|SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q/A(Amendment No. 1)
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2004
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission File Number: 0-20736
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                         
|Sport Chalet, Inc.
    (Exact name of registrant as specified in its charter)                                                                                                                                                                                                                                                                                                                                            

|                                                                   |                                     
|------------------------------------------------------------------ | ------------------------------------
|Delaware                                                           | 95-4390071                          
|(State or other jurisdiction of
    incorporation or organization) | (I.R.S. Employer Identification No.)
|                                                                   |                                     

|One Sport Chalet Drive, La Canada, CA  91011
    (Address of principal executive offices)
|-----------------------------------------------------------------------------------------
|                                                                                         
|(818) 949-5300
    (Registrants telephone number, including area code)                  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
Act). Yes o No x
Number of shares outstanding of the registrants Common Stock, $0.01 par value, as of February
8, 2005: 6,685,701

|1
|-



|EXPLANATORY NOTE
This
Amendment No. 1 to this Quarterly Report on Form 10-Q/A (Form 10-Q/A) for the quarterly
period ended December 31, 2004 is being filed in order to correct an error in the previously issued
condensed consolidated financial statements of Sport Chalet, Inc. (the Company) initially
filed with the Securities and Exchange Commission (the SEC) on February 9, 2005 (the
Original Filing). The corrections are to properly account for landlord construction allowances
in accordance with Statement of Financial Accounting Standards No.13, Accounting for Leases
and Financial Accounting Standards Board Technical Bulletin No. 88-1, Issues Relating to Accounting
for Leases; rent expense in accordance with Financial Accounting Standards Board Technical
Bulletin No. 85-3, Accounting for Operating Leases with Scheduled Rent Increases and
amortization of leasehold improvements in accordance with paragraph 5(f) of Statement of Financial
Accounting Standards No.13 Accounting for Leases. See Note 2: Restatement and Reclassification
of Financial Statements under Notes to Condensed Consolidated Financial Statements included
in Item 1, Financial Statements of this Form 10-Q/A for additional discussion and a summary
of the effect of these changes on the Companys condensed consolidated financial statements
as of December 31, 2004 and March 31, 2004 and for the interim periods ended December 31, 2004 and December 31, 2003.
This
Form 10-Q/A amends and restates only Items 1, 2 and 4 of Part I and Item 6 of Part II of the Original
Filing to reflect the effects of this restatement of the financial statements for the period presented.
The remaining items contained within this Amendment No. 1 on Form 10-Q/A consist of all other Items
originally contained on Form 10-Q for the fiscal quarter ended December 31, 2004. These remaining
Items are not amended hereby, but are included for the convenience of the reader. Except for the
forgoing amended information, this Form 10-Q/A continues to describe conditions as of the date of
the Original Filing, and the disclosures contained herein have not been updated to reflect events
that occurred at a later date.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2
|-



|SPORT CHALET, INC.              
|--------------------------------
|                                
|Table of Contents to Form 10-Q/A
|                                
|PART I  FINANCIAL INFORMATION  
|
|                                
|Item 1.                         
|                                
|Item 2.                         
|                                
|Item 3.                         
|                                
|Item 4.                         
|                                
|PART II  OTHER INFORMATION     
|                                
|Item 1.                         
|                                
|Item 2.                         
|                                
|Item 3.                         
|                                
|Item 4.                         
|                                
|Item 5.                         
|                                
|Item 6.                         

|3
|-



|PART I  FINANCIAL INFORMATION
Item 1.
Financial Statements.
SPORT CHALET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME(UNAUDITED)
|--------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                      

|Three months ended
December 31,                                  |   | Nine months ended
December 31, | 
|---------------------------------------------------------------- | - | ------------------------------ | 
|
|
|
|                                                                 |   |                               
|                                                                 |   |                               
|Net sales                                                        | $ | 95,913,947                     | 
|Cost of goods sold, buying and occupancy                         |   | 64,667,651                     | 
|                                                                 |   |                               
|Gross profit                                                     |   | 31,246,296                     | 
|Selling, general and administrative expenses                     |   | 24,905,999                     | 
|                                                                 |   |                               
|                                                                 |   |                                | 
|Income from operations                                           |   | 6,340,297                      | 
|Interest expense                                                 |   | 145,842                        | 
|                                                                 |   |                               
|Income before taxes                                              |   | 6,194,455                      | 
|Income tax provision                                             |   | 2,475,795                      | 
|                                                                 |   |                               
|                                                                 |   |                                | 
|Net income                                                       | $ | 3,718,660                      | 
|                                                                 |   |                               
|                                                                
|Earnings per share:                                             
|Basic                                                            | $ | 0.56                           | 
|                                                                 |   |                                | 
|                                                                 |   |                               
|Diluted                                                          | $ | 0.51                           | 
|                                                                 |   |                               
|                                                                 |   |                                | 
|                                                                
|Weighted average number of
           common shares outstanding: |   |                                | 
|                                                                 |   |                                | 
|Basic                                                            |   | 6,675,534                      | 
|                                                                 |   |                                | 
|                                                                 |   |                               
|Diluted                                                          |   | 7,226,357                      | 
|                                                                 |   |                               
|                                                                 |   |                                | 
|                                                                 |   |                                | 

|                       
|-----------------------
|See accompanying notes.

|4
|-



|SPORT CHALET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|--------------------------------------------------------
|                                                        

|                                                                                                                           | December 31,
2004 |             | March 31,
2004 |  
|-------------------------------------------------------------------------------------------------------------------------- | ----------------- | ----------- | -------------- | -
|
|
|                                                                                                                           |                   |             |                |  
|Assets                                                                                                                     | (As restated)     |             | (As restated)  |  
|Current assets:                                                                                                           
|Cash                                                                                                                       | $                 | 6,894,585   |                | $
|Accounts receivable, less allowance of $300,000                                                                           
|at December 31, 2004 and $30,000 at March 31, 2004                                                                         |                   | 4,795,010   |                |  
|Merchandise inventories                                                                                                    |                   | 75,407,922  |                |  
|Prepaid expenses and other current assets                                                                                  |                   | 3,180,961   |                |  
|Deferred income taxes                                                                                                      |                   | 2,294,721   |                |  
|
|Total current assets                                                                                                       |                   | 92,573,199  |                |  
|Furniture, equipment and leasehold improvements-net                                                                        |                   | 38,657,374  |                |  
|Deferred income taxes                                                                                                      |                   | 1,610,075   |                |  
|Other assets                                                                                                               |                   | 81,780      |                |  
|
|Total assets                                                                                                               | $                 | 132,922,428 |                | $
|
|                                                                                                                          
|Liabilities and stockholders equity                                                                                       |                   |             |                |  
|Current liabilities:                                                                                                      
|Accounts payable                                                                                                           | $                 | 33,642,637  |                | $
|Salaries and wages payable                                                                                                 |                   | 3,856,777   |                |  
|Income taxes payable                                                                                                       |                   | 1,837,090   |                |  
|Other accrued expenses                                                                                                     |                   | 11,917,418  |                |  
|
|Total current liabilities                                                                                                  |                   | 51,253,922  |                |  
|                                                                                                                           |                   |             |                |  
|Deferred rent                                                                                                              |                   | 13,290,151  |                |  
|Stockholders equity                                                                                                       |                   |             |                |  
|Preferred stock, $.01 par value:                                                                                          
|Authorized shares - 2,000,000Issued and outstanding shares  none                                                          |                   |            |                |  
|Common stock, $.01 par value:                                                                                             
|Authorized shares - 15,000,000Issued and outstanding shares  6,682,701at December 31, 2004 and 6,673,534at March 31, 2004 |                   | 66,827      |                |  
|Additional paid-in capital                                                                                                 |                   | 22,949,331  |                |  
|Retained earnings                                                                                                          |                   | 45,362,197  |                |  
|
|Total stockholders equity                                                                                                 |                   | 68,378,355  |                |  
|
|Total liabilities and stockholders equity                                                                                 | $                 | 132,922,428 |                | $
|

|                       
|-----------------------
|See accompanying notes.

|5
|-



|SPORT CHALET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)
|-----------------------------------------------------------------------------
|                                                                             

|                                                                                 | Nine months ended December 31, |            
|-------------------------------------------------------------------------------- | ------------------------------ | -----------
|
|
|
|
|Operating activities                                                             |                                |            
|Net income                                                                       | $                              | 5,449,331  
|Adjustments to reconcile net income to net cash providedby operating activities: |                                |            
|Depreciation and amortization                                                    |                                | 5,925,203  
|Loss on disposal of furniture, equipment and leasehold improvements              |                                | 205,094    
|Deferred income taxes                                                            |                                | (226,122   
|Tax benefit on employee stock options                                            |                                | 69,244     
|Changes in operating assets and liabilities:                                    
|Accounts receivable                                                              |                                | (3,586,076 
|Merchandise inventories                                                          |                                | (21,235,867
|Prepaid expenses and other current assets                                        |                                | (978,925   
|Refundable income taxes                                                          |                                |           
|Accounts payable                                                                 |                                | 22,511,164 
|Salaries and wages payable                                                       |                                | 502,409    
|Income taxes payable                                                             |                                | 1,801,459  
|Other accrued expenses                                                           |                                | 4,086,457  
|Deferred rent                                                                    |                                | 3,396,570  
|
|Net cash provided by operating activities                                        |                                | 17,919,941 
|                                                                                
|Investing activities                                                             |                                |            
|Purchase of furniture, equipment and leasehold improvements                      |                                | (14,165,533
|Other assets                                                                     |                                | 19,256     
|
|Net cash used in investing activities                                            |                                | (14,146,277
|                                                                                
|Financing activities                                                             |                                |            
|Proceeds from exercise of stock options                                          |                                | 49,273     
|
|Net cash provided by financing activities                                        |                                | 49,273     
|
|                                                                                 |                                |            
|Increase in cash and cash equivalents                                            |                                | 3,822,937  
|Cash and cash equivalents at beginning of period                                 |                                | 3,071,648  
|
|Cash and cash equivalents at end of period                                       | $                              | 6,894,585  
|
|                                                                                
|Supplemental Disclosure of Cash Flow Information                                 |                                |            
|Cash paid during the period for:                                                
|Income taxes                                                                     | $                              | 1,998,000  
|Interest                                                                         |                                | 101,512    

|                       
|-----------------------
|See accompanying notes.

|6
|-



|SPORT CHALET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
1.Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all information and footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation of the results of operations
for the periods presented have been included.
The financial data at March 31, 2004 is derived from audited financial statements which are included
in the Companys Annual Report on Form 10-K for the year ended March 31, 2004, and should be
read in conjunction with the audited financial statements and notes thereto. Interim results are
not necessarily indicative of results for the full year.
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results could differ from those
estimates.
Certain reclassifications were made to the prior year financial statements to conform to current year
presentation with regard to the consolidated statement of cash flows.
2.             Restatement and Reclassification
of Financial Statements
On
February 7, 2005, the Office of the Chief Accountant of the SEC (the OCA) issued a letter
to American Institute of Certified Public Accountants regarding lease accounting which identified
three issues:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

| | 1. | Amortization of Leasehold Improvements  The OCA believes that leasehold improvements in an operating

lease should be amortized by the lessee over the shorter of their economic lives or the lease term,

as defined in paragraph 5(f) of FASB Statement 13 (SFAS 13), Accounting for Leases,
  as
  amended. The OCA believes amortizing leasehold improvements over a term that includes assumption

of lease renewals is appropriate only when the renewals have been determined to be reasonably

assured, as that term is contemplated by SFAS 13.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 2. | Rent Holidays  The OCA believes that pursuant to the response in paragraph 2 of FASB Technical

Bulletin 85-3 (FTB 85-3), Accounting for Operating Leases with Scheduled Rent Increases,

rent holidays in an operating lease should be recognized by the lessee on a straight line basis
  over
  the lease term (including any rent holiday period) unless another systematic and rational
  allocation
  is more representative of the time pattern in which leased property is physically employed.                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 3. | Landlord/Tenant Incentives  The OCA believes that: (a) leasehold improvements made by a lessee
  that are funded by landlord incentives or allowances under an operating lease should be                                                                                                                                                                                                                                                                                                                                                                    

|7
|-



| | recorded by the lessee as leasehold improvement assets and amortized over a term consistent with the
  guidance in item 1 above; (b) the incentives should be recorded as deferred rent and amortized as
  reductions to lease expense over the lease term in accordance with paragraph 15 of SFAS 13 and the
  response to Question 2 of FASB Technical Bulletin 88-1 (FTB 88-1), Issues Relating to
  Accounting for Leases, and therefore, the OCA believes it is inappropriate to net the deferred rent
  against the leasehold improvements; and (c) a registrants statement of cash flows should reflect
  cash received from the lessor that is accounted for as a lease incentive within operating activities
  and the acquisition of leasehold improvements for cash within investing activities.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                                                                                                                                                                                                                                                                                          
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Management
and the Audit Committee of the Board of Directors of the Company in consultation with Moss Adams
LLP and Ernst & Young LLP, determined that the Companys accounting for leases was not consistent
with the accounting principles described in the OCAs letter. Consistent with many other retailers,
the Company has corrected its error in accounting for leases as follows:
|                                                                                                                                                                                                                                                                                                                                                                                          

| | 1. | Generally the Company has amortized leasehold improvements over the shorter of the assets estimated
  useful lives or the initial lease terms, excluding any renewal options. This is consistent with the
  Companys utilization of initial lease terms in its calculation of straight line rent expense,
  however, in some situations the Company depreciated leasehold improvements over a 15-year period
  while the straight line rent expense in those same years was computed over the initial lease terms,
  which were less than 15 years. Therefore, to ensure compliance with generally accepted accounting
  principles, the Company is correcting its calculation of its amortization of leasehold improvements
  to utilize the shorter of their estimated useful lives or the initial terms of the related leases.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 2. | The Company had historically recognized straight line rent expense for leases beginning on the earlier

of the store opening date or lease commencement date, which had the effect of excluding the build-out

period from the calculation of the period over which it expensed rent. The Company has determined

that it should have included the build-out period in its calculation of straight line rent expense

and has corrected its straight line rent accrual and deferred lease credits accordingly.                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 3. | The Company has historically treated construction allowances from landlords as a reduction of fixed
  assets on its balance sheet and a reduction of depreciation expense on its statement of cash flows.
  The Company has corrected its accounting for tenant improvement allowances to reflect the recognition
  of rent expense on a straight line basis. Certain reclassifications have been reflected in the statement
  of cash flows to include tenant improvement allowances within operating activities and exclude them
  as a component of capital expenditures within investing activities. This restatement to previously
  issued consolidated financial statements does not have an effect on total net cash flows during any
  of the periods restated.                                                           

|                                                                                                                                                                                                                                                                                                                                                               
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.            Earnings per Share
Earnings per share, basic, is computed based on the weighted average number of common shares outstanding
for the period. Earnings per share, diluted, is computed based on the weighted average number of
common and potentially dilutive common equivalent shares outstanding for the period. A reconciliation
is as follows:

|8
|-



|                                            | Three months ended
December 31, |           | Nine months ended
December 31, |  
|------------------------------------------- | ------------------------------- | --------- | ------------------------------ | -
|
|
|
|
|
|Net income                                  | $                               | 3,718,660 |                                | $
|Weighted average number of common shares:  
|Basic                                       |                                 | 6,675,534 |                                |  
|Effect of dilutive securities-stock options |                                 | 550,823   |                                |  
|
|Diluted                                     |                                 | 7,226,357 |                                |  
|
|                                           
|Earnings per share:                        
|Basic                                       | $                               | 0.56      |                                | $
|Effect of dilutive securities-stock options | $                               | 0.05      |                                | $
|
|Diluted                                     | $                               | 0.51      |                                | $
|

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.             Stock Compensation
Statement of Financial Accounting Standards (SFAS) No. 148 amends the disclosure requirements
of SFAS No. 123 to require prominent disclosure in annual and interim financial statements about
the method of accounting for stock-based compensation and its effects on reporting. In December 2004,
the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), Share-Based
Payment. The standard requires all entities to recognize compensation expense for all share-based
payments granted to employees in an amount equal to the fair value. The new standard is effective
for the first period that begins after June 15, 2005, and allows two different methods of transition.
The Company continues to apply the principles of APB Opinion No. 25 and related interpretations in
accounting for its stock-based compensation plans. Accordingly, no compensation expense has been
recorded in conjunction with options issued to employees. Had compensation cost been determined based
on the fair value of the options at the grant date and amortized over the options vesting period,
consistent with the method prescribed by SFAS No. 123, the Companys net income would have been:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                                                                                                                          | Three months ended
December 31, |           | Nine months ended
December 31, |  
|------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | --------- | ------------------------------ | -
|
|
|
|
|
|Net income as reported                                                                                                    | $                               | 3,718,660 |                                | $
|Add:                                                                                                                     
|Stock-based compensation expense included in
          reported net income, net of related tax effects                    |                                 |          |                                |  
|                                                                                                                         
|Deduct:                                                                                                                  
|Total stock-based employee compensationexpense determined under fair market valuemethod for all awards related taxeffects |                                 | 147,294   |                                |  
|
|Pro forma net income                                                                                                      | $                               | 3,571,366 |                                | $
|
|                                                                                                                         
|Earnings per share  basic and diluted                                                                                    |                                 |           |                                |  
|As reported  basic                                                                                                       | $                               | 0.56      |                                | $
|As reported  diluted                                                                                                     | $                               | 0.51      |                                | $
|                                                                                                                          |                                 |           |                                |  
|Pro forma  basic                                                                                                         | $                               | 0.54      |                                | $
|Pro forma  diluted                                                                                                       | $                               | 0.50      |                                | $

|9
|-



|The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions used for grants in fiscal 2004: expected volatility of 41%;
risk-free interest rate of 4.0%; expected lives from one to four years; and expected dividends of
0%. The Black-Scholes model was developed for use in estimating the fair value of traded options,
which have no vesting restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock price volatility.
Because the Companys employee stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions can materially affect
the fair value estimate, in managements opinion, the existing models do not necessarily provide
a reliable single measure of the fair value of its employee stock options.
5.             New Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment. The standard requires
all entities to recognize compensation expense for all share-based payments granted to employees
in an amount equal to the fair value. The new standard is effective for the first period that begins
after June 15, 2005, and allows two different methods of transition. Note 3, Stock Compensation,
of the Notes to Consolidated Financial Statements of this Quarterly Report on Form 10-Q, contains
pro forma disclosures regarding the effect on net earnings and earnings per share as if the Company
had applied the fair value method of accounting for stock-based compensation. Depending on the model
used to calculate stock-based compensation expense in the future and other requirements of SFAS No.
123(R), the pro forma disclosure may not be indicative of the stock-based compensation expense that
will be recognized in the Companys future financial statements. The Company does not believe
that the adoption of SFAS No. 123(R) will have a material impact on its results of operations or
financial position. The Company expects to implement the new standard in the second quarter ending
September 30, 2005 and is currently evaluating the new standard and models which may be used to calculate
future stock-based compensation expense.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10
|--



|Item 2. | Managements Discussion and Analysis of Financial Condition and 
  Results of Operations.
|------- | -----------------------------------------------------------------------------------------

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Except
for the historical information contained herein, the matters addressed in this Item 2 constitute
forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking
statements are subject to a variety of risks and uncertainties, including those discussed below under
the heading Factors That May Affect Future Results and elsewhere in this Quarterly Report
on Form 10-Q, that could cause actual results to differ materially from those anticipated by the
Companys management. The Private Securities Litigation Reform Act of 1995 (the Act)
provides certain safe harbor provisions for forward-looking statements. All forward-looking
statements made in this Quarterly Report on Form 10-Q are made pursuant to the Act.
The following should be read in conjunction with the Companys financial statements and related
notes thereto provided under Item 1Financial Statements above.
Restatement and Reclassification of Financial Statements
On
February 7, 2005, the Office of the Chief Accountant of the SEC (the OCA) issued a letter
to the American Institute of Certified Public Accountants regarding lease accounting which identified
three issues:
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

| | 1. | Amortization of Leasehold Improvements  The OCA believes that leasehold improvements in an operating

lease should be amortized by the lessee over the shorter of their economic lives or the lease term,

as defined in paragraph 5(f) of FASB Statement 13 (SFAS 13), Accounting for Leases,
  as
  amended. The OCA believes amortizing leasehold improvements over a term that includes assumption

of lease renewals is appropriate only when the renewals have been determined to be reasonably

assured, as that term is contemplated by SFAS 13.                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 2. | Rent Holidays  The OCA believes that pursuant to the response in paragraph 2 of FASB Technical

Bulletin 85-3 (FTB 85-3), Accounting for Operating Leases with Scheduled Rent Increases,

rent holidays in an operating lease should be recognized by the lessee on a straight line basis
  over
  the lease term (including any rent holiday period) unless another systematic and rational
  allocation
  is more representative of the time pattern in which leased property is physically employed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 3. | Landlord/Tenant Incentives  The OCA believes that: (a) leasehold improvements made by a lessee
  that are funded by landlord incentives or allowances under an operating lease should be recorded
  by the lessee as leasehold improvement assets and amortized over a term consistent with the guidance
  in item 1 above; (b) the incentives should be recorded as deferred rent and amortized as reductions
  to lease expense over the lease term in accordance with paragraph 15 of SFAS 13 and the response
  to Question 2 of FASB Technical Bulletin 88-1 (FTB 88-1), Issues Relating to Accounting
  for Leases, and therefore, the OCA believes it is inappropriate to net the deferred rent against
  the leasehold improvements; and (c) a registrants statement of cash flows should reflect cash
  received from the lessor that is accounted for as a lease incentive within operating activities and
  the acquisition of leasehold improvements for cash within investing activities.

|                                                                                                                                                                                          
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Management
and the Audit Committee of the Board of Directors of the Company in consultation with Moss Adams
LLP and Ernst & Young LLP, determined that the Companys accounting for leases

|11
|--



|was not consistent with the accounting principles described in the OCAs letter. Similar to many
other retailers, the Company has corrected its error in accounting for leases as follows:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                          

| | 1. | Generally the Company has amortized leasehold improvements over the shorter of the assets estimated
  useful lives or the initial lease terms, excluding any renewal options. This is consistent with the
  Companys utilization of initial lease terms in its calculation of straight line rent expense,
  however, in some situations the Company depreciated leasehold improvements over a 15-year period
  while the straight line rent expense in those same years was computed over the initial lease terms,
  which were less than 15 years. Therefore, to ensure compliance with generally accepted accounting
  principles, the Company is correcting its calculation of its amortization of leasehold improvements
  to utilize the shorter of the assets estimated useful lives or the initial terms of the related leases.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 2. | The Company had historically recognized straight line rent expense for leases beginning on the earlier

of the store opening date or lease commencement date, which had the effect of excluding the build-out

period from the calculation of the period over which it expensed rent. The Company has determined

that it should have included the build-out period in its calculation of straight line rent expense

and has corrected its straight line rent accrual and deferred lease credits accordingly.                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 3. | The Company has historically treated construction allowances from landlords as a reduction of fixed
  assets on its balance sheet and the related amortization as a reduction of depreciation expense on
  its statement of cash flows. The Company has corrected its accounting for tenant improvement allowances
  to reflect the recognition of rent expense on a straight line basis. Certain reclassifications have
  been reflected in the statement of cash flows to include tenant improvement allowances within operating
  activities and exclude them as a component of capital expenditures within investing activities. This
  restatement to previously issued consolidated financial statements does not have an effect on total
  net cash flows during any of the periods restated.                                     

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Overview
Sport
Chalet, Inc. is a leading operator of 36 full service specialty sporting goods superstores in California
and Nevada. In 1959, Norbert Olberz, the Companys Chairman Emeritus and principal stockholder
(the Principal Stockholder), purchased a small ski and tennis shop in La Canada, California.
A focus on providing quality merchandise with outstanding customer service was the foundation of
Norberts vision. The Company continues this tradition and is focused on growth through a number
of initiatives, including: continuing new store development; remodeling stores to conform to the
prototype; and improving information systems to increase product flow-through, improve in-stock positions
and optimize merchandise assortment.
The
Companys growth strategy had historically focused on Southern California, but now includes
opening new stores throughout California and Nevada as suitable locations are found. In addition,
the Company currently plans to expand into Arizona with an initial opening of three locations in
the Phoenix area in fiscal 2005-2006. The Company has opened eight stores in the last 24 months.
Future store openings are subject to availability of satisfactory store locations based on local
competitive conditions,site availability and cost and the ability to provide and maintain high service levels and quality
brand merchandising at competitive prices. Store openings are expected to have a favorable impact
on sales volume, but will negatively affect profit in the short term. New stores tend to have higher
costs in the early years of operation, due primarily to increased promotional costs and lower sales
on a per employee basis until the store matures. As the store matures, sales tend to level off and
expenses decline as a percentage of sales. Stores generally require three to four years to attract
a stable, mature customer base.

|12
|--



|The Companys prototype stores and over 70% of the total store base range in size from 40,000
to 45,000 square feet and showcase each product category with the feel of a specialty shop all contained
under one roof. The full service approach to customer service and product knowledge is enhanced by
fixtures which feature specific categories, and give the customer an enhanced shopping experience.
Mature stores are evaluated for remodel based on each stores age and competitive situation,
as well as how much the landlord will contribute to the required improvements. Future store remodeling
plans will depend upon several factors, including, but not limited to, general economic conditions,
competition trends and the availability of adequate capital.
The
Company believes that the overall growth of its business will allow it to maintain or increase its
operating margins. Increased merchandise volumes should enable the Company to improve its purchasing
leverage and achieve greater support throughout the supply chain. The Companys overall growth
should leverage its investments in infrastructure such as the distribution center and information
systems. However, these improvements are partially offset by the operating costs of new and maturing
stores.
Results of Operations
Three Months Ended December 31, 2004 Compared to Three Months Ended December 31, 2003.
The following tables set forth statements of income data and relative percentages of net sales for
the three months ended December 31, 2004 and 2003 (dollar amounts in thousands, except per share
amounts).
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                                             |  | Three months ended December 31, |       
|-------------------------------------------- |  | ------------------------------- | ------
|
|
|
|
|
|
|Net sales                                    |  | $                               | 95,914
|Gross profit                                 |  |                                 | 31,246
|Selling, general and administrative expenses |  |                                 | 24,906
|Income from operations                       |  |                                 | 6,340 
|Interest expense                             |  |                                 | 146   
|Income before taxes                          |  |                                 | 6,194 
|Net income                                   |  |                                 | 3,718 
|Earnings per share:                          | 
|Basic                                        |  | $                               | 0.56  
|Diluted                                      |  | $                               | 0.51  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Sales increased $16.2 million, or 20.3%, from $79.7 million for the three months ended December 31,
2003 to $95.9 million for the same period this year. The sales growth is the result of opening eight
new stores which resulted in an $11.4 million increase in sales, or 14.3%, as well as a same store
sales increase of 6.8%. Three new stores were opened in the third quarter of fiscal 2004, two new
stores were opened in the second quarter of fiscal 2005 and three new stores were opened in the third
quarter of fiscal 2005. The same store sales increase is due to colder weather early in the quarter
this year compared to the same period last year that helped stimulate demand for winter apparel and
equipment. Excluding sales of winter related merchandise, same store sales increased 3.4% for the
three months ended December 31, 2004 compared to the same period last year. Same store sales are
based upon stores opened throughout both periods presented and exclude team sales.

|13
|--



|Gross
profit increased $5.2 million, or 19.9%, primarily from increased sales. As a percent of sales, gross
profit decreased slightly from 32.7% for the three months ended December 31, 2003 to 32.6% for the
same period this year.
Selling, general and administrative expenses increased $4.0 million, or 19.2%, primarily from additional
stores. As a percent of sales, these expenses decreased from 26.2% for the three months ended December
31, 2003, to 26.0% for the same period this year. The decrease is primarily a result of the efficiencies
from the increase in same store sales by the mature stores offset in part by the new stores which
take time to reach operating efficiency. In addition, a decrease in workers compensation expense
resulted in a reduction equal to approximately 1% of sales, partially as the result of an increase
in reserves required in the same period last year as well as significantly reduced claim activity
this year. The reduction in claim activity this year is believed to be the result of a new safety
program implemented at all store locations.
The effective income tax rate was 39.3% for the three months ended December 31, 2003 compared to 40.0%
for the same period this year. These rates differ from the statutory rate of 39.8% primarily as a
result of permanent differences between financial reporting and tax-basis income.
Net income increased $631,000, or 20.4%, from $3.1 million, or $0.44 per diluted share, for the three
months ended December 31, 2003 to $3.7 million, or $0.51 per diluted share, for the same period this
year, primarily as a result of increased sales and reduced workers compensation expense, partially
offset by the expenses associated with the new stores.
Nine Months Ended December 31, 2004 Compared to Nine Months Ended December 31, 2003.
The following tables set forth statements of income data and relative percentages of net sales
  for the nine months ended December 31, 2004 and 2003 (dollar amounts in thousands, except per share
  amounts).
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|                                             | Nine months ended December 31, |        
|-------------------------------------------- | ------------------------------ | -------
|
|
|
|
|
|
|Net sales                                    | $                              | 229,917
|Gross profit                                 |                                | 71,312 
|Selling, general and administrative expenses |                                | 61,983 
|Income from operations                       |                                | 9,329  
|Interest expense                             |                                | 237    
|Income before taxes                          |                                | 9,092  
|Net income                                   |                                | 5,449  
|Earnings per share:                         
|Basic                                        | $                              | 0.82   
|Diluted                                      | $                              | 0.76   

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Sales increased $35.1 million, or 18.0%, from $194.8 million for the nine months ended December 31,
2003 to $229.9 million for the same period this year. The increase is the result of opening eight
new stores which resulted in a $23.1 million increase in sales, or 11.9%, as well as a same store
sales increase of 6.1%. Three new stores were opened in the third quarter of fiscal 2004, two new
stores were opened in the second quarter of fiscal 2005 and three new stores were opened in the third
quarter of fiscal 2005. The same store sales increase is believed to be due to better inventory assortments
compared to the same period last year. Same store sales are based upon stores opened throughout both
periods presented and exclude team sales.

|14
|--



|Gross
profit increased $11.6 million, or 19.5%, primarily from increased sales. As a percent of sales,
gross profit increased from 30.6% for the nine months ended December 31, 2003 to 31.0% for the
same period this year. The increase in gross profit as a percent of sales is primarily due to reduced
costs from more efficient inbound logistics and continued improvements in inventory procurement which
lowered markdowns.
Selling, general and administrative expenses increased $9.6 million, or 18.3%, primarily from additional
stores. As a percent of sales, these expenses increased slightly from 26.9% for the nine months ended
December 31, 2003 to 27.0% for the same period this year. Efficiencies from the increase in same
store sales by the mature stores were offset by the new stores which take time to reach operating
efficiency. In addition, a decrease in workers compensation expense resulted in a reduction
equal to approximately 0.4% of sales, partially as the result of an increase in reserves required
in the same period last year as well as significantly reduced claim activity this year. The reduction
in claim activity this year is believed to be the result of a new safety program implemented at all
store locations.
The effective income tax rate was 39.5% for the nine months ended December 31, 2003 compared to 40.1%
for the same period this year. These rates differ from the statutory rate of 39.8% primarily as a
result of permanent differences between financial reporting and tax-basis income.
Net income increased $1.1 million, or 26.3%, from $4.3 million, or $0.62 per diluted share, for the
nine months ended December 31, 2003 to $5.4 million, or $0.76 per diluted share, for the same period
this year, primarily as a result of increased sales, improved gross profit margin, and reduced workers
compensation expense, partially offset by the expenses associated with the new stores.
Liquidity and Capital Resources
The
Companys primary capital requirements are for inventory and store expansion, relocation and
remodeling. Historically, cash from operations, credit terms from vendors and bank borrowings have
met the Companys liquidity needs. Management believes that these sources will be sufficient
to fund currently anticipated cash requirements for the foreseeable future.
Net cash provided by operating activities is primarily the result of net income, adjusted for depreciation
and amortization, and increases in accounts payable partially offset by inventory purchases. For
the nine months ended December 31, 2004, $17.9 million was generated by operating activities compared
to $13.1 million for the same period last year.
Accounts
receivable increased $3.4 million for the nine months ended December 31, 2004 compared to the year-end
balance primarily from amounts due to the Company from the landlords of recently opened new stores.
These amounts represent partial reimbursement of construction costs as required by the lease agreements.
Inventories increased by $21.2 million and $20.0 million for the nine months ended December 31, 2004
and 2003, respectively, compared to the respective year-end balances primarily due to the build-up
of seasonal inventory. In addition, the Company opened two new stores in the second quarter of fiscal
2005 and three new stores in the third quarter of fiscal 2005. The average inventory per store decreased
by 9.2%, at December 31, 2004 as compared to December 31, 2003, primarily due to the continuing improvements
in inventory procurement.
Historically, accounts payable has increased as inventory increases. In the nine months ended December
31, 2004, accounts payable increased by $22.5 million as compared to an increase of $13.3
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|15
|--



|million for the nine months ended December 31, 2003. The relative change as compared to inventory levels
is the result of the timing of vendor payments near the end of the period.
Deferred rent increased $3.2 million for the nine months ended December 31, 2004, as we received unusually
large landlord reimbursements for improvements made to new stores. The landlord reimbursement varies
based on our participation in the construction of a new store.
Net cash used in investing activities for the nine months ended December 31, 2004 was $14.1 million
compared to $6.9 million for the same period ended December 31, 2003. In addition to routine capital
spending, the Company remodeled two stores and opened three new stores during the nine months ended
December 31, 2003. For the nine months ended December 31, 2004, the Company completed two store remodels
and opened five new stores. The Southern California based team dealer acquired during the quarter
ended September 30, 2004 had an immaterial effect on the Companys cash flow.
The Companys amended credit facility with Bank of America, N.A. (the Lender) provides
for advances up to $20 million, increasing to $35.0 million for the period October 1, through December
31, each year, less the amount of any outstanding draws, up to a $4.0 million maximum in authorized
letters of credit. Interest accrues at the Lenders prime rate plus 0.25% (5.50% at December
31, 2004) or can be fixed for a period of time at the then current rate established under one of
several indices, all at the Companys option. In addition, there is an unused commitment fee
of 0.20% per year, based on a weighted average formula. This credit facility expires on September
30, 2005, and the Company expects to renegotiate and extend the term of this agreement or obtain
another form of financing before that date. The Companys obligation to the Lender is presently
secured by a first priority lien on substantially all of the Companys non-real estate assets,
and the Company is subject to several restrictive covenants. The principal operating covenants require
the Company to maintain certain minimum cash flow coverage and debt to equity ratios and restrict
the level of capital expenditures, calculated on a quarterly basis. The Company currently is in compliance
with the covenants. The Company believes its credit line with the Lender is sufficient to fund capital
expenditures for the foreseeable future and to meet seasonal fluctuations in cash flow requirements.
However, unexpected conditions could require the Company to request additional borrowing capacity
from the Lender or alter its expansion plans or operations.
The Companys primary contractual obligations and commitments as of December 31, 2004, are its
store leases with initial terms expiring from 2005 through 2020, which typically provide for multiple
five-year renewal options, and employment contracts:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

| | Payments due by period: | Operating
Leases |             | Employment Contracts |          
| | ----------------------- | ---------------- | ----------- | -------------------- | ---------
|
| | Within 1 year           | $                | 21,392,206  |                      | $        
| | 2 - 3 years             |                  | 42,055,034  |                      |          
| | 4 - 5 years             |                  | 37,970,135  |                      |          
| | After 5 years           |                  | 73,490,723  |                      |          
| |                        
| | Total                   | $                | 174,908,098 | $                    | 2,955,375
|

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|All retail store leases provide for base rent which may or may not be credited against percentage rent based upon gross sales from the premises. In some of the leases, base rental amounts increase as the lease term progresses although, in some cases, the Company expects that percentage rent will more than offset the base rental amounts. Generally, purchase obligations are cancelable 45 days prior to shipment from vendors. Letters of credit amounting to $2,309,000 relating to self-insurance reserves were outstanding as of December 31, 2004 and expire within one year.

|16
|--



|No
cash dividends were declared on Common Stock in the first three quarters of fiscal 2005. The Company
intends to retain earnings for use in the operation and expansion of its business and, therefore,
does not anticipate paying any cash dividends in the foreseeable future.
Critical Accounting Policies and Use of Estimates
The Companys significant accounting policies are described in Note 2 of the Companys Annual
Report on Form 10-K for the year ended March 31, 2004, which have been prepared in accordance with
accounting principles generally accepted in the United States. In preparing the financial statements,
the Company is required to make estimates and judgments which affect the results of its operations
and the reported value of assets and liabilities. Actual results may differ from these estimates.
The Company believes that the following summarizes critical accounting policies which require significant
judgments and estimates in the preparation of its consolidated financial statements.
Accounting for Lease Incentives.  On February 7, 2005, the Office of the Chief Accountant of the SEC (the OCA) issued
a letter regarding lease accounting. The Company has historically treated construction allowances
from landlords as a reduction of fixed assets on its balance sheet and a reduction of depreciation
expense on its statement of cash flows. In the opinion of the OCA, Statement of Accounting Standards
No. 13 and FASB Technical Bulletin No. 88-1 require such landlord reimbursements to be presented
on the balance sheet as a deferred credit and the amortization to be a reduction of rent expense.
The Company and its independent registered public accounting firm have not yet determined the effect
of the OCAs position on the Companys financial statements. However, because the amortization
period for the related leasehold improvements is generally the same as the life of the lease, the
Company does not believe that the OCAs position would have a material effect on the Companys
income from operations.
Inventory Valuation.  Merchandise inventories are stated at the lower of cost (first-in, first-out determined by the
retail method of accounting) or market. The Company considers cost to include direct cost of merchandise,
plus internal costs associated with merchandise procurement, storage and handling. The Company regularly
reviews aged and excess inventories to determine if the carrying value of such inventories exceeds
market value. A reserve is recorded to reduce the carrying value to market value as necessary. A
determination of market value requires estimates and judgment based on the Companys historical
markdown experience and anticipated markdowns based on future merchandising and advertising plans,
seasonal considerations, expected business trends and other factors.
Revenue Recognition.  Sales are recognized upon the purchase by customers at the Companys retail store locations,
less merchandise returned by customers. The Company provides a reserve for projected merchandise
returns based on historical experience which is not material to the results of operations. As the
reserve for merchandise returns is based on estimates, the actual returns could differ from the reserve,
which could impact sales. Revenue from gift cards, gift certificates and store merchandise credits
is recognized at the time of redemption. Revenues from services and licensing agreement are generally
recorded on a cash basis, which approximates when the revenue is earned, and are not material.
Self-insurance.   Property, general liability and workers compensation insurance coverage is self-insured
for various levels. Self-insurance accruals include claims filed, as well as estimates of claims
incurred but not yet reported based on historical trends. Projections of future loss are inherently
uncertain because of the random nature of insurance claim occurrences and could be significantly
affected if future occurrences and claims differ from historical trends.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|17
|--



|Gift Card/Certificate Redemption.The Company offers its customers the option of purchasing gift cards and, in the past, gift certificates
which may be used toward the future purchase of the Companys product offerings. The gift cards
and certificates have no expiration dates. The Company records unredeemed gift cards or certificates
as a liability until the point of redemption. The Companys historical experience indicates
that not all issued gift cards or certificates get redeemed. Accordingly, the Company periodically
adjusts the carrying value of the related liability and decreases cost of sales by a corresponding
amount. Such adjustments have not been material to the Companys results of operations to date.
Pending legislation could impact the method in which the Company calculates the carrying value in
the future. The Company monitors redemptions rates as a percent of issuances and uses this information
to estimate probable redemption of all outstanding gift cards or certificates. This calculation is
based on historical experience, and future redemption rates may vary if consumer purchasing practices
change or if the pattern of redeeming gift cards is significantly different than the Company has
experienced with gift certificates.
Impairment of Long-Lived Assets.The Company accounts for long-lived assets in accordance with the provisions of Statement of Financial
Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets. The Company reviews long-lived assets 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 determined 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 impaired, the impairment recognized is measured by comparing projected individual
store discounted cash flow to the asset carrying values. Declines in projected store cash flow could
result in the impairment of assets.
Accounting for Income Taxes.  As part of the process of preparing the financial statements, income taxes are estimated for
each of the jurisdictions in which the Company operates. This process involves estimating actual
current tax exposure together with assessing temporary differences resulting from differing treatment
of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities,
which are included within the balance sheet. The likelihood that deferred tax assets will be recovered
from future taxable income is assessed, recognizing that future taxable income may give rise to new
deferred tax assets. To the extent that future recovery is not likely, a valuation allowance would
be established. To the extent that a valuation allowance is established or increased, an expense
will be included within the tax provision in the income statement.
Significant management judgment is required in determining the provision for income taxes, deferred
tax assets and liabilities and any valuation allowance recorded against net deferred tax assets.
Based on the Companys history of operating earnings, no valuation allowance has been recorded
as of December 31, 2004. In the event that actual results differ from these estimates, or these estimates
are adjusted in future periods, a valuation allowance may need to be established, which could impact
the Companys financial position and results of operations.
Provisions for income taxes for 2004, 2003 and 2002 are based on numerous factors that are subject
to audit by the Internal Revenue Service and the tax authorities in the various jurisdictions in
which the Company does business.
Factors That May Affect Future Results
The Companys short- and long-term success is subject to many factors that are beyond the Companys
control. Stockholders and prospective stockholders in the Company should consider carefully the following
risk factors, in addition to other information contained in this report. This Report on Form
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|18
|--



|l0-Q contains forward-looking statements, which are subject to a variety of risks and uncertainties.
The Companys actual results could differ materially from those anticipated in these forward-looking
statements as a result of various factors including those set forth below.
Implementing Section 404 of the Sarbanes-Oxley Act of 2002.The regulations implementing Section 404 of the Sarbanes-Oxley Act of 2002 require the Company
to provide an assessment of the effectiveness of its internal control over financial reporting beginning
with the Annual Report on Form 10-K for the fiscal year ending March 31, 2006. The Companys
independent auditors will be required to confirm in writing whether the assessment of the effectiveness
of its internal control over financial reporting is fairly stated in all material respects, and separately
report on whether they believe the Company maintained, in all material respects, effective internal
control over financial reporting as of March 31, 2006.
This process will be expensive, time consuming and will require significant attention of management.
The Company cannot assure that it will not discover material weaknesses in its internal controls.
The Company also cannot assure that it will complete the process of its evaluation and the auditors
attestation on time. If the Company discovers a material weakness, corrective action may be time
consuming, costly and further divert the attention of management. The disclosure of a material weakness,
even if quickly remedied, could reduce the markets confidence in the Companys financial
statements, cause the delisting of its Common Stock from Nasdaq and harm its stock price, especially
if a restatement of financial statements for past periods were to be necessary.
Economic Conditions.  The retail industry historically has been subject to substantial cyclical variations. The merchandise
sold by the Company is generally a discretionary expense for its customers. A recession in the general
economy or uncertainties regarding future economic prospects that affect consumer spending habits
has had, and may in the future have, a material adverse effect on the Companys results of operations.
Terrorism/War.   Terrorist attacks may cause damage or disruption to the Companys employees, facilities,
information systems, vendors and customers, which could significantly impact net sales, costs and
expenses and financial condition. 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 the Company to suffer in ways that the Company currently cannot predict. The Companys
geographical focus in California and Nevada may make the Company more vulnerable to such uncertainties
than other comparable retailers who may not have similar geographical concentration.
Competition.   The sporting goods business and the retail environment are highly competitive, and the
Company competes with national, regional and local full-line sporting goods chains, specialty stores,
supplier owned stores, discount and department stores, and internet retailers. A number of the Companys
competitors are larger and have greater resources than the Company.
Regional Market Concentration.  Currently, most of the Companys stores are located in Southern California and the balance
are located in Northern California and the Las Vegas area of Nevada. Accordingly, the Company is
subject to regional risks, such as the economy, weather conditions, natural disasters and government
regulations. For example, warm winter weather in the resorts frequented by Southern California residents
has affected sales in the past. When the region suffers an economic downturn or when other adverse
events occur, historically there has been an adverse effect on the Companys net sales and profitability
and this could also affect the Companys ability to implement its planned growth. Several of
the Companys competitors operate stores across the United States and, thus, are not as vulnerable
as the Company to such regional risks.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|19
|--



|Reliance on a Single Distribution Center.  The Company currently relies on a single distribution center in Ontario, 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 the Companys inventory and could materially impair
both the Companys ability to adequately stock its stores and the Companys net sales and
profitability.
Expansion Plan.   The Companys continued growth depends on a strategy of opening new, profitable stores
in existing markets and in new regional markets. The ability to successfully implement this growth
strategy could be negatively affected by any of the following:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

| |  | suitable sites may not be available for leasing;                                                   
| | - | ---------------------------------------------------------------------------------------------------
| |   |                                                                                                    
| |  | the Company may not be able to negotiate acceptable lease terms;                                   
| |   |                                                                                                    
| |  | the Company might not be able to hire and retain qualified store personnel; and                    
| |   |                                                                                                    
| |  | the Company might not have the financial resources necessary to fund the Companys expansion plans.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|In addition, the Companys expansion in new and existing markets may present competitive, distribution
and merchandising challenges that differ from the current challenges. These potential new challenges
include competition among the Companys stores, added strain on the Companys distribution
center, additional information to be processed by the Companys information systems and diversion
of management attention from ongoing operations. The Company faces additional challenges in entering
new markets, including consumers lack of awareness of the Company, difficulties in hiring personnel
and problems due to the Companys unfamiliarity with local real estate markets and demographics.
New markets may also have different competitive conditions, consumer tastes and discretionary spending
patterns than the Companys existing markets. To the extent that the Company is not able to
meet these new challenges, net sales could decrease and operating costs could increase. Furthermore,
a decline in the Companys overall financial performance, increased rents or any other adverse
effects arising from the commercial real estate market in the Companys markets may adversely
affect the Companys current growth plan. There can be no assurance that the Company will possess
sufficient funds to finance the expenditures related to its planned growth, that new stores can be
opened on a timely basis, that such new stores can be operated on a profitable basis, or that such
growth will be manageable.
Future Capital Requirements.  The Company may not be able to fund its future growth or react to competitive pressures if it
lacks sufficient funds. Unexpected conditions could cause the Company to be in violation of its Lenders
operating covenants. Currently, the Company feels it has sufficient cash available through its bank
credit facilities and cash from operations to fund existing operations for the foreseeable future.
The Company cannot be certain that additional financing will be available in the future if necessary.
Management of Growth.Since its inception, the Company has experienced periods of rapid growth. No assurance can be given
that the Company will be successful in maintaining or increasing its sales in the future. Any future
growth in sales will require additional working capital and may place a significant strain on the
Companys management, information systems, inventory management and distribution facilities.
Any failure to timely enhance the Companys operating systems, or unexpected difficulties in
implementing such enhancements, could have a material adverse effect on the Companys results
of operations.
Dependence on Key Personnel.  The Company depends on the continued service of its senior management. The loss of the services
of any key employee could hurt the business. Also, the future

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|success of the Company depends on its ability to identify, attract, hire, train and motivate other
highly skilled personnel. Failure to do so may adversely affect future results.
Seasonality.  The Companys sales volume increases significantly during the Holiday season as is typical
with other sporting goods retailers. In addition, the Companys product mix has historically
emphasized cold weather sporting goods increasing the seasonality of the Companys business.
In recent years the months of November, December and January represent between 30% and 34% of the
Companys total net sales, while winter-related products ranged from 15% to 19% of total net
sales. The operating results historically have been influenced by the amount and timing of snowfall
at the resorts frequented by those living in Southern California. An early snowfall often has influenced
sales because it generally extends the demand for winter apparel and equipment, while a late snowfall
may have the opposite effect. Suppliers in the ski and snowboard industry require the Company to
make commitments for purchases of apparel and equipment by April for fall delivery, and only limited
quantities of merchandise can be reordered during the fall. Consequently, the Company places its
orders in the spring anticipating snowfall in the winter. If the snowfall does not at least provide
an adequate base or occurs late in the season, or if sales do not meet projections, the Company may
be required to mark down its winter apparel and equipment.
Variability of Quarterly Results.  The Company has experienced, and expects to continue to experience, a substantial variation
in its net sales and operating results from quarter to quarter. The Company believes that the factors
which influence this variability of quarterly results include general economic and industry conditions
that affect consumer spending, changing consumer demands, the timing of the Companys introduction
of new products, the level of consumer acceptance of each new product, the seasonality of the markets
in which the Company participates, the weather and actions of competitors. Accordingly, a comparison
of the Companys results of operations from period to period is not necessarily meaningful,
and the Companys results of operations for any period are not necessarily indicative of future
performance.
Closely Controlled Stock.  At February 8 2005, Norbert Olberz, the Companys founder, Chairman Emeritus, director
and principal stockholder, owned approximately 65% of the Companys outstanding Common Stock.
Mr. Olberz effectively has the ability to control the outcome on all matters requiring stockholder
approval, including, but not limited to, the election and removal of directors, and any merger, consolidation
or sale of all or substantially all of the Companys assets, and to control the Companys
management and affairs.
Information Systems are Vulnerable.  The Companys success, in particular the Companys ability to successfully manage
inventory levels and its centralized distribution system, largely depends upon the efficient operation
of the Companys computer hardware and software systems. The Company uses information systems
to track inventory information at the store level, replenish inventory from the Companys warehouse,
and aggregate daily sales information among other things. These systems and the Companys 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
and similar events; and
| |   |                                                                                                                                                                                                                                     
| |  | computer viruses, penetration by hackers seeking to disrupt operations or misappropriate information
and other breaches of security.                                                                                                

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|The Company seeks to minimize these risks by the use of backup facilities and redundant systems. Nevertheless
any failure that causes an interruption in the Companys operations or a decrease in inventory
tracking could result in reduced net sales.
Business Depends on Anticipating Consumer Tastes.  If the Company fails to anticipate changes in consumer preferences, it may experience lower
net sales, higher inventory markdowns and lower margins. Products must appeal to a broad range of
consumers whose preferences cannot be predicted with certainty. These preferences are also subject
to change. Sporting goods are often subject to short-lived trends, such as the short-lived popularity
of in-line scooters. Outdoor wear is significantly influenced by fashion. The Companys success
depends upon the ability to anticipate and respond in a timely manner to trends in sporting goods
merchandise and consumers participation in sports. Failure to identify and respond to these
changes may cause net sales to decline. In addition, because the Company generally makes commitments
to purchase products from vendors up to nine months in advance of the proposed delivery, misjudging
the market may over-stock unpopular products and force inventory markdowns that could have a negative
impact on profitability, or have insufficient inventory of a popular item that can be sold at full markup.
Stock Price.   The Companys Common Stock is thinly traded making it difficult to sell large amounts.
The market price of the Companys Common Stock is likely to be volatile and could be subject
to significant fluctuations in response to factors such as quarterly variations in operating results,
operating results which vary from the expectations of securities analysts and investors, changes
in financial estimates, changes in market valuations of competitors, announcements by the Company
or its competitors of a material nature, additions or departures of key personnel, future sales of
Common Stock and stock volume fluctuations. Also, general political and economic conditions such
as a recession or interest rate fluctuations may adversely affect the market price of the Companys
Common Stock.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
  The Companys exposure to interest rate risk consists primarily of borrowings under its credit
facility, which bears interest at floating rates. The impact on earnings or cash flow during the
next fiscal year from a change of 100 basis points in the interest rate would not be significant.
Item 4.   Controls and Procedures.
The Companys Chief Executive Officer, Craig Levra, and Chief Financial Officer, Howard Kaminsky,
with the participation of the Companys management, carried out an evaluation of the effectiveness
of the Companys disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e).
Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded
that our disclosure controls and procedures were not effective as of the period ended in this report
for the following reason: In May 2005, we announced that our financial statements were to be restated,
relating to certain lease accounting and leasehold amortization accounting practices, consistent
with similar adjustments made by many other retailers and other publicly traded companies concerning
these practices. Our conclusion to change our accounting policy and restate was made, among other
things, in consideration of the views of the Office of the Chief Accountant of the SEC expressed
in its letter related to these matters dated February 7, 2005. Accordingly, we concluded that our
controls over the selection of appropriate assumptions and factors affecting lease accounting practices
were not effective as of the period ended in this report.
In
May 2005, the Company remediated the material weakness in internal control over financial reporting
by correcting its method of accounting for construction allowances and recording of rent between
the date the Company takes possession and the commencement date of the lease. The Company implemented
controls in which all leases are reviewed and accounted for in accordance with Statement of Financial
Accounting Standards No. 13, Accounting for Leases and Financial Accounting Standards
Board Technical Bulletin No. 88-1, Issues Relating to Accounting for Leases; and Financial
Accounting Standards Board Technical Bulletin No. 85-3, Accounting for Operating Leases with
Scheduled Rent Increases.
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.
There were no changes in the Companys internal controls over financial reporting, known to the
Chief Executive Officer or the Chief Financial Officer that occurred during the most recent fiscal
quarter that have materially affected, or are reasonably likely to materially affect, the Companys
internal control over financial reporting.
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|Part II  OTHER INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                    
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|The Company is involved in various routine legal proceedings incidental to the conduct of its business. Management does not believe that any of these legal proceedings will have a material adverse impact on the business, financial condition, cash flows or results of operations of the Company, either due to the nature of the claims, or because management believes that such claims should not exceed the limits of the Companys insurance coverage.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               

| | Item 2.         |  | Unregistered Sales of Equity Securities and Use of Proceeds.
| | --------------- |  | ------------------------------------------------------------
| |                 |  |                                                             
| | Not Applicable.
| |                 |  |                                                             
| | Item 3.         |  | Defaults Upon Senior Securities.                            
| |                 |  |                                                             
| | Not Applicable.
| |                 |  |                                                             
| | Item 4.         |  | Submission of Matters to a Vote of Security Holders.        
| |                 |  |                                                             
| | Not Applicable.
| |                 |  |                                                             
| | Item 5.         |  | Other Information.                                          

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Stockholder Proposals
      The proxy materials for the 2004 annual meeting of the stockholders held on August 2, 2004 were mailed to stockholders of the Company on June 21, 2004.
      Under certain circumstances, stockholders are entitled to present proposals at stockholder meetings. The 2005 annual meeting of stockholders is presently expected to be held on or about August 1, 2005. Any such proposal to be included in the proxy statement for the Companys 2005 annual meeting of stockholders must be received by the Secretary of the Company at the Companys office at One Sport Chalet Drive, La Canada, California 91011 on or before February 21, 2005 in a form that complies with applicable regulations. If the date of the 2005 annual meeting is advanced or delayed more than 30 days from the date of the 2004 annual meeting, stockholder proposals intended to be included in the proxy statement for the 2005 annual meeting must be received by the Company within a rea
sonable time before the Company begins to print and mail the proxy statement for the 2005 annual meeting. Upon any determination that the date of the 2005 annual meeting will be advanced or delayed by more than 30 days from the date of the 2004 annual meeting, the Company will disclose the change in the earliest practicable Quarterly Report on Form 10-Q.
    In the event a stockholder proposal is not submitted to the Company on or before May 6, 2005, the proxies solicited by the Board of Directors for the 2005 annual meeting of the stockholders will confer authority on the holders of the proxy to vote the shares in accordance with the recommendations of the Board of Directors if the proposal is presented at the 2005 annual meeting of stockholders without any discussion of the proposal in the proxy statement for such meeting.

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|Changes in Registrants Independent Registered Public Accounting Firm
(a)           On November 15, 2004, the Company
dismissed Ernst & Young LLP as the Companys independent registered public accounting firm.
Ernst & Young LLP had served as the Companys independent registered public accounting firm
since 1983. The decision to dismiss Ernst & Young LLP was made by the Audit Committee of the
Board of Directors of the Company and, upon recommendation by that committee, was approved by the
full Board of Directors.
The reports of Ernst & Young LLP on the Companys financial statements for each of the last
two completed fiscal years contained no adverse opinion or disclaimer of opinion, nor were they qualified
or modified as to uncertainty, audit scope, or accounting principles.
During the two most recent fiscal years and the subsequent interim period through the date of the dismissal,
the Company had no disagreement with Ernst & Young LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure, which disagreement,
if not resolved to the satisfaction of Ernst & Young LLP, would have caused them to make reference
to such disagreement in connection with their reports for such periods.
During the two most recent fiscal years and the subsequent interim period through the date of the dismissal,
there have been no reportable events (as defined in Regulation S-K, Item 304(a)(1)(v)).
The Company provided Ernst & Young LLP with a copy of the above disclosures and requested that
they furnish us with a letter addressed to the Securities and Exchange Commission stating whether
they agree with the above statements and, if not, stating the respects in which they do not agree.
A copy of the letter from Ernst & Young LLP is incorporated by reference to Exhibit 16.1 to the
Companys Form 8-K (File NO. 000-20736) filed on November 18, 2004.
(b)           On November 15, 2004, the Company
engaged Moss Adams LLP as the independent registered public accounting firm to audit the Companys
financial statements for the fiscal year ending March 31, 2005. The engagement of Moss Adams
LLP was made by the Audit Committee of the Board of Directors of the Company and, upon recommendation
by that committee, was approved by the full Board of Directors.
During the two most recent fiscal years of the Company and the subsequent interim period prior to engaging
Moss Adams LLP, neither the Company, nor anyone on its behalf, has consulted with Moss Adams LLP
regarding any of the matters set forth in Item 304(a)(2)(i)-(ii) of Regulation S-K.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|Item 6.      Exhibits.
|----------------------
|                      

| | Exhibits:
| | ---------
| |          
| | 3.1      
| |          
| | 3.2      
| |          
| | 4.1      
| |          
| | 31.1     
| |          
| | 31.2     
| |          
| | 32.1     

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|SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly authorized.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                  

|                                       | SPORT CHALET, INC.                                                                                                                                                                         
|-------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                       |                                                                                                                                                                                            
|DATE:                    June 23, 2005 | By:                                                                                                                                                                                        
|                                       |                                                                                                                                                                                            
|                                       | Howard K. Kaminsky
    Executive Vice President-Finance,
    Chief Financial Officer and Secretary 
    (On behalf of the Registrant and as
    Principal Financial and Accounting Officer)

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