
    
    
    100,096
  (7)
    
    Accrued ExpensesAccrued expenses consist of the following: December
    
    December29, 2002
    
    28, 2003Payroll and related expenses
    
    $
    13,757
    
    
    
    20,793Advertising
    
    
    5,047
    
    
    
    4,815Sales tax
    
    
    7,810
    
    
    
    8,831
 F-13




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##### Table of Contents



December
    
    December29, 2002
    
    28, 2003Income tax
    
    
    10,407
    
    
    
    3,834Other
    
    
    21,667
    
    
    
    16,147$
    58,688
    
    
    
    54,420
  (8)
    
    Income TaxesTotal income tax expense (benefit) consists of the following: Current
    
    Deferred
    
    Total2003:Federal
    
    $
    13,723
    
    
    
    574
    
    
    
    14,296State
    
    
    3,142
    
    
    
    147
    
    
    
    3,290$
    16,865
    
    
    
    721
    
    
    
    17,5862002:Federal
    
    $
    14,745
    
    
    
    (798
    )
    
    
    13,947State
    
    
    3,323
    
    
    
    (755
    )
    
    
    2,568$
    18,068
    
    
    
    (1,553
    )
    
    
    16,5152001:Federal
    
    $
    8,049
    
    
    
    897
    
    
    
    8,946State
    
    
    1,852
    
    
    
    124
    
    
    
    1,976$
    9,901
    
    
    
    1,021
    
    
    
    10,922
  The provision for income taxes differs from the amounts computed by
applying the federal statutory tax rate of 35% to earnings before income
taxes, as follows: Year ended
    
    Year ended
    
    Year endedDecember
    
    December
    
    December30, 2001
    
    29, 2002
    
    28, 2003Tax expense at statutory rate
    
    $
    9,467
    
    
    
    14,750
    
    
    
    15,357State taxes, net of federal benefit
    
    
    1,310
    
    
    
    2,077
    
    
    
    2,131Other
    
    
    145
    
    
    
    (312
    )
    
    
    98$
    10,922
    
    
    
    16,515
    
    
    
    17,586
  Deferred tax assets and liabilities consist of the following tax-effected
temporary differences: December 29,
    
    December2002
    
    28, 2003Deferred assets:Self-insurance reserves
    
    $
    2,341
    
    
    
    2,593Employee benefits
    
    
    2,193
    
    
    
    2,819State taxes
    
    
    1,161
    
    
    
    1,087Accrued expenses
    
    
    4,829
    
    
    
    4,556Tax Credits
    
    
    791
    
    
    
    680
 F-14




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##### Table of Contents



December 29,
    
    December2002
    
    28, 2003Other
    
    
    551
    
    
    
    291Deferred tax assets
    
    $
    11,866
    
    
    
    12,026Deferred
liabilities  basis difference in fixed assets
    
    $
    1,517
    
    
    
    2,398Net deferred tax assets
    
    $
    10,349
    
    
    
    9,628
  In assessing the realizability of deferred tax assets, 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 asset considered realizable,
however, could be reduced in the near term if estimates of future taxable
income during the carry-forward period are reduced.(9)
    
    Employee Benefit PlansThe Company has a 401(k) plan covering eligible employees. Employee
contributions may be supplemented by Company contributions. The Company
contributed $1.8 million for the fiscal year ended December 30, 2001, $2.0
million for the fiscal year ended December 29, 2002 and $2.0 million for
the fiscal year ended December 28, 2003 in employer matching and profit
sharing contributions.The Company and its parent have an employment agreement with Robert W.
Miller, Chairman Emeritus of the Board of the Companys parent, that
stipulates upon his retirement he will receive $350,000 per year for the
remainder of his life. Upon his death, his spouse will continue to receive
this benefit for the remainder of her life. The Company has recorded a
liability of $0.6 million and $1.2 million as of December 29, 2002 and
December 28, 2003, respectively, based on actuarial valuation estimates
related to the employment agreement with the executive. The actuarial
assumptions used included a discount rate of 6.50% as well as the use of a
mortality table as of December 28, 2003.(10)
    
    Related Party TransactionsPrior to September 1992, the Company was a wholly owned subsidiary of
Thrifty Corporation (Thrifty), which was in turn a wholly owned
subsidiary of Pacific Enterprises (PE). In December 1996, Thrifty was
acquired by Rite Aid Corp. (Rite Aid).As a result of the Companys prior relationship with Thrifty and its
affiliates, the Company continues to maintain certain relationships with
Rite Aid, PE and PEs successor company, Sempra Energy. 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. Green Equity Investors III, L.P., an
affiliate of Leonard Green & Partners, L.P., holds convertible preferred
stock in Rite Aid, which, if converted, would represent approximately 12.2%
of Rite Aids outstanding stock.The Company leases certain property and equipment from Rite Aid, which
leases this property and equipment from an outside party. Charges related
to these leases totaled $0.2 million for the fiscal years ended December
30, 2001, December 29, 2002 and December 28, 2003. F-15




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##### Table of Contents



The Company had a Management Services Agreement with Leonard Green &
Associates, L.P., an affiliate of Leonard Green & Partners, L.P., which
was due to expire in May 2005, under which $0.3 million, plus expenses, was
paid annually for financial advisory and investment banking services. The
agreement was terminated in conjunction with the initial public offering in
fiscal 2002 for a fee of $0.9 million. During each of the fiscal years
ended December 30, 2001 and December 29, 2002 the Company paid $0.3 million
and $1.0 million to this advisor group, respectively.The Company and its parent have an employment agreement with Robert W.
Miller which provides that he will serve as Chairman Emeritus of the Board
of Directors of the Companys parent for a term of three years from any
given date, such that there will always be a minimum of at least three
years remaining under his employment agreement. The employment agreement
provides for Robert W. Miller to receive an annual base salary of $350,000,
as well as specified perquisites. If Robert W. Millers employment is
terminated by either Robert W. Miller or the Companys parent for any reason, the
employment agreement provides that the Company and its parent will pay Robert W. Miller
his annual base salary and provide specified benefits for the remainder of
his life. The employment agreement also provides that in the event Robert
W. Miller is survived by his wife, the Company and its parent will pay his wife his annual
base salary and provide her specified benefits for the remainder of her
life. The Company and its parent are jointly and severally obligated
under the employment agreement with Robert W. Miller. Robert W. Miller is the co-founder of the Company and the father of
Steven G. Miller, Chairman of the Board, Chief Executive Officer and a
director of the Company, and Michael D. Miller, a director of the Companys
parent.During the fiscal years ended
December 29, 2002 and December 30, 2001 the Company purchased and forgave
$2.8 million and $12.5 million face value of its
parents senior discount notes for
$2.5 million and $6.7 million, respectively.(11)
    
    ContingenciesOn August 9, 2001, the Company received a copy of a complaint filed in the
California Superior Court in Los Angeles alleging violations of the
California Labor Code and the Business and Professions Code. This
complaint was brought as a purported class action with two subclasses
comprised of our California store managers and our California first
assistant store managers. The plaintiffs alleged that the Company
improperly classified its store managers and first assistant store managers
as exempt employees not entitled to overtime pay for work in excess of
forty hours per week. On February 8, 2002 the Company filed a joint
settlement which was approved by the court on August 1, 2002. The
settlement constitutes a full and complete settlement and release of all
claims related to the lawsuit. Under the terms of the settlement, the
Company agreed to pay $32.46 per week of active employment as store manager
from August 8, 1997 through December 31, 2001, the covered period, and
$25.50 per week of active employment as first assistant store manager
during the covered period to each class member who submits a valid and
timely claim form. The Company also agreed to pay attorneys fees, plus
costs and expenses, in the amount of $0.7 million, as well as up to $0.04
million for the cost of the settlement administrator. In addition, the
Company agreed to pay the class representatives an additional aggregate
amount of $0.03 million for their service as named plaintiffs. The Company
recorded a charge of approximately $2.5 million in the fourth quarter of
fiscal 2001 to provide for expected payments to the class members as well
as legal and other fees associated with the settlement. All payments under
the settlement agreement were made as of December 29, 2002.The Company is also 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.(12)
    
    Business ConcentrationsThe Company operates traditional 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 that affect the retail industry, there could be a significant adverse
effect on managements estimates and an adverse impact on the Companys
performance. F-16




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##### Table of Contents



(13)
    
    Quarterly Financial Data (unaudited) Year Ended December 29, 2002First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    TotalNet sales
    
    $
    157,133
    
    
    
    162,703
    
    
    
    170,913
    
    
    
    176,720
    
    
    
    667,469Gross profit
    
    $
    55,007
    
    
    
    59,633
    
    
    
    59,107
    
    
    
    63,864
    
    
    
    237,611Net income
    
    $
    4,277
    
    
    
    6,238
    
    
    
    5,474
    
    
    
    9,628
    
    
    
    25,617
 Year Ended December 28, 2003First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    TotalNet sales
    
    $
    164,517
    
    
    
    170,125
    
    
    
    183,275
    
    
    
    191,823
    
    
    
    709,740Gross profit
    
    $
    57,852
    
    
    
    62,595
    
    
    
    65,210
    
    
    
    70,269
    
    
    
    255,926Net income
    
    $
    3,395
    
    
    
    6,269
    
    
    
    6,743
    
    
    
    9,881
    
    
    
    26,288
  (14)
    
    Goodwill
In accordance with SFAS No. 142, goodwill amortization was discontinued as
of December 31, 2001. There was no cumulative effect of a change in
accounting principle upon adoption, as there was deemed to be no impairment
in the carrying value of goodwill or other identifiable intangibles. The
following adjusts reported net income and earnings per share to exclude
goodwill amortization: Year EndedDecember 30,
    
    December 29,
    
    December 28,2001
    
    2002
    
    2003(in thousands)Reported net income
    
    $
    16,126
    
    
    $
    25,617
    
    
    $
    26,288Goodwill amortization, net of tax
    
    
    146
    
    
    
    
    
    
    
    Adjusted net income
    
    $
    16,272
    
    
    $
    25,617
    
    
    $
    26,288
 F-17




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##### Table of Contents



BIG 5 CORP.
Schedule II - Valuation and Qualifying Accounts
(dollars in thousands) 
 DEDUCTIONS:BALANCE AT
    
    ADDITIONS:
    
    ACCOUNTS
    
    BALANCEBEGINNING
    
    CHARGES TO
    
    RECEIVABLE
    
    AT END OFOF YEAR
    
    OPERATIONS
    
    WRITE OFFS
    
    YEARDecember 30, 2001Allowance for doubtful receivables
    
    
    607
    
    
    
    129
    
    
    
    (65
    )
    
    
    671December 29, 2002Allowance for doubtful receivables
    
    
    671
    
    
    
    120
    
    
    
    (62
    )
    
    
    729December 28, 2003Allowance for doubtful receivables
    
    
    729
    
    
    
    170
    
    
    
    (380
    )
    
    
    520
 II-1