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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002
 
OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934.

For the transition period from __________________ to _________________________
 
Commission File Number: 333-68094

BIG 5 SPORTING GOODS CORPORATION

     Registrant’s Telephone Number, Including Area Code: (310) 536-0611

     Indicate by check mark whether the registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports). Yes [X] No [   ]

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

     There were 21,678,513 shares of common stock with a par value of $0.01 per share outstanding at August 14, 2002.

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BIG 5 SPORTING GOODS CORPORATION
 
INDEX

						Page
PART I - FINANCIAL INFORMATION
Item 1				Condensed Consolidated Financial Statements (unaudited)
				Condensed Consolidated Balance Sheets			3
				Condensed Consolidated Statements of Operations			4
				Condensed Consolidated Statements of Cash Flows			5
				Notes to Condensed Consolidated Financial Statements			6
Item 2				Management’s Discussion and Analysis of Financial Condition and Results of Operations			10
Item 3				Quantitative and Qualitative Disclosures About Market Risk			26
PART II - OTHER INFORMATION
Item 1				Legal Proceedings			27
Item 2				Changes in Securities and Use of Proceeds			27
Item 3				Defaults Upon Senior Securities			29
Item 4				Submission of Matters to a Vote of Security Holders			29
Item 5				Other Information			30
Item 6				Exhibits and Reports on Form 8-K			30
SIGNATURES							31

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BIG 5 SPORTING GOODS CORPORATION
 
Condensed Consolidated Balance Sheets
(dollars in thousands)

See accompanying notes to condensed consolidated financial statements.

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BIG 5 SPORTING GOODS CORPORATION
 
Condensed Consolidated Statements of Operations
(unaudited)
(dollars in thousands, except per share data)

See accompanying notes to condensed consolidated financial statements.

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BIG 5 SPORTING GOODS CORPORATION
 
Consolidated Condensed Statement of Cash Flows
(unaudited)
(dollars in thousands)

See accompanying notes to condensed consolidated financial statements.

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BIG 5 SPORTING GOODS CORPORATION

Notes to Unaudited Condensed Consolidated Financial Statements

(1) Basis of Presentation and Description of Business

     We operate 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 261 stores at June 30, 2002 in California, Washington, Arizona, Oregon, Texas, New Mexico, Nevada, Utah, Idaho and Colorado. We are a holding company that operates our business through Big 5 Corp., our wholly owned subsidiary.

     In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to present fairly and in accordance with generally accepted accounting principles (GAAP) the financial position as of June 30, 2002 and December 30, 2001 and the results of operations and cash flows for the periods ended June 30, 2002 and July 1, 2001. It should be understood that accounting measurements at interim dates inherently involve greater reliance on estimates than those at fiscal year-end. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission; however, we believe that the disclosures are adequate to make the information presented not misleading. These unaudited consolidated condensed financial statements should be read in conjunction with the audited financial statements included in the Registration Statement on Form S-1 (File No. 333-68094) we originally filed with the Securities and Exchange Commission on August 21, 2001.

(2) Reclassifications

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

(3) Initial Public Offering

     In the second quarter of 2002, we completed an initial public offering of 8.1 million shares of common stock, of which 1.6 million shares were sold by selling stockholders. Subsequent to the end of the second quarter 2002, our underwriters exercised their right to purchase an additional 1.2 million shares through their overallotment option, of which 0.5 million shares were sold by selling stockholders. With net proceeds of $76.4 million from the offering and total net proceeds of $84.2 million after exercise of the underwriter’s overallotment option, and together with borrowings under our credit facility, we redeemed all of our outstanding senior discount notes and preferred stock, paid bonuses to executive officers and directors and repurchased 0.5 million shares of our common stock from non-executive employees. All but $4.5 million of the net proceeds from the offering and the net proceeds from the exercise of our underwriters’ overallotment option had been received at June 30, 2002. All uses of proceeds, other than the payment of bonuses and certain initial public offering costs, occurred in the third quarter of fiscal 2002.

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     Our accompanying statements of operations report net income and earnings per diluted share in accordance with GAAP and additionally on a pro forma basis to exclude certain effects of our initial public offering. The pro forma figures assume that the initial public offering took place at the beginning of the periods presented and exclude the effects of certain initial public offering related expenses, the payment of bonuses that were funded through the reduction of the redemption premium that would otherwise have been applicable to the redemption of preferred stock, interest payments on debt redeemed in connection with the initial public offering, dividends payable on preferred stock redeemed in connection with the initial public offering and related income tax effects. We use this pro forma reporting internally to evaluate our operating performance without regard to certain non-recurring financial effects of the initial public offering and believe this presentation will provide investors with additional insight into our operating results. The following table contains a reconciliation of the pro forma adjustments to GAAP:

(in thousands except earnings per share data)

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     Our accompanying balance sheets were prepared in accordance with GAAP and additionally on a pro forma basis to reflect the uses of proceeds in connection with our initial public offering (including the exercise of the underwriters’ overallotment option) as well as additional borrowings under our credit facility. These uses include the redemption of our senior discount notes and preferred stock and the payment of expenses associated with the initial public offering.

(4) Recent Accounting Pronouncements

     On June 29, 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 142, Goodwill and Other Intangible Assets, which addresses financial accounting and reporting for goodwill and other intangible assets and requires that goodwill amortization be discontinued and replaced with periodic tests of impairment. A two-step impairment test is used first to identify potential goodwill impairment and then to measure the amount of goodwill impairment loss, if any.

     SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Impairment losses that arise due to the initial application of this standard are reported as a cumulative effect of a change in accounting principle. The first step of the goodwill impairment test, which must be completed within six months of the effective date of the standard, will identify potential goodwill impairment. The second step of the goodwill impairment test, which must be completed prior to the issuance of a company’s next annual financial statements, will measure the amount of goodwill impairment loss, if any.

     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.

     The following adjusts reported net income and earnings per share to exclude goodwill amortization:

(in thousands except earnings per share data)

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     In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which provides new guidance on the recognition of impairment losses on long-lived assets to be held and used or to be disposed of and also broadens the definition of what constitutes a discontinued operation and how the results of a discontinued operation are to be measured and presented. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. We adopted SFAS No. 144 effective December 31, 2001, and the adoption of this standard did not have an impact on our consolidated financial statements.

(5) Earnings Per Share

     The following table sets forth the computation of basic and diluted net income per share of common stock:

(in thousands except earnings per share data)

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ITEM 2:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 the following critical accounting policies require us to make significant judgments and estimates in the preparation of our unaudited condensed consolidated financial statements.

     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 cost of goods sold for estimated decreases in 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 too high 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 over-valued or that would require an impairment consideration at this time.

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RESULTS OF OPERATIONS

     The results of the interim periods are not necessarily indicative of results for the entire fiscal year.

13 Weeks Ended June 30, 2002 Compared to 13 Weeks Ended July 1, 2001

     The following table sets forth selected items from our operating results as a percentage of our net sales for the periods indicated:

     1. Net Sales. Net sales increased by $11.2 million, or 7.4%, to $162.7 million in the 13 weeks ended June 30, 2002 from $151.5 million in the same period last year. This growth reflected an increase of $6.4 million in same store sales and an increase of $5.4 million in new store sales, which reflected the opening of 14 new stores since April 1, 2001. The remaining variance was attributable to net sales from closed stores. Same store sales increased 4.3% in the 13 weeks ended June 30, 2002 versus the same period last year, representing the twenty-sixth consecutive quarterly increase in same store sales over comparable prior periods. 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 the 13 weeks ended June 30, 2002 was 261 versus 252 at the end of the 13 weeks ended July 1, 2001. We opened one new store in the 13 weeks ended June 30, 2002 and four new stores, one of which was a replacement store, in the 13 weeks ended July 1, 2001. We expect to open approximately 14 new stores during the remaining 26 weeks of fiscal 2002.

     2. Gross Profit. Gross profit increased by $6.0 million, or 11.2%, to $59.6 million in the 13 weeks ended June 30, 2002 from $53.6 million in the same period last year. Gross profit margin was 36.7% in the 13 weeks ended June 30, 2002 compared to 35.4% in the same period last year. We were able to achieve higher gross profit margins primarily due to improved selling margins in the majority of our product categories.

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     3. Selling and Administrative. Selling and administrative expenses increased by $5.3 million, or 13.0%, to $45.8 million in the 13 weeks ended June 30, 2002 from $40.5 million in the same period last year. The increase was primarily due to a $1.8 million increase in store personnel expenses associated with supporting increased sales, new store openings and increased employee health benefit costs. Other factors impacting the increase included higher other store related costs of $0.2 million primarily related to increased expenses due to electric utility rate increases in our California markets and an increase of $0.5 million in advertising costs that resulted primarily from advertising expenditures for the 14 new stores opened after April 1, 2001. The remaining increase in selling and administrative expenses resulted primarily from expenses incurred in connection with our initial public offering of common stock. These expenses include termination costs associated with our management services agreement with Leonard Green & Associates, L.P., an affiliate of Leonard Green & Partners, L.P., which were $0.9 million in the 13 weeks ended June 30, 2002, as well as bonuses paid to our executive officers and directors during the 13 weeks ended June 30, 2002. The bonuses for that period totaled $1.5 million and were funded through a reduction of the redemption price that would otherwise have been applicable to the redemption of our outstanding preferred stock. When measured as a percentage of net sales and adjusting on a pro forma basis to exclude expenses related to our initial public offering of common stock, selling and administrative expenses were 26.6% for the 13 weeks ended June 30, 2002 compared to 26.7% for the same period last year. (See note 3 to the accompanying condensed consolidated financial statements.)

     4. Depreciation and Amortization. Depreciation and amortization expense decreased by $0.1 million, or 4.2%, to $2.5 million in the 13 weeks ended June 30, 2002 from $2.6 million in the same period last year as a result of certain assets having been fully depreciated and 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.

     5. Interest Expense, net. Interest expense, net decreased by $0.7 million, or 12.7%, to $4.3 million in the 13 weeks ended June 30, 2002 from $5.0 million in the same period last year. This decrease reflected lower average daily debt balances and lower average interest rates on our credit facility in the 13 weeks ended June 30, 2002 versus the 13 weeks ended July 1, 2001. In the third quarter of fiscal 2002, we used some of the proceeds from our initial public offering to redeem all of our outstanding senior discount notes for an aggregate redemption price of approximately $27.5 million. Interest expense, net included expense related to those senior discount notes of $1.0 million in each of the 13 weeks ended June 30, 2002 and the 13 weeks ended July 1, 2002.

     6. Income Taxes. Provision for income taxes was $2.9 million for the 13 weeks ended June 30, 2002 and $2.3 million for the 13 weeks ended July 1, 2001. Our effective income tax rate was 41% for both the 13 weeks ended June 30, 2002 and the 13 weeks ended July 1, 2001. Income taxes are based upon the estimated effective tax rate for the entire fiscal year applied to pre-tax income for the year. The effective rate is subject to ongoing evaluation by management.

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26 Weeks Ended June 30, 2002 Compared to 26 Weeks Ended July 1, 2001

     The following table sets forth selected items from our operating results as a percentage of our net sales for the periods indicated: