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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended March 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to .
 Commission file number: 0-20736
 Sport Chalet, Inc.
  a. Delaware
    
    95-4390071(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification Number)One Sport Chalet Drive, La Cañada, California
    
    91011(Address of principal executive offices)
    
    (Zip Code)
 
   o þ
 o þ
  þ o
 o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS
 Item
    
    PagePART I1. Business
    
    
    11A. Risk Factors
    
    
    71B. Unresolved Staff Comments
    
    
    112. Properties
    
    
    123. Legal Proceedings
    
    
    134. Submission of Matters to a Vote of Security Holders
    
    
    13PART II5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    146. Selected Financial Data
    
    
    157. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    167A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    268. Financial Statements and Supplementary Data
    
    
    269. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    269A. Controls and Procedures
    
    
    279B. Other Information
    
    
    27PART III10. Directors and Executive Officers of the Registrant
    
    
    2811. Executive Compensation
    
    
    2812. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    2813. Certain Relationships and Related Transactions
    
    
    2814. Principal Accountant Fees and Services
    
    
    28PART IV15. Exhibits and Financial Statement Schedules
    
    
    29Exhibit 10.3Exhibit 10.5Exhibit 10.7Exhibit 10.16Exhibit 23.1Exhibit 23.2Exhibit 31.1Exhibit 31.2Exhibit 32.1




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PART I
 This Annual Report on Form 10-K contains statements that 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. These forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include statements relating to trends in, or representing
managements beliefs about, our future strategies, operations and financial results, as well as
other statements including words such as believe, anticipate, expect, estimate, predict,
intend, plan, project, will, could, may, might or any variations of such words or
other words with similar meanings. Forward-looking statements are made based upon managements
current expectations and beliefs concerning trends and future developments and their potential
effects on the Company. You are cautioned not to place undue reliance on forward-looking
statements as predictions of actual results. These statements are not guarantees of future
performance and involve risks and uncertainties that are difficult to predict. Further, certain
forward-looking statements are based upon assumptions as to future events that may not prove to be
accurate. Actual results may differ materially from those suggested by forward-looking statements
as a result of risks and uncertainties which are discussed in further detail under Item 1A. Risk
Factors. We do not assume, and specifically disclaim, any obligation to update any
forward-looking statements, which speak only as of the date made.
 
 ITEM 1. BUSINESS
 General
 www.sportchalet.com
 Operating History and Growth Plans
    1




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Stores and Merchandising
     Year Ended March 31,2006
    
    
    2005
    
    
    2004Hardlines
    
    
    52
    %
    
    
    53
    %
    
    
    53
    %Apparel
    
    
    29
    %
    
    
    28
    %
    
    
    28
    %Footwear
    
    
    19
    %
    
    
    19
    %
    
    
    19
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 2




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www.sportchalet.com www.sportchalet.com
 Seasonal fluctuations
in the sales of sporting goods could cause our operating results to suffer.
 Marketing and Advertising
  Purchasing and Distribution
    3




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Information Systems
   Recapitalization Plan
    4




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Fiscal Year endedMarch 31, 2006Compensation
expense
    
    $
    8,221,826Professional fees
    
    
    471,3888,693,214Income tax benefit
    
    
    (854,000
    )Effect on net income
    
    $
    7,839,214
 Trademarks and Trade Names
  Industry and Competition
  
    
    full-line sporting goods chains, such as The Sports Authority, Dicks Sporting Goods
and Copeland Sports;
    
    specialty stores, such as REI, Bass Pro, Foot Locker, Finish Line, Chicks and Adventure 16;
    
    supplier-owned stores, such as Nike, The North Face, adidas, New Balance and Puma;
    
    mass merchandisers, club stores, discount stores and department stores, such as
Wal-Mart, Costco, Target and Kohls, Macys and Nordstroms; and
    
    Internet retailers and catalog merchandisers, such as Cabelas and Sportsmans
Guide.
  5




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Employees
   Additional Information
  www.sec.gov
 6




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ITEM 1A. RISK FACTORS
  Implementing Section 404 of the Sarbanes-Oxley Act of 2002 will be expensive, time-consuming
and require significant management attention, and may not be successful.
  A downturn in the economy may affect consumer purchases of discretionary items, which would
reduce our net sales.
  Terrorist attacks or acts of war may harm our business.
  Intense competition in the sporting goods industry could limit our growth and reduce our
profitability.
  Because our stores are concentrated in the western portion of the United States, we are
subject to regional risks.
  7




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We rely on one distribution center and any disruption could reduce our sales.
  Our ability to expand our business will be dependent upon our ability to meet challenges in
new markets.
  
    
    suitable sites may not be available for leasing;
    
    we may not be able to negotiate acceptable lease terms;
    
    we might not be able to hire and retain qualified store personnel; and
    
    we might not have the financial resources necessary to fund our expansion plans.
  We may pursue strategic acquisitions, which could have an adverse impact on our business.
  Our future growth will be dependent on the availability of additional financing.
  8




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If we are unable to successfully implement our controlled growth strategy or manage our
growing business, our future operating results could suffer.
  If we lose key management or are unable to attract and retain talent, our operating results
could suffer.
  Seasonal fluctuations in the sales of sporting goods could cause our annual operating results
to suffer.
  Our quarterly operating results may fluctuate substantially, which may adversely affect our
business.
  We are controlled by our Founder and management, whose interests may differ from other
stockholders.
  9




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Problems with our information systems could disrupt our operations and negatively impact our
financial results.
  
    
    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.
  If we are unable to predict or react to changes in consumer demand, we may lose customers and
our sales may decline.
  The price of our Class A Common Stock and Class B Common Stock may be volatile.
  Provisions in the Companys charter documents could discourage a takeover that stockholders
may consider favorable.
  10




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We may be subject to product liability claims and our insurance may not be sufficient to cover
damages related to those claims.
  Our comparable store sales will fluctuate and may not be a meaningful indicator of future
performance.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
 None.
 11




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ITEM 2. PROPERTIES
  Location
    
    Opening Date
    
    Gross Square FootageLa Cañada (1)
    
    June 1960
    
    
    40,300Huntington Beach (2) (4)
    
    June 1981
    
    
    50,000La Jolla
    
    June 1983
    
    
    20,000Mission Viejo
    
    August 1986
    
    
    30,000Point Loma (2)
    
    November 1987
    
    
    34,600Valencia (2) (5)
    
    November 1987
    
    
    40,000Marina del Rey (6)
    
    November 1989
    
    
    42,300Beverly Hills
    
    November 1989
    
    
    40,500Brea (2) (5)
    
    April 1990
    
    
    40,500Oxnard (2)
    
    June 1990
    
    
    40,100West Hills (2) (6)
    
    June 1991
    
    
    44,000Burbank
    
    August 1992
    
    
    45,000Montclair
    
    November 1992
    
    
    18,000Torrance (3)
    
    November 1993
    
    
    43,700Glendora
    
    November 1993
    
    
    40,000Rancho Cucamonga (2)
    
    June 1994
    
    
    36,000Irvine (2)
    
    November 1995
    
    
    35,000Laguna Niguel (4)
    
    November 1997
    
    
    40,000Mission Valley (3)
    
    June 1998
    
    
    47,000Long Beach
    
    May 1999
    
    
    43,000Porter Ranch
    
    July 1999
    
    
    43,000Temecula (4)
    
    October 1999
    
    
    40,000Chino Hills
    
    July 2000
    
    
    40,000Palmdale (2)
    
    June 2001
    
    
    40,000Henderson, NV (2)
    
    November 2001
    
    
    42,000Costa Mesa  South Coast
Plaza
    
    November 2001
    
    
    41,500Summerlin, NV (2)
    
    November 2002
    
    
    40,300Riverside
    
    November 2002
    
    
    44,000Antioch (2)
    
    November 2003
    
    
    40,000Redlands (2)
    
    November 2003
    
    
    42,000Sacramento (2)
    
    December 2003
    
    
    40,600Roseville
    
    August 2004
    
    
    37,000Pleasanton (2)
    
    August 2004
    
    
    40,500Arcadia
    
    October 2004
    
    
    42,200Elk Grove (2)
    
    November 2004
    
    
    42,000Visalia (2)
    
    November 2004
    
    
    41,000Happy Valley, AZ (2)
    
    November 2005
    
    
    42,000Chandler, AZ (2)
    
    November 2005
    
    
    41,200Scottsdale, AZ (2)
    
    November 2005
    
    
    41,500Foothill Ranch (2)
    
    February 2006
    
    
    43,000Total
    
    
    1,593,800
 
 (1)
    
    The original store opened in 1959. The existing store includes four facilities.(2)
    
    Includes swimming pool facility for SCUBA and kayaking instruction.(3)
    
    Remodels scheduled for fiscal 2007.(4)
    
    Remodels completed in fiscal 2006.(5)
    
    Remodels completed in fiscal 2005.(6)
    
    Remodels completed in fiscal 2004. 12




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ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  13




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PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 Market Price for Common Shares
  Old Common StockFiscal 2005
    
    High
    
    
    LowFirst Quarter
    
    $
    13.90
    
    
    $
    9.65Second Quarter
    
    $
    14.00
    
    
    $
    11.15Third Quarter
    
    $
    14.70
    
    
    $
    11.51Fourth Quarter
    
    $
    15.00
    
    
    $
    12.85
 Old Common StockFiscal 2006
    
    High
    
    LowFirst Quarter
    
    $
    19.50
    
    
    $
    12.84Second Quarter
    
    $
    18.14
    
    
    $
    16.00
 Class A
    
    
    Class BFiscal 2006
    
    High
    
    
    Low
    
    
    High
    
    
    LowSecond Quarter
    
    $
    10.75
    
    
    $
    8.50
    
    
    $
    68.00
    
    
    $
    13.00Third Quarter
    
    $
    10.20
    
    
    $
    6.87
    
    
    $
    15.55
    
    
    $
    8.00Fourth Quarter
    
    $
    8.36
    
    
    $
    7.01
    
    
    $
    8.70
    
    
    $
    7.12
 Class A
    
    Class BFiscal 2007
    
    High
    
    Low
    
    High
    
    LowFirst Quarter (through June 12, 2006)
    
    $
    8.45
    
    
    $
    7.49
    
    
    $
    8.34
    
    
    $
    7.50
  Approximate Number of Holders of Common Shares
  Dividend Policy
  14




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ITEM 6. SELECTED FINANCIAL DATA
  Year Ended March 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(In thousands, except per share, per square foot amounts)Statements of Income Data:Net sales
    
    $
    343,204
    
    
    $
    309,090
    
    
    $
    264,237
    
    
    $
    238,033
    
    
    $
    227,349Cost of goods sold, buying and occupancy
costs
    
    
    237,137
    
    
    
    213,429
    
    
    
    184,047
    
    
    
    168,519
    
    
    
    162,368Gross profit
    
    
    106,067
    
    
    
    95,661
    
    
    
    80,190
    
    
    
    69,514
    
    
    
    64,981Selling, general and administrative expenses (3)
    
    
    101,534
    
    
    
    85,145
    
    
    
    72,360
    
    
    
    62,579
    
    
    
    57,443Income from operations (3)
    
    
    4,533
    
    
    
    10,516
    
    
    
    7,830
    
    
    
    6,935
    
    
    
    7,538Interest expense
    
    
    267
    
    
    
    263
    
    
    
    190
    
    
    
    307
    
    
    
    71Income before taxes (3)
    
    
    4,266
    
    
    
    10,253
    
    
    
    7,640
    
    
    
    6,628
    
    
    
    7,467Income tax provision (3)
    
    
    4,353
    
    
    
    4,082
    
    
    
    2,996
    
    
    
    2,584
    
    
    
    3,026Net income (loss) (3)
    
    $
    (87
    )
    
    $
    6,171
    
    
    $
    4,644
    
    
    $
    4,044
    
    
    $
    4,441Class A and Class B earnings (loss) per
share  basic (3)
    
    $
    (0.01
    )
    
    $
    0.46
    
    
    $
    0.35
    
    
    $
    0.31
    
    
    $
    0.34Class A and Class B earnings (loss) per
share  diluted (3)
    
    $
    (0.01
    )
    
    $
    0.44
    
    
    $
    0.33
    
    
    $
    0.29
    
    
    $
    0.32Weighted average Class A and Class B
shares outstanding:Basic
    
    
    13,506
    
    
    
    13,361
    
    
    
    13,291
    
    
    
    13,230
    
    
    
    13,174Diluted
    
    
    13,506
    
    
    
    14,007
    
    
    
    14,017
    
    
    
    13,894
    
    
    
    13,990Selected Operating Data:Comparable store sales increase (decrease) (1)
    
    
    1.9
    %
    
    
    5.7
    %
    
    
    3.7
    %
    
    
    (0.9
    )%
    
    
    (1.1
    )%Gross profit margin
    
    
    30.9
    %
    
    
    30.9
    %
    
    
    30.3
    %
    
    
    29.2
    %
    
    
    28.6
    %Selling, general and administrative expenses as
percentage of net sales (3)
    
    
    29.6
    %
    
    
    27.5
    %
    
    
    27.4
    %
    
    
    26.3
    %
    
    
    25.3
    %Net cash provided by operating activities
    
    $
    16,976
    
    
    $
    17,955
    
    
    $
    7,608
    
    
    $
    6,513
    
    
    $
    7,350Depreciation and amortization
    
    $
    9,226
    
    
    $
    7,692
    
    
    $
    6,447
    
    
    $
    5,890
    
    
    $
    5,143Stores open at end of period
    
    
    40
    
    
    
    36
    
    
    
    31
    
    
    
    28
    
    
    
    26Total square feet at end of period
    
    
    1,586
    
    
    
    1,412
    
    
    
    1,210
    
    
    
    1,087
    
    
    
    1,002Net sales per square foot (2)
    
    $
    238
    
    
    $
    241
    
    
    $
    239
    
    
    $
    241
    
    
    $
    247Average net sales per store (2)
    
    $
    9,351
    
    
    $
    9,430
    
    
    $
    9,221
    
    
    $
    9,220
    
    
    $
    9,453
 As of March 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Balance Sheet Data:Working capital
    
    $
    43,446
    
    
    $
    43,116
    
    
    $
    40,746
    
    
    $
    37,329
    
    
    $
    32,224Total assets
    
    
    132,238
    
    
    
    118,789
    
    
    
    95,057
    
    
    
    89,492
    
    
    
    85,510Long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total stockholders equity
    
    
    77,468
    
    
    
    69,110
    
    
    
    62,811
    
    
    
    57,456
    
    
    
    53,223
 
 (1)
    
    A stores sales are included in the comparable store sales calculation after its twelfth
full month of operation.(2)
    
    Calculated by using stores that were open for the full current fiscal year and were
also open for the full prior fiscal year.(3)
    
    For fiscal 2006, the recapitalization plan included the transfer of stock from the
Companys founder to certain members of management with a resulting charge to selling, general
and administrative expenses of $8.7 million, primarily related to stock compensation, and a
reduction to net income of $7.8 million. Selling, general and administrative expenses for
fiscal 2006 without the expense from the recapitalization plan are 27.1% of sales. Basic and
diluted earnings per share for fiscal 2006 without the expense of the recapitalization plan
are $0.57 and $0.55, respectively. 15




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 This Annual Report on Form 10-K contains statements that 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. These forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include statements relating to trends in, or representing
managements beliefs about, our future strategies, operations and financial results, as well as
other statements including words such as believe, anticipate, expect, estimate, predict,
intend, plan, project, will, could, may, might or any variations of such words or
other words with similar meanings. Forward-looking statements are made based upon managements
current expectations and beliefs concerning trends and future developments and their potential
effects on the Company. You are cautioned not to place undue reliance on forward-looking
statements as predictions of actual results. These statements are not guarantees of future
performance and involve risks and uncertainties that are difficult to predict. Further, certain
forward-looking statements are based upon assumptions as to future events that may not prove to be
accurate. Actual results may differ materially from those suggested by forward-looking statements
as a result of risks and uncertainties which are discussed in further detail under Item 1A. Risk
Factors. We do not assume, and specifically disclaim, any obligation to update any
forward-looking statements, which speak only as of the date made.
  Overview
     16




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Results of Operations
 Fiscal 2006 Compared to Fiscal 2005.
  Year ended March 31,2006
    
    2005
    
    Dollar
    
    PercentageAmount
    
    Percent
    
    Amount
    
    Percent
    
    Change
    
    ChangeNet sales
    
    $
    343,204
    
    
    
    100.0
    %
    
    $
    309,090
    
    
    
    100.0
    %
    
    $
    34,114
    
    
    
    11.0
    %Gross profit
    
    
    106,067
    
    
    
    30.9
    %
    
    
    95,661
    
    
    
    30.9
    %
    
    
    10,406
    
    
    
    10.9
    %Selling, general and
administrative expenses
    
    
    101,534
    
    
    
    29.6
    %
    
    
    85,145
    
    
    
    27.5
    %
    
    
    16,389
    
    
    
    19.2
    %Income from operations
    
    
    4,533
    
    
    
    1.3
    %
    
    
    10,516
    
    
    
    3.4
    %
    
    
    (5,983
    )
    
    
    (56.9
    %)Interest expense
    
    
    267
    
    
    
    0.1
    %
    
    
    263
    
    
    
    0.1
    %
    
    
    4
    
    
    
    1.5
    %Income before taxes
    
    
    4,266
    
    
    
    1.2
    %
    
    
    10,253
    
    
    
    3.3
    %
    
    
    (5,987
    )
    
    
    (58.4
    %)Net income (loss)
    
    
    (87
    )
    
    
    (0.0
    %)
    
    
    6,171
    
    
    
    2.0
    %
    
    
    (6,258
    )
    
    
    (101.4
    %)Class A and Class BEarnings (loss) per share:Basic
    
    $
    (0.01
    )
    
    
    
    
    
    $
    0.46
    
    
    
    
    
    
    $
    (0.47
    )
    
    
    (102.2
    %)Diluted
    
    $
    (0.01
    )
    
    
    
    
    
    $
    0.44
    
    
    
    
    
    
    $
    (0.45
    )
    
    
    (102.3
    %)
 
 All share and per share information has been adjusted to reflect the reclassification and
stock dividend as discussed in Item 1 Business  Recapitalization Plan. 17




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Year ended March 31,2006
    
    2005
    
    Dollar
    
    PercentageAmount
    
    Percent
    
    Amount
    
    Percent
    
    Change
    
    ChangeNet sales
    
    $
    343,204
    
    
    
    100.0
    %
    
    $
    309,090
    
    
    
    100.0
    %
    
    $
    34,114
    
    
    
    11.0
    %Gross profit
    
    
    106,067
    
    
    
    30.9
    %
    
    
    95,661
    
    
    
    30.9
    %
    
    
    10,406
    
    
    
    10.9
    %Selling, general and
administrative
expenses
    
    
    92,841
    
    
    
    27.1
    %
    
    
    85,145
    
    
    
    27.5
    %
    
    
    7,696
    
    
    
    9.0
    %Income from operations
    
    
    13,226
    
    
    
    3.9
    %
    
    
    10,516
    
    
    
    3.4
    %
    
    
    2,710
    
    
    
    25.8
    %Interest expense
    
    
    267
    
    
    
    0.1
    %
    
    
    263
    
    
    
    0.1
    %
    
    
    4
    
    
    
    1.5
    %Income before taxes
    
    
    12,959
    
    
    
    3.8
    %
    
    
    10,253
    
    
    
    3.3
    %
    
    
    2,706
    
    
    
    26.4
    %Net income
    
    
    7,752
    
    
    
    2.3
    %
    
    
    6,171
    
    
    
    2.0
    %
    
    
    1,581
    
    
    
    25.6
    %Class A and Class BEarnings per share:Basic
    
    $
    0.57
    
    
    
    
    
    
    $
    0.46
    
    
    
    
    
    
    $
    0.11
    
    
    
    23.9
    %Diluted
    
    $
    0.55
    
    
    
    
    
    
    $
    0.44
    
    
    
    
    
    
    $
    0.11
    
    
    
    25.0
    %
 
 All share and per share information has been adjusted to reflect the reclassification and
stock dividend as discussed in Item 1  Business Recapitalization Plan.  Fiscal year ended March 31, 2006GAAP
    
    
    Adjustments
    
    
    Non-GAAPSelling, general and administrative expenses
    
    $
    101,534
    
    
    $
    (8,693
    )
    
    $
    92,841Income from operations
    
    
    4,533
    
    
    
    8,693
    
    
    
    13,226Income before taxes
    
    
    4,266
    
    
    
    8,693
    
    
    
    12,959Income tax provision
    
    
    4,353
    
    
    
    (854
    )
    
    
    5,207Net income (loss)
    
    $
    (87
    )
    
    $
    7,839
    
    
    $
    7,752Class A and Class Bearning (loss) per share:Basic
    
    $
    (0.01
    )
    
    $
    0.58
    
    
    $
    0.57Diluted
    
    $
    (0.01
    )
    
    $
    0.56
    
    
    $
    0.55
 18




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##### Table of Contents



19




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##### Table of Contents



Fourth Quarter 2006 Compared to Fourth Quarter 2005.
  Quarter ended March 31,2006
    
    2005
    
    Dollar
    
    PercentageAmount
    
    Percent
    
    Amount
    
    Percent
    
    Increase
    
    IncreaseNet sales
    
    $
    89,663
    
    
    
    100.0
    %
    
    $
    79,172
    
    
    
    100.0
    %
    
    $
    10,491
    
    
    
    13.3
    %Gross profit
    
    
    27,062
    
    
    
    30.2
    %
    
    
    24,350
    
    
    
    30.8
    %
    
    
    2,712
    
    
    
    11.1
    %Selling, general and
administrative
expenses
    
    
    24,251
    
    
    
    27.0
    %
    
    
    23,162
    
    
    
    29.3
    %
    
    
    1,089
    
    
    
    4.7
    %Income from operations
    
    
    2,811
    
    
    
    3.1
    %
    
    
    1,188
    
    
    
    1.5
    %
    
    
    1,623
    
    
    
    136.6
    %Interest expense
    
    
    77
    
    
    
    0.1
    %
    
    
    27
    
    
    
    0.0
    %
    
    
    50
    
    
    
    185.2
    %Income before taxes
    
    
    2,734
    
    
    
    3.0
    %
    
    
    1,161
    
    
    
    1.5
    %
    
    
    1,573
    
    
    
    135.5
    %Net income
    
    
    1,638
    
    
    
    1.8
    %
    
    
    722
    
    
    
    0.9
    %
    
    
    916
    
    
    
    126.9
    %Class A and Class BEarnings per share:Basic
    
    $
    0.12
    
    
    
    
    
    
    $
    0.06
    
    
    
    
    
    
    $
    0.06
    
    
    
    100.0
    %Diluted
    
    $
    0.12
    
    
    
    
    
    
    $
    0.05
    
    
    
    
    
    
    $
    0.07
    
    
    
    140.0
    %
 
 All share and per share information has been adjusted to reflect the reclassification and
stock dividend as discussed in Item 1 Business Recapitalization Plan.     20




---



##### Table of Contents



Fiscal 2005 Compared to Fiscal 2004.
  Year ended March 31,2005
    
    2004
    
    Dollar
    
    PercentageAmount
    
    Percent
    
    Amount
    
    Percent
    
    Increase
    
    IncreaseNet sales
    
    $
    309,090
    
    
    
    100.0
    %
    
    $
    264,237
    
    
    
    100.0
    %
    
    $
    44,853
    
    
    
    17.0
    %Gross profit
    
    
    95,661
    
    
    
    30.9
    %
    
    
    80,190
    
    
    
    30.3
    %
    
    
    15,471
    
    
    
    19.3
    %Selling, general and
administrative
expenses
    
    
    85,145
    
    
    
    27.5
    %
    
    
    72,360
    
    
    
    27.4
    %
    
    
    12,785
    
    
    
    17.7
    %Income from operations
    
    
    10,516
    
    
    
    3.4
    %
    
    
    7,830
    
    
    
    3.0
    %
    
    
    2,686
    
    
    
    34.3
    %Interest expense
    
    
    263
    
    
    
    0.1
    %
    
    
    190
    
    
    
    0.1
    %
    
    
    73
    
    
    
    38.4
    %Income before taxes
    
    
    10,253
    
    
    
    3.3
    %
    
    
    7,640
    
    
    
    2.9
    %
    
    
    2,613
    
    
    
    34.2
    %Net income
    
    
    6,171
    
    
    
    2.0
    %
    
    
    4,644
    
    
    
    1.8
    %
    
    
    1,527
    
    
    
    32.9
    %Class A and Class BEarnings per share:Basic
    
    $
    0.46
    
    
    
    
    
    
    $
    0.35
    
    
    
    
    
    
    $
    0.11
    
    
    
    31.4
    %Diluted
    
    $
    0.44
    
    
    
    
    
    
    $
    0.33
    
    
    
    
    
    
    $
    0.11
    
    
    
    33.3
    %
 
 All share and per share information has been adjusted to reflect the reclassification and
stock dividend as discussed in Item 1 Business  Recapitalization Plan.    21




---



##### Table of Contents



Liquidity and Capital Resources
        Year ended March 31,2006
    
    
    2005
    
    
    2004New stores
    
    $
    10,033
    
    
    $
    9,840
    
    
    $
    3,595Remodels
    
    
    2,625
    
    
    
    1,552
    
    
    
    1,978Existing stores
    
    
    1,393
    
    
    
    1,127
    
    
    
    850Information systems
    
    
    4,768
    
    
    
    1,152
    
    
    
    1,496Rental equipment
    
    
    1,161
    
    
    
    1,089
    
    
    
    886Other
    
    
    315
    
    
    
    438
    
    
    
    196Total
    
    $
    20,295
    
    
    $
    15,198
    
    
    $
    9,001
  22




---



##### Table of Contents



Operating
    
    
    EmploymentPayments due by period:
    
    Leases
    
    
    ContractsWithin 1 year
    
    $
    25,726,911
    
    
    $
    169,5002 - 3 years
    
    
    49,621,203
    
    
    
    339,0004 - 5 years
    
    
    45,048,722
    
    
    
    339,000After 5 years
    
    
    79,174,127
    
    
    
    678,000Total
    
    $
    199,570,963
    
    
    $
    1,525,500
   23




---



##### Table of Contents



Critical Accounting Policies and Use of Estimates
  Inventory Valuation.
   Revenue Recognition.
 Gift Card/Certificate Redemption.
   24




---



##### Table of Contents



Self-insurance.
 Impairment of Long-Lived Assets.
 Accounting for Income Taxes.
   Stock-Based Compensation
 25




---



##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
        26




---



##### Table of Contents



ITEM 9A. CONTROLS AND PROCEDURES
    
 ITEM 9B. OTHER INFORMATION
  27




---



##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
  
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  28




---



##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 (a)
    
    (1)
    
    Financial Statements  The financial statements listed on the accompanying Index to Audited Consolidated Financial Statements are filed as part of this report.(2)
    
    Schedules  Valuations and Qualifying Accounts.
  Allowance for
    
    Balance atSales Returns
    
    beginning of
    
    
    
    
    
    
    
    
    
    Balance at(Year ended)
    
    period
    
    Additions
    
    Deductions
    
    end of period3/31/2006
    
    
    $
    330,000
    
    
    $
    16,769,528
    
    
    $
    16,713,528
    
    
    $
    386,0003/31/2005
    
    
    $
    240,000
    
    
    $
    15,302,119
    
    
    $
    15,212,119
    
    
    $
    330,0003/31/2004
    
    
    
    
    
    
    $
    13,591,231
    
    
    $
    13,351,231
    
    
    $
    240,000
  (b)
    
    Exhibits  See Index on Page 52.
 29




---



##### Table of Contents



Sport Chalet, Inc.
 Index to Audited Consolidated Financial Statements
 PageReports of Independent Registered Public Accounting Firms
    
    
    31Consolidated Statements of Operations for each of the three years in the
period ended March 31, 2006
    
    
    33Consolidated Balance Sheets as of March 31, 2006 and 2005
    
    
    34Consolidated Statements of Stockholders Equity for each of the three
years in the period ended March 31, 2006
    
    
    35Consolidated Statements of Cash Flows for each of the three years in the
period ended March 31, 2006
    
    
    36Notes to Consolidated Financial Statements
    
    
    37
 30




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
     
 31




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
     
 32




---



##### Table of Contents



Sport Chalet, Inc.
 
 Consolidated Statements of Operations
 Year ended March 31,2006
    
    
    2005
    
    
    2004Net sales
    
    $
    343,204,097
    
    
    $
    309,089,551
    
    
    $
    264,236,923Cost of goods sold, buying and occupancy costs
    
    
    237,137,009
    
    
    
    213,428,269
    
    
    
    184,046,770Gross profit
    
    
    106,067,088
    
    
    
    95,661,282
    
    
    
    80,190,153Selling, general and administrative expenses
    
    
    101,534,075
    
    
    
    85,144,702
    
    
    
    72,360,528Income from operations
    
    
    4,533,013
    
    
    
    10,516,580
    
    
    
    7,829,625Interest expense
    
    
    266,910
    
    
    
    263,523
    
    
    
    189,924Income before taxes
    
    
    4,266,103
    
    
    
    10,253,057
    
    
    
    7,639,701Income tax provision
    
    
    4,353,292
    
    
    
    4,082,000
    
    
    
    2,995,625Net income (loss)
    
    $
    (87,189
    )
    
    $
    6,171,057
    
    
    $
    4,644,076Earnings (loss) per share:Basic
    
    $
    (0.01
    )
    
    $
    0.46
    
    
    $
    0.35Diluted
    
    $
    (0.01
    )
    
    $
    0.44
    
    
    $
    0.33Weighted average number of common shares
outstanding:Basic
    
    
    13,505,952
    
    
    
    13,360,986
    
    
    
    13,291,334Diluted
    
    
    13,505,952
    
    
    
    14,007,372
    
    
    
    14,016,760
  See accompanying notes.
 33




---



##### Table of Contents



Sport Chalet, Inc.
 
 Consolidated Balance Sheets
 March 31,2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    2,563,930
    
    
    $
    6,176,689Accounts receivable, less allowance of $130,000 in 2006
and $182,000 in 2005
    
    
    2,479,386
    
    
    
    1,462,042Merchandise inventories
    
    
    67,777,059
    
    
    
    65,061,142Prepaid expenses and other current assets
    
    
    3,857,570
    
    
    
    3,044,153Deferred income taxes
    
    
    3,920,192
    
    
    
    3,915,079Total current assets
    
    
    80,598,137
    
    
    
    79,659,105Fixed assets, net
    
    
    48,365,653
    
    
    
    37,502,578Deferred income taxes
    
    
    3,274,015
    
    
    
    1,550,753Other assets
    
    
    
    
    
    
    76,960Total assets
    
    $
    132,237,805
    
    
    $
    118,789,396Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    16,467,120
    
    
    $
    18,805,953Salaries and wages payable
    
    
    5,473,610
    
    
    
    5,080,320Income taxes payable
    
    
    302,274
    
    
    
    825,059Other accrued expenses
    
    
    14,909,439
    
    
    
    11,831,595Total current liabilities
    
    
    37,152,443
    
    
    
    36,542,927Deferred rent
    
    
    17,616,994
    
    
    
    13,136,303Commitments and contingenciesStockholders equity:Preferred stock, $.01 par value:Authorized shares  2,000,000
Issued and outstanding shares  none
    
    
    
    
    
    
    Class A Common stock, $.01 par value:Authorized shares  46,000,000
Issued and outstanding shares  11,927,146 in 2006 and
11,700,794 in 2005
    
    
    119,271
    
    
    
    117,008Class B Common stock, $.01 par value:Authorized shares  2,000,000
Issued and outstanding shares  1,703,909 in 2006 and
1,671,571 in 2005
    
    
    17,039
    
    
    
    16,716Additional paid-in capital
    
    
    31,335,324
    
    
    
    22,892,519Retained earnings
    
    
    45,996,734
    
    
    
    46,083,923Total stockholders equity
    
    
    77,468,368
    
    
    
    69,110,166Total liabilities and stockholders equity
    
    $
    132,237,805
    
    
    $
    118,789,396
  See
accompanying notes
 34




---



##### Table of Contents



Sport Chalet, Inc.
 
 Consolidated Statements of Stockholders Equity
 Common StockClass A
    
    
    Class B
    
    
    Additional
    
    
    RetainedShare
    
    
    Amount
    
    
    Share
    
    
    Amount
    
    
    Paid-in Capital
    
    
    Earnings
    
    
    TotalBalance at March 31, 2003
    
    
    11,599,238
    
    
    $
    115,992
    
    
    
    1,657,063
    
    
    $
    16,571
    
    
    $
    22,055,089
    
    
    $
    35,268,790
    
    
    $
    57,456,442Options exercised
    
    
    79,100
    
    
    
    791
    
    
    
    11,300
    
    
    
    113
    
    
    
    225,669
    
    
    
    
    
    
    
    226,573Related income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,498
    
    
    
    
    
    
    
    34,498Shares granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    448,918
    
    
    
    
    
    
    
    448,918Net income for 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,644,076
    
    
    
    4,644,076Balance at March 31, 2004
    
    
    11,678,338
    
    
    $
    116,783
    
    
    
    1,668,363
    
    
    $
    16,684
    
    
    $
    22,764,174
    
    
    $
    39,912,866
    
    
    $
    62,810,507Options exercised
    
    
    22,456
    
    
    
    225
    
    
    
    3,208
    
    
    
    32
    
    
    
    59,101
    
    
    
    
    
    
    
    59,358Related income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69,244
    
    
    
    
    
    
    
    69,244Shares granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income for 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,171,057
    
    
    
    6,171,057Balance at March 31, 2005
    
    
    11,700,794
    
    
    $
    117,008
    
    
    
    1,671,571
    
    
    
    16,716
    
    
    $
    22,892,519
    
    
    $
    46,083,923
    
    
    $
    69,110,166Options exercised
    
    
    226,352
    
    
    
    2,263
    
    
    
    32,338
    
    
    
    323
    
    
    
    471,603
    
    
    
    
    
    
    
    474,189Related income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,013,895
    
    
    
    
    
    
    
    1,013,895Optionee
withholding taxes from exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,264,519
    )
    
    
    
    
    
    
    (1,264,519
    )Shares granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,221,826
    
    
    
    
    
    
    
    8,221,826Net income for 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (87,189
    )
    
    
    (87,189
    )Balance at March 31, 2006
    
    
    11,927,146
    
    
    $
    119,271
    
    
    
    1,703,909
    
    
    $
    17,039
    
    
    $
    31,335,324
    
    
    $
    45,996,734
    
    
    $
    77,468,368
  See accompanying notes.
 35




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##### Table of Contents



Sport Chalet, Inc.
 
 Consolidated Statements of Cash Flows
 Year ended March 31,2006
    
    
    2005
    
    
    2004Operating activitiesNet (loss) income
    
    $
    (87,189
    )
    
    $
    6,171,057
    
    
    $
    4,644,076Adjustments to reconcile net (loss) income to net
cash provided by operating activities:Depreciation and amortization
    
    
    9,225,765
    
    
    
    7,692,015
    
    
    
    6,446,657(Gain) Loss on disposal of equipment
    
    
    (213,122
    )
    
    
    360,761
    
    
    
    354,608Stock compensation
    
    
    8,221,826
    
    
    
    
    
    
    
    448,918Deferred income taxes
    
    
    (1,728,375
    )
    
    
    (1,787,158
    )
    
    
    (1,073,494
    )Tax benefit on employee stock options
    
    
    1,013,895
    
    
    
    69,244
    
    
    
    34,498Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,017,344
    )
    
    
    (253,108
    )
    
    
    (68,415
    )Merchandise inventories
    
    
    (2,715,917
    )
    
    
    (10,889,087
    )
    
    
    (3,285,425
    )Prepaid expenses and other current assets
    
    
    (813,417
    )
    
    
    (842,117
    )
    
    
    (163,448
    )Refundable income taxes
    
    
    
    
    
    
    
    
    
    
    58,990Bank overdraft
    
    
    
    
    
    
    
    
    
    
    (5,764,355
    )Accounts payable
    
    
    (2,338,833
    )
    
    
    7,787,476
    
    
    
    1,778,029Salaries and wages payable
    
    
    393,290
    
    
    
    1,725,952
    
    
    
    1,163,033Other accrued expenses
    
    
    3,077,844
    
    
    
    3,887,638
    
    
    
    2,789,208Income taxes payable
    
    
    (522,785
    )
    
    
    789,428
    
    
    
    35,631Deferred rent
    
    
    4,480,691
    
    
    
    3,242,722
    
    
    
    209,066Net cash provided by operating activities
    
    
    16,976,329
    
    
    
    17,954,823
    
    
    
    7,607,577Investing activitiesPurchases of fixed assets
    
    
    (20,295,088
    )
    
    
    (15,197,322
    )
    
    
    (9,001,374
    )Other assets
    
    
    76,960
    
    
    
    24,076
    
    
    
    8,869Proceeds from sales of fixed assets
    
    
    419,370
    
    
    
    264,106
    
    
    
    Net cash used in investing activities
    
    
    (19,798,758
    )
    
    
    (14,909,140
    )
    
    
    (8,992,505
    )Financing activitiesProceeds from bank borrowings
    
    
    46,361,065
    
    
    
    10,700,000
    
    
    
    10,225,000Repayment of bank borrowings
    
    
    (46,361,065
    )
    
    
    (10,700,000
    )
    
    
    (10,225,000
    )Proceeds from exercise of stock options
    
    
    474,189
    
    
    
    59,358
    
    
    
    226,573Optionee
withholding taxes from exercise of stock options
    
    
    (1,264,519
    )
    
    
    
    
    
    
    Net cash provided by (used) financing activities
    
    
    (790,330
    )
    
    
    59,358
    
    
    
    226,573Increase (decrease) in cash and cash equivalents
    
    
    (3,612,759
    )
    
    
    3,105,041
    
    
    
    (1,158,355
    )Cash and cash equivalents at beginning of year
    
    
    6,176,689
    
    
    
    3,071,648
    
    
    
    4,230,003Cash and cash equivalents at end of year
    
    $
    2,563,930
    
    
    $
    6,176,689
    
    
    $
    3,071,648Cash paid during the year for:Income taxes
    
    $
    5,591,000
    
    
    $
    3,624,000
    
    
    $
    3,940,000Interest
    
    
    157,946
    
    
    
    101,512
    
    
    
    189,925
 See accompanying notes.
 36




---



##### Table of Contents



Sport Chalet, Inc.
 
 Notes to Consolidated Financial Statements
 1. Description of Business and Recapitalization Plan
      37




---



##### Table of Contents



Sport Chalet, Inc.
 Notes to Consolidated Financial Statements (continued)
 Fiscal year endedMarch 31, 2006Compensation expense
    
    $
    8,221,826Professional fees
    
    
    471,3888,693,214Income tax benefit
    
    
    (854,000
    )Effect on net income
    
    $
    7,839,214
  Segments of an Enterprise
  2. Summary of Significant Accounting Policies
 Principles of Consolidation
  Cash and Cash Equivalents
   Merchandise Inventories
  38




---



##### Table of Contents



Sport Chalet, Inc.
 Notes to Consolidated Financial Statements (continued)
   Accounts Receivable
  Fixed Assets
  Fixtures and equipment
    
    5-7 yearsRental equipment
    
    3 yearsVehicles
    
    5 yearsLeasehold improvements
    
    10-15 years
  March 31,2006
    
    
    2005Fixtures and equipment
    
    $
    40,864,670
    
    
    $
    31,175,598Rental equipment
    
    
    5,010,435
    
    
    
    4,454,223Vehicles
    
    
    376,448
    
    
    
    307,366Leasehold improvements
    
    
    41,448,392
    
    
    
    33,583,08287,699,946
    
    
    
    69,520,269Accumulated depreciation
    
    
    (39,334,293
    )
    
    
    (32,017,691
    )Net fixed assets
    
    $
    48,365,653
    
    
    $
    37,502,578
  39




---



##### Table of Contents



Sport Chalet, Inc.
 Notes to Consolidated Financial Statements (continued)
 Long Lived Assets
  Financial Instruments
  Pre-opening Costs
  Revenue Recognition
  Gift Card/Certificate Redemption
   Vendor Allowances
  40




---



##### Table of Contents



Sport Chalet, Inc.
 Notes to Consolidated Financial Statements (continued)
 Advertising Costs
  Income Taxes
  Deferred Rent
  Self-insurance Accruals
  41




---



##### Table of Contents



Sport Chalet, Inc.
 Notes to Consolidated Financial Statements (continued)
 Earnings Per Share
   March 31,2006
    
    2005
    
    2004(in thousands, except per share data)Basic EPS computation:Numerator
    
    $
    (87
    )
    
    $
    6,171
    
    
    $
    4,644Denominator:Weighted average common
shares outstanding
    
    
    13,506
    
    
    
    13,361
    
    
    
    13,291Basic earnings (loss) per share
    
    $
    (0.01
    )
    
    $
    0.46
    
    
    $
    0.35Diluted EPS computation:Numerator
    
    $
    (87
    )
    
    $
    6,171
    
    
    $
    4,644Denominator:Weighted average common
shares outstanding
    
    
    13,506
    
    
    
    13,361
    
    
    
    13,291Incremental shares from
assumed conversion of
options
    
    
    
    
    
    
    646
    
    
    
    726Total weighted average common
shares  assuming dilution
    
    
    13,506
    
    
    
    14,007
    
    
    
    14,017Diluted earnings (loss) per share
    
    $
    (0.01
    )
    
    $
    0.44
    
    
    $
    0.33
   Use of Estimates
  42




---



##### Table of Contents



Sport Chalet, Inc.
 Notes to Consolidated Financial Statements (continued)
 Stock-Based Compensation
     43




---



##### Table of Contents



Sport Chalet, Inc.
 Notes to Consolidated Financial Statements (continued)
  March 31,2006
    
    2005
    
    2004Net income (loss) as reported
    
    $
    (87,189
    )
    
    $
    6,171,057
    
    
    $
    4,644,076Add:Stock based compensation expense included
in reported net income, net of related
tax effects
    
    
    7,541,662
    
    
    
    
    
    
    
    271,146Cancellation of Sport Chalet Option, LLC
    
    
    747,351
    
    
    
    
    
    
    
    Deduct:Sport Chalet Option, LLC
    
    
    
    
    
    
    348,660
    
    
    
    313,476Stock-based compensation expense from
recapitalization
    
    
    (7,541,662
    )
    
    
    
    
    
    
    Total stock-based employee compensation
expense determined under fair market
value based method for all awards, net of
related tax effects
    
    
    (1,215,712
    )
    
    
    (202,138
    )
    
    
    (492,306
    )Pro forma net income (loss)
    
    $
    (555,550
    )
    
    $
    5,620,259
    
    
    $
    4,109,440Earnings (loss) per share  basic and dilutedAs reported  basic
    
    $
    (0.01
    )
    
    $
    0.46
    
    
    $
    0.35As reported  diluted
    
    $
    (0.01
    )
    
    $
    0.44
    
    
    $
    0.33Pro forma  basic
    
    $
    (0.04
    )
    
    $
    0.42
    
    
    $
    0.31Pro forma  diluted
    
    $
    (0.04
    )
    
    $
    0.40
    
    
    $
    0.29
   44




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##### Table of Contents



Sport Chalet, Inc.
 Notes to Consolidated Financial Statements (continued)
 3. Loans Payable to Bank
    4. Commitments and Contingencies
   Leases with
    
    UnrelatedFounder
    
    Leases
    
    Total2007
    
    $
    1,876,445
    
    
    $
    23,850,466
    
    
    $
    25,726,9112008
    
    
    1,876,445
    
    
    
    23,784,685
    
    
    
    25,661,1302009
    
    
    1,876,445
    
    
    
    22,083,628
    
    
    
    23,960,0732010
    
    
    1,876,445
    
    
    
    21,763,683
    
    
    
    23,640,1282011
    
    
    1,793,111
    
    
    
    19,615,482
    
    
    
    21,408,593Thereafter
    
    
    3,444,329
    
    
    
    75,729,799
    
    
    
    79,174,128$
    12,743,220
    
    
    $
    186,827,743
    
    
    $
    199,570,963
 45




---



##### Table of Contents



Sport Chalet, Inc.
 Notes to Consolidated Financial Statements (continued)
   5. Income Taxes
  2006
    
    2005
    
    2004Federal:Current
    
    $
    4,953,795
    
    
    $
    4,430,000
    
    
    $
    3,278,625Deferred
    
    
    (1,492,424
    )
    
    
    (1,186,000
    )
    
    
    (919,000
    )3,461,372
    
    
    
    3,244,000
    
    
    
    2,359,625State:Current
    
    
    1,127,871
    
    
    
    1,439,000
    
    
    
    799,000Deferred
    
    
    (235,951
    )
    
    
    (601,000
    )
    
    
    (163,000
    )891,921
    
    
    
    838,000
    
    
    
    636,000$
    4,353,292
    
    
    $
    4,082,000
    
    
    $
    2,995,625
  2006
    
    2005Non-
    
    
    
    
    
    Non-Current
    
    current
    
    Current
    
    currentDeferred tax assets:Fixed assets
    
    $
    
    
    
    $
    1,752,668
    
    
    $
    
    
    
    $
    166,973Uniform cost capitalization
    
    
    309,007
    
    
    
    
    
    
    
    297,944
    
    
    
    Inventory reserves
    
    
    876,357
    
    
    
    
    
    
    
    796,688
    
    
    
    Accrued vacation
    
    
    337,170
    
    
    
    
    
    
    
    316,058
    
    
    
    Bonus accrual
    
    
    730,961
    
    
    
    
    
    
    
    637,350
    
    
    
    Self-insurance accruals
    
    
    1,049,847
    
    
    
    
    
    
    
    991,612
    
    
    
    Allowance for bad debt and
sales returns
    
    
    205,546
    
    
    
    
    
    
    
    397,092
    
    
    
    State income taxes
    
    
    591,745
    
    
    
    
    
    
    
    326,965
    
    
    
    Deferred rent
    
    
    
    
    
    
    1,521,347
    
    
    
    
    
    
    
    1,383,780Other
    
    
    (180,441
    )
    
    
    
    
    
    
    151,370
    
    
    
    Total deferred tax assets
    
    $
    3,920,192
    
    
    $
    3,274,015
    
    
    $
    3,915,079
    
    
    $
    1,550,753
 46




---



##### Table of Contents



Sport Chalet, Inc.
 Notes to Consolidated Financial Statements (continued)
  2006
    
    2005
    
    2004Statutory rate, 34% applied to income
before taxes
    
    $
    1,450,475
    
    
    $
    3,486,000
    
    
    $
    2,597,000State taxes, net of federal tax effect
    
    
    248,901
    
    
    
    598,000
    
    
    
    446,000Nondeductible stock award
    
    
    2,629,668Other, net
    
    
    24,248
    
    
    
    (2,000
    )
    
    
    (47,375
    )$
    4,353,292
    
    
    $
    4,082,000
    
    
    $
    2,995,625
 6. Award Plan and Stock Award
 Award Plan
     47




---



##### Table of Contents



Sport Chalet, Inc.
 Notes to Consolidated Financial Statements (continued)
   March 31, 2006
    
    
    March 31, 2005
    
    
    March 31, 2004Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseOptions
    
    
    Price
    
    
    Options
    
    
    Price
    
    
    Options
    
    
    PriceOutstanding at
beginning of year
    
    
    2,016,000
    
    
    $
    3.04
    
    
    
    1,811,334
    
    
    $
    2.57
    
    
    
    1,879,334
    
    
    $
    2.55Granted
    
    
    426,500
    
    
    
    7.75
    
    
    
    256,334
    
    
    
    6.35
    
    
    
    86,000
    
    
    
    3.61Exercised
    
    
    (258,687
    )
    
    
    1.83
    
    
    
    (25,668
    )
    
    
    2.31
    
    
    
    (90,400
    )
    
    
    2.51Forfeited
    
    
    (233,645
    )
    
    
    2.56
    
    
    
    (26,000
    )
    
    
    3.40
    
    
    
    (63,600
    )
    
    
    3.55Outstanding at end
of year
    
    
    1,950,168
    
    
    $
    4.29
    
    
    
    2,016,000
    
    
    $
    3.04
    
    
    
    1,811,334
    
    
    $
    2.57Exercisable at end
of year
    
    
    1,865,612
    
    
    $
    4.19
    
    
    
    1,560,466
    
    
    $
    2.43
    
    
    
    1,455,068
    
    
    $
    2.29
  Stock Options Outstanding
    
    
    Stock Options ExercisableWeightedWeighted
    
    
    Average
    
    
    
    
    
    
    WeightedRange of Exercise
    
    
    
    
    
    Average
    
    
    Remaining
    
    
    
    
    
    
    AveragePrices
    
    Shares
    
    
    Exercise Price
    
    
    Life
    
    
    Shares
    
    
    Exercise PriceUnder $3.00
    
    
    897,000
    
    
    $
    2.30
    
    
    
    2.7
    
    
    
    897,000
    
    
    $
    2.30$3.00-$4.50
    
    
    408,000
    
    
    
    4.12
    
    
    
    5.3
    
    
    
    402,000
    
    
    
    4.12$4.50-$5.99
    
    
    20,000
    
    
    
    4.58
    
    
    
    0.2
    
    
    
    20,000
    
    
    
    4.58$6.00-$7.50
    
    
    461,168
    
    
    
    6.92
    
    
    
    9.1
    
    
    
    387,612
    
    
    
    7.00Above $7.50
    
    
    164,000
    
    
    
    8.15
    
    
    
    9.3
    
    
    
    159,000
    
    
    
    8.171,950,168
    
    
    
    4.29
    
    
    
    5.3
    
    
    
    1,865,612
    
    
    
    4.19
 48




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##### Table of Contents



Sport Chalet, Inc.
 Notes to Consolidated Financial Statements (continued)
 Stock Award
    7. Employee Retirement Plan
  8. Other Accrued Expenses
  March 31,2006
    
    2005Amount due to customers
    
    $
    3,741,056
    
    
    $
    3,036,509Accrued sales tax
    
    
    2,421,609
    
    
    
    2,249,770Self-insurance accruals
    
    
    2,400,527
    
    
    
    2,364,336Other
    
    
    6,346,247
    
    
    
    4,180,980Other accrued expenses
    
    $
    14,909,439
    
    
    $
    11,831,595
 49




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##### Table of Contents



Sport Chalet, Inc.
 Notes to Consolidated Financial Statements (continued)
 9. Quarterly Results of Operations (Unaudited)
  First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    QuarterFiscal 2006Net sales
    
    $
    72,144
    
    
    $
    81,732
    
    
    $
    99,665
    
    
    $
    89,663Gross profit
    
    
    21,304
    
    
    
    25,958
    
    
    
    31,743
    
    
    
    27,062Income (loss) from operations
    
    
    655
    
    
    
    (4,241
    )
    
    
    5,308
    
    
    
    2,811Net income (loss)
    
    
    389
    
    
    
    (5,163
    )
    
    
    3,049
    
    
    
    1,638Basic earnings (loss) per share
    
    $
    0.03
    
    
    
    ($0.38
    )
    
    $
    0.22
    
    
    $
    0.12Diluted earnings (loss) per share
    
    $
    0.03
    
    
    
    ($0.38
    )
    
    $
    0.22
    
    
    $
    0.12
 First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    QuarterFiscal 2005Net sales
    
    $
    61,538
    
    
    $
    72,465
    
    
    $
    95,914
    
    
    $
    79,172Gross profit
    
    
    17,768
    
    
    
    22,297
    
    
    
    31,246
    
    
    
    24,350Income from operations
    
    
    282
    
    
    
    2,707
    
    
    
    6,340
    
    
    
    1,188Net income
    
    
    137
    
    
    
    1,594
    
    
    
    3,719
    
    
    
    722Basic earnings per share
    
    $
    0.01
    
    
    $
    0.12
    
    
    $
    0.28
    
    
    $
    0.06Diluted earnings per share
    
    $
    0.01
    
    
    $
    0.11
    
    
    $
    0.26
    
    
    $
    0.05
   50




---



##### Table of Contents



SIGNATURES
  SPORT CHALET, INC.(Registrant)Date: June 21, 2006
    
    
    
    By:
    
    /s/ Howard K. KaminskyHoward K. Kaminsky, Executive Vice President Finance, Chief Financial Officer and Secretary(Principal Financial and Accounting Officer)
   /s/ Norbert Olberz
    
    Date: June 21, 2006Norbert Olberz,Chairman Emeritus and Director/s/ Craig L. Levra
    
    Date: June 21, 2006Craig L. Levra, Chairman,Chief Executive Officer and President(Principal Executive Officer)/s/ Howard K. Kaminsky
    
    Date: June 21, 2006Howard K. Kaminsky, Executive Vice President Finance, Chief Financial Officer and Secretary(Principal Financial and Accounting Officer)/s/ John R. Attwood
    
    Date: June 21, 2006John R. Attwood, Director/s/ Donald J. Howard
    
    Date: June 21, 2006Donald J. Howard, Director/s/ Al D. McCready
    
    Date: June 21, 2006Al D. McCready, Director/s/ Eric S. Olberz
    
    Date: June 21, 2006Eric S. Olberz, Director/s/ Kenneth Olsen
    
    Date: June 21, 2006Kenneth Olsen, Director/s/ Frederick H. Schneider
    
    Date: June 21, 2006Frederick H. Schneider, Director
 51




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##### Table of Contents



Exhibit Index
 Number
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation.
    
    
    (1
    )3.2
    
    Certificate of Amendment to the Amended and Restated Certificate of Incorporation.
    
    
    (2
    )3.3
    
    Bylaws, of Sport Chalet, Inc., as amended.
    
    
    (3
    )4.1
    
    Form of Certificate for the Class A Common Stock.
    
    
    (4
    )4.2
    
    Form of Certificate for the Class B Common Stock.
    
    
    (4
    )10.1
    
    1992 Incentive Award Plan.
    
    
    (5
    )10.2
    
    2004 Equity Incentive Plan.
    
    
    (6
    )10.3*
    
    Form of Director and Officer Indemnification Agreement.
    
    
    10.4
    
    Lease for La Cañada stores dated as of September 1, 1992, between the Company and La
Cañada Properties, Inc.
    
    
    (7
    )10.5
    
    Amendment to Lease for La Cañada stores dated as of June 12, 2006, between the Company
and La Cañada Properties, Inc.
    
    
    10.6
    
    Lease for Huntington Beach store dated as of August 25, 1994, between the Company and
Huntington Beach Properties, Inc.
    
    
    (8
    )10.7
    
    Amendment to Lease for Huntington Beach store dated as of June 12, 2006, between the
Company and Huntington Beach Properties, Inc.
    
    
    10.8
    
    Lease for Porter Ranch store dated as of May 7, 1999, between the Company and North San
Fernando Valley Properties, Inc.
    
    
    (9
    )10.9
    
    Lease for La Cañada offices dated as of October 1, 2002, between the Company and La
Cañada Properties, Inc.
    
    
    (10
    )10.10
    
    Business Loan Agreement dated as of June 19, 1998, between the Company and Bank of
America, N.A.
    
    
    (11
    )10.11
    
    Amendment No. 2 to Business Loan Agreement dated as of June 19,1998, between the Company
and Bank of America, N.A.
    
    
    (12
    )10.12
    
    Amendment No. 3 to Business Loan Agreement dated as of November 20, 2001, between the
Company and Bank of America, N.A.
    
    
    (13
    )10.13
    
    Amendment No. 4 to Business Loan Agreement dated as of June 10, 2002, between the Company
and Bank of America, N.A.
    
    
    (14
    )10.14
    
    Amendment No. 5 to Loan Agreement, dated as of September 25, 2003, between the Company
and Bank of America, N.A.
    
    
    (15
    )10.15
    
    Amendment No. 6 to Loan Agreement, dated as of September 30, 2005, between the Company
and Bank of America, N.A.
    
    
    (16
    )10.16
    
    Amendment No. 7 to Loan Agreement, dated as of March 31, 2006, between the Company and
Bank of America, N.A.
    
    
    10.17*
    
    Employment Agreement dated as of April 1, 2000, between the Company and Norbert J. Olberz.
    
    
    (17
    )10.18*
    
    Amendment No. 1 to Employment Agreement, dated as of December 9, 2005, between Sport
Chalet, Inc. and Norbert J. Olberz.
    
    
    (18
    )10.19*
    
    Employment Agreement dated as of November 15, 2002, between the Company and Craig L.
Levra.
    
    
    (19
    )10.20*
    
    Employment Agreement dated as of November 15, 2002, between the Company and Howard K.
Kaminsky.
    
    
    (19
    )
 52




---



##### Table of Contents



Exhibit
Index
 Number
    
    Description10.21*
    
    Employment Agreement dated as of November 15, 2002,
between the Company and Dennis D. Trausch.
    
    
    (19
    )14.1
    
    Code of Conduct.
    
    
    (20
    )16.1
    
    Letter regarding change in accounting firm.
    
    
    (21
    )23.1
    
    Report of Independent Registered Public Accounting Firm.
    
    
    23.2
    
    Report of Independent Registered Public Accounting Firm.
    
    
    24.1
    
    Power of attorney (see signature page).31.1
    
    Certification Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
    
    
    31.2
    
    Certification Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
    
    
    32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
    
    
    
    
    Filed as part of this Annual Report on Form 10-K.*
    
    Constitute management contracts, or compensatory plans or
arrangements, which are required to be filed pursuant to
Item 601 of Regulation S-K.(1)
    
    Incorporated by reference to Exhibit 3.1 to the Companys
Registration Statement on Form S-1 (Registration
Statement No. 33-53120).(2)
    
    Incorporated by reference to Exhibit A to the Companys
definitive proxy statement for the 2005 annual meeting of
stockholders.(3)
    
    Incorporated by reference to Exhibit 3.2 to the Companys
Registration Statement on Form S-8 (Registration
Statement No. 333-107683).(4)
    
    Incorporated by reference to Exhibit 4.1 and 4.2 to the
Companys Registration of Certain Classes of Securities
on Form 8-A (Registration Statement No. 000-20736).(5)
    
    Incorporated by reference to Exhibit 10.19 to the
Companys Registration Statement on Form S-1
(Registration Statement No. 33-53120).(6)
    
    Incorporated by reference to Appendix D to the Companys
definitive proxy statement for the 2004 annual meeting of
stockholders.(7)
    
    Incorporated by reference to Exhibit 10.1 to the
Companys Registration Statement on Form S-1
(Registration Statement No. 33-53120).(8)
    
    Incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the quarter
ended September 30, 1994.(9)
    
    Incorporated by reference to Exhibit 10.41 to the
Companys Annual Report on Form 10-K for the fiscal year
ended March 31, 1999.(10)
    
    Incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002.(11)
    
    Incorporated by reference to Exhibit 10.37 to the
Companys Annual Report on Form 10-K for the fiscal year
ended March 31, 1998.(12)
    
    Incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000.(13)
    
    Incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the quarter
ended December 31, 2001.
 53




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##### Table of Contents



Exhibit
Index
 Number
    
    Description(14)
    
    Incorporated by reference to Exhibit 10.55 to the Companys Annual
Report on Form 10-K for the fiscal year ended March 31, 2002.(15)
    
    Incorporated by reference to Exhibit 10.1 to the Companys Quarterly
Report on Form 10-Q for the quarter ended September 30, 2003.(16)
    
    Incorporated by reference to Exhibit 99.4 to the Companys Current
Report on Form 8-K filed on October 3, 2005(17)
    
    Incorporated by reference to Exhibit 10.45 to the Companys Annual
Report on Form 10-K for the fiscal year ended March 31, 2000.(18)
    
    Incorporated by reference to Exhibit 99.1 to the Companys Current
Report on Form 8-K filed on December 9, 2005(19)
    
    Incorporated by reference to Exhibits 10.1, 10.2 and 10.3 to the
Companys Quarterly Report on Form 10-Q for the quarter ended
December 31, 2002.(20)
    
    Incorporated by reference to Exhibit 14.1 to Amendment No.1 to the
Companys Annual Report on Form 10-K/A for the fiscal year ended
March 31, 2004.(21)
    
    Incorporated by reference to Exhibit 16.1 to the Companys Current
Report on Form 8-K filed on November 18, 2004.
 54