UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549





FORM
10-K





(Mark
One)




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


For the fiscal year endedMarch 29, 2009





OR





[  ]
            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.


(Exact
name of registrant as specified in its charter)




Delaware
                  (State or other
      jurisdiction of incorporation or
      organization)
                
                95-4390071
                  (I.R.S.
      Employer Identification Number)One Sport
      Chalet Drive, La Cañada, California
                  (Address
      of principal executive offices)
                
                91011
                  (Zip
      Code)




Registrant’s
telephone number, including area code: (818) 949-5300


Securities
registered pursuant to Section 12(b) of the Act:




Title of Each
      Class:
                      
                      Name of Each
      Exchange on Which Registered:Class A Common Stock, $0.01 par
      value
                        Class B Common Stock, $0.01 par
      value
                      
                      The NASDAQ Stock Market
      LLC
                        The NASDAQ Stock Market
      LLC




Securities
registered pursuant to Section 12(g) of the Act:  None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act.[   ]  Yes  [X]  No





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. [   ]  Yes  [X]  No





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. [X]  Yes  [   ]  No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
[   ]  Yes  [   ]  No





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










Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.:




Large
      accelerated filer
                      [   ]
                      Accelerated
      filer
                      [   ]Non-accelerated
      filer
                      [   ]
                      Smaller
      reporting company
                      [X]




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
[   ]  Yes  [X]  No





The
aggregate market value of Class A Common Stock and Class B Common Stock held by
non-affiliates of the registrant as of September 30, 2008, was approximately
$13.2 million based upon the closing sale prices of Class A Common Stock and
Class B Common Stock on that date.





At June
25, 2009, there were 12,359,990 shares of Class A Common Stock outstanding and
1,763,321 shares of Class B Common Stock outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the registrant’s definitive proxy statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A in connection with the 2009
annual meeting of stockholders are incorporated by reference into Part III of
this Report. The proxy statement will be filed with the Securities and Exchange
Commission not later than 120 days after the registrant’s fiscal year ended
March 29, 2009.







TABLE
OF CONTENTS


Item
                                      
                                      PagePART
      I1.
                                      Business
                                      11A.
                                      Risk
      Factors
                                      111B.
                                      Unresolved
      Staff Comments
                                      182.
                                      Properties
                                      193.
                                      Legal
      Proceedings
                                      214.
                                      Submission
      of Matters to a Vote of Security Holders
                                      21PART
      II5.
                                      Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                                      226.
                                      Selected
      Financial Data
                                      247.
                                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                      257A.
                                      Quantitative
      and Qualitative Disclosures About Market Risk
                                      418.
                                      Financial
      Statements and Supplementary Data
                                      419.
                                      Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                                      419A(T).
                                      Controls
      and Procedures
                                      429B.
                                      Other
      Information
                                      43PART
      III10.
                                      Directors,
      Executive Officers and Corporate Governance
                                      4411.
                                      Executive
      Compensation
                                      4412.
                                      Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                      4413.
                                      Certain
      Relationships and Related Transactions, and Director
      Independence
                                      4414.
                                      Principal
      Accountant Fees and Services
                                      44PART
      IV15.
                                      Exhibits
      and Financial Statement Schedules
                                      45









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
Overview





Sport Chalet, Inc. (referred to as the
“Company,” “Sport Chalet,” “we,” “us,” and “our” unless specified otherwise), is
a leading operator of 55 full-service, specialty sporting goods stores in
California, Nevada, Arizona and Utah, comprising a total of over two million
square feet of retail space.  As of March 29, 2009, we had 33
locations in Southern California, eight in Northern California, two in Central
California, three in Nevada, eight in Arizona and one in Utah. These stores
average approximately 41,000 square feet in size. In addition, we have a retail
e-commerce store at www.sportchalet.com.
Originally we were incorporated in California and we reincorporated as a
Delaware corporation in 1992. Our executive offices are located at One Sport
Chalet Drive, La Cañada, California 91011, and our telephone number is (818)
949-5300.





Operating
History





In 1959, Norbert Olberz, our founder
(the “Founder”), purchased a small ski and tennis shop in La Cañada,
California.  A focus on providing quality merchandise with outstanding
customer service was the foundation of Norbert’s vision.  As a true
pioneer in the industry, Norbert’s mission was three simple
things.  To “see things through the eyes of the customer;” “to do a
thousand things a little bit better;” and to focus on “not being the biggest,
but the best.”  Over the last 50 years, Sport Chalet has grown into a
chain of 55 specialty sporting goods stores serving California, Nevada, Arizona
and Utah.





Our growth had historically focused on
Southern California; but since 2001 we have expanded our scope to all of
California and to Nevada, Arizona and Utah.  Generally, our new stores
were located with the intent of strengthening our focus on Southern California
or in areas characterized by a large number of housing
developments.  We opened seven stores in fiscal 2008, 17 stores in the
last three years and 25 in the last five years.  In fiscal 2009, we
opened four new stores, relocated one and re-launched our website.  We
currently do not anticipate opening new stores or entering into new lease
commitments in the near future.





Store openings have had a favorable
impact on sales volume, but have negatively affected 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.  We
believe our stores historically have required three to four years to attract a
stable, mature customer base; but, because of our relatively low number of
stores, the impact of competitors’ stores and changing economic conditions,
reliable statistical trends are not available and there can be no assurance that
our newer stores will mature at that rate.  We estimate the cash
required to open an average new store is approximately $2.5 million consisting
primarily of the investment in inventory (net of average vendor payables), the
cost of leasehold improvements (net of landlord reimbursement), fixtures and
equipment and pre-opening expenses, which are primarily the costs associated
with training employees and stocking the store.  Cash requirements for
opening costs of each new store can vary significantly depending on how much the
landlord has agreed to contribute to our required improvements.




1





We believe our stores are located in
the geographic regions hardest hit by the downturn in the housing and credit
markets.  Our sales largely depend on the economic environment and
level of consumer spending in the geographic regions around our
stores.  The retail industry historically has been subject to
substantial cyclical variation, and a recession in the general economy or
uncertainties regarding future economic prospects that affect consumer spending
habits in our market areas are having, and may in the future continue to have, a
materially adverse effect on our results of operations.





Recent
Events





Our
comparable store sales growth had been positive for the four fiscal years prior
to fiscal 2008.  Comparable store sales declined 4.5% for fiscal 2008
and 12.4% for fiscal 2009 as we continue to confront a difficult macro-economic
environment, which began with weak housing trends and high gasoline prices in
our core markets and continued with the financial and credit
crisis.  As a result of the reduction in comparable store sales for
fiscal 2009 and the opening of new stores which have not reached maturity, we
incurred a net loss of $52.2 million, or $3.70 per diluted share, compared to a
net loss of $3.4 million, or $0.24 per diluted share, for fiscal
2008.  We have sustained operating losses in seven of the past eight
quarters.  Comparable store sales for the past seven quarters from the
second quarter of fiscal 2008 to the fourth quarter of fiscal 2009 are +2.2%,
-6.9%, -8.8%, -11.1%, -6.7%, -15.4% and -17.7%, respectively.  More
recently, for our first quarter through June 21, 2009, we have experienced a
14.9% decline in comparable store sales.





Non-cash impairment charges of $10.7
million and $2.1 million were recorded in fiscal 2009 and 2008, related to
eleven and two stores, respectively, with significantly lower than expected
sales volume which, based on recent trends, those stores are not expected to
obtain sufficient cash flow over their remaining lease terms to support the net
book value of their leasehold improvements and fixtures.





As of
December 31, 2008, an event of default had occurred under our Amended and
Restated Loan and Security Agreement, as amended, dated as of June 20, 2008 (the
"Loan Agreement") with our existing lender, Bank of America, N.A. (the
“Lender”).  On January 9, 2009, we entered into an amendment to the
Loan Agreement (the "First Amendment") under which, among other things, the
Lender agreed to forbear from exercising its rights in respect of the event of
default until January 31, 2009.  On January 29, 2009, the Lender
agreed to extend the forbearance until March 2, 2009.





On March 2, 2009, we further amended
the Loan Agreement (the “Third Amendment”).  Under the Third
Amendment, (i) the Lender waived the event of default, (ii) the amount we can
borrow against our borrowing base was reduced, (iii) the interest rate was
increased, and (iv) we agreed to maintain a minimum monthly
EBITDA.  The seasonal revolver limits under the credit facility remain
unchanged under the Third Amendment.





On May 4, 2009, we amended the Loan
Agreement (the “Fourth Amendment”).  Under the terms of the Fourth
Amendment, our availability increases by up to an additional $10.0 million
through a special advance facility.  The amount available under the
special advance facility will be reduced by $2.5 million on the first day of
each month commencing on July 1, 2010 and the special advance facility will
terminate on October 1, 2010.  This effectively increases the revolver
limit up to $55 million from January 1st of each year through August 31st and
also allows for seasonal advances up to $75.0 million from September 1st of each
year to December 31st, subject to the scheduled reductions.  For a
more detailed description of our Loan Agreement, see “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital
Resources and Item 1A. Risk Factors – The covenants in our revolving
credit facility may limit future borrowings to fund our
operations.”




2





Company
Initiatives to Manage Macro-Economic Environment





In October 2008, we began aggressively
taking action to address the severe downturn in the macro-economic environment
by examining our practices, assumptions, models and cost structures in an effort
to modify our business model in a manner which makes the Company more efficient,
more focused and better able to navigate the difficult
environment.  We are focused more intently than ever on reducing
operating expenses and improving liquidity through the following core
initiatives:





·
            Amended
      loan agreement with our single source lender, Bank of America, following
      two 30-day forbearance agreements.





·
            Aggressively
      reduced aged inventory, providing fresher and cleaner merchandise on the
      floor and enhancing the collateral
base.





·
            Communicated
      with all vendors regularly throughout the process to make sure they were
      fully aware of the challenges we are facing and the initiatives taken for
      a turnaround.





·
            Renegotiated
      lease terms across many of our stores, which eliminated the immediate need
      for store closures with reduced base rent payments, percentage rent and
      kick-out clauses.





·
            Significantly
      increased payroll efficiency in our stores and distribution center, which
      delivered lower spend per customer while maintaining the customer
      experience.





·
            Initiated
      significant reductions in corporate overhead, from a personnel and
      discretionary spending standpoint.





·
            Strengthened
      our corporate governance policies and
practices.





Although
no assurance can be given about the ultimate impact of these initiatives or of
the overall  economic climate, we believe these initiatives combined with a
diminished competitive environment due to the exit or diminished capacity of
many key specialty competitors throughout the marketplace will position us for
sustainability, viability and positive results in the future.





In June 2008, we moved from a cash flow
based revolving bank loan to an asset-based loan to improve
liquidity.  We had gone for nine years, through the end of 2006,
without bank debt at the end of any quarter.  This changed as we
invested heavily for growth with twelve new stores over the past two years, a
33% growth rate.  Additionally, there was a $9.5 million investment in
computer systems primarily from SAP along with $2.1 million investment in
ecommerce.  This led to the increased
borrowing.  Subsequently, we defaulted on a loan covenant and received
a Forbearance Agreement from Bank of America in January 2009 and a second
Forbearance Agreement in February 2009.  By March 2, 2009, based on
improving metrics of the Company and the initiatives listed above, we were able
to successfully negotiate an amendment to our loan agreement which waived the
event of default and reset the covenants.  Subsequently, on May 4,
2009, the bank amended the line to increase availability an additional $10
million.





In Fall 2008, we began an aggressive
inventory management program, which led to historic lows of aged Winter apparel
and hardlines, along with footwear, general apparel, and other key categories of
hardlines.  This was due in part to the renewed commitment by us to
better inventory control, new executive leadership in merchandising, along with
the implementation and roll out of SAP computer systems.  The result
was fresh assortments on the floor and an enhanced borrowing base.





In January 2009, we began communicating
with vendors asking for additional dating and credit terms, merchandise returns
and other means of vendor support.   Our requests were reviewed
and approved by a significant number of our vendors.  From January
through May 2009, we received a total of $138.6 million in fresh inventory at
retail.  Combined with the reduction in aged inventory, we believe we
have the freshest and cleanest inventory on our sales floors in our
history.




3




In
November 2008, we began approaching landlords of all 55 stores, as well as of
the corporate office, distribution center, and Team Sales division about
restructuring lease terms.  To date, these efforts have resulted in
projected savings of approximately $14 million over the next three years with
many leases to include kick-out clauses, percentage rent and co-tenancy
clauses.  We continue to negotiate aggressively for additional
concessions.





In October 2008, we revised our store
operating model by creating four models based on individual store performance,
increasing the number of fulltime versus part-time employees, freezing incentive
and salary programs. This resulted in a $7.2 million payroll reduction in the
second half of fiscal 2009, combined with an expected $10.7 million reduction
throughout fiscal 2010.  We began approaching expense vendors
concerning elimination or reduction of non-critical programs, implementing
aggressive cost containment and renegotiations.  In the second half of
fiscal 2009, we reduced over $2.8 million in annual expenses, which includes
advertising and marketing, professional fees, supplies, utilities, repairs and
maintenance, travel, insurance, computer maintenance agreements, auditor and
attorney fees, alarm monitoring services and shipping costs.  We
expect a $9.4 million reduction throughout fiscal 2010 in those
expenses.  In addition, there were headcount reductions in the
corporate office and distribution center.





We are working toward new corporate
governance policies aimed to provide complete transparency to stockholders, such
as removal of classes for Directors, annual election of Directors by a simple
majority vote, and the elimination of Actions by Written
Consent.  Additionally, we are changing the compensation structure to
decrease the fees paid to the Board of Directors.





Despite the macro-economic environment,
we continued to aggressively move forward with our Sport Chalet Action Pass
program, which was initiated in November 2007 to enhance our customer
relationship management capabilities.  At the beginning of the fiscal
year, we had 278,000 members.  To date, we have 720,000 members and
are signing 6,000 to 8,000 new members each week.  Currently, over 40%
of all sales are being generated by Action Pass members.  We have
shifted a significant portion of our marketing activities away from traditional
channels and towards direct marketing to our Action Pass members, our best
customers, and believe that this will result in a higher return on advertising
investment.





We successfully completed on-time and
on-budget the launch of the new sportchalet.com website on March 23,
2009.  We established a leadership position in ecommerce in the
sporting goods industry by selecting Marketlive, Sapient, Shopatron,
Bazaarvoice, and Experian CheetahMail to run the website.  This new
business is expected to achieve average store sales volume by the end of the
fiscal year and continue to grow.  It is also expected to be one of
our primary advertising and marketing vehicles in the future.





In April 2008, we implemented SAP, our
core finance and merchandising system, replacing a 25-year-old legacy
system.  The cost of this system was $9.5 million.  This
installation provided the platform for us to become Sarbanes-Oxley compliant and
provided the foundation for the ecommerce platform to launch.  The
system provides enhanced cost controls as well as performance data and has been
a key component to manage cash flow and expenses.  We received an
award from SAP as the retailer experiencing the most timely and efficient
implementation for the year.





As
mentioned earlier, as a result of the initiatives taken by us, Bank of America
approved loan amendments favorable to us and agreed to covenants that require a
$19 million EBITDA loss in fiscal 2009 improve to a $5.4 million EBITDA profit
in fiscal 2010, a $24 million improvement.  Performance against this
plan is measured on a monthly cumulative basis and non-compliance could result
in a default.  We have reported to the bank that results have exceeded
plan in the first two months of fiscal 2010.  We believe that these
aggressive actions taken early in the crisis, and in most cases well ahead of
our competitors, positions us for sustainability, viability and positive results
in the future.




4





Stores
and Merchandising





Our
prototype store is 42,000 square feet in size and showcases every merchandise
and service 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.  Each shop is staffed by trained sales associates with
expertise in the merchandise they sell, permitting us to offer our customers a
high level of product knowledge and service from the beginner to the serious
sports enthusiast.





Our
prototype format boasts a natural and outdoor-feel color scheme, clear-coated
fixtures, 30-foot clear ceilings, large sport-specific graphics, pool for SCUBA
and water sports instruction and demonstrations, and a 100 foot shoe wall, among
other features.  We have retro-fitted ten mature stores to conform to
the prototype as much as was practical.  For both new stores and
remodels, we continually update our prototype format to remain
competitive.  While we have taken advantage of unusual building
layouts in the past, and when appropriate may do so in the future, we will
utilize as many standard prototype design elements as possible.  We
evaluate stores for remodel based on each store’s age and competitive situation,
as well as how much the landlord will contribute to our required improvements.
Future store remodeling plans will depend upon several factors, including, but
not limited to, general economic conditions, competitive trends and the
availability of capital. As of March 29, 2009, 78% of our store base is based on
our prototype.





Our
stores feature a number of distinct, specialty sports and lifestyle categories,
offering a large assortment of quality brand name merchandise at competitive
prices.  The stores include traditional sporting goods merchandise
(e.g., footwear, apparel and other general athletic products) and core specialty
merchandise such as snowboarding, skateboarding, mountaineering and
SCUBA.  The merchandise appeals to both experts and moderate
users.  Using our investments in technology, we tailor each store’s
merchandise mix to appeal to our customers in each market.  In
addition, our stores offer over 50 services for the serious sports enthusiast,
including backpacking, canyoneering, and kayaking instruction, custom golf club
fitting and repair, snowboard and ski rental and repair, SCUBA training and
certification, SCUBA boat charters, team sales, racquet stringing, and bicycle
tune-up and repair.  Although the revenues generated by these support
services are not material, these services further differentiate us from our
competitors.  Generally, our stores are open seven days a week,
typically from 9:30 a.m. to 9:30 p.m. Monday through Friday, 9:00 a.m. to 9:00
p.m. Saturday, and 10:00 a.m. to 7:00 p.m. on Sunday.





The
following table illustrates our merchandise assortment of hardlines, which are
durable items, and softlines, which are non-durable items suchas apparel and
footwear, as a percentage of total net sales for each of the last three fiscal
years:




Fiscal
      year2009
                                
                                
                                
                                2008
                                
                                
                                
                                2007Hardlines
                                
                                
                                53
                                %
                                
                                
                                52
                                %
                                
                                
                                53
                                %Apparel
                                
                                
                                27
                                %
                                
                                
                                28
                                %
                                
                                
                                27
                                %Footwear
                                
                                
                                20
                                %
                                
                                
                                20
                                %
                                
                                
                                20
                                %Total
                                
                                
                                100
                                %
                                
                                
                                100
                                %
                                
                                
                                100
                                %





5




Ecommerce





Prior to
December 2008, Sport Chalet had an online store that was operated and managed by
GSI Commerce, Inc. (“GSI”).   Since 1999, GSI had created and
operated all aspects of the www.sportchalet.com
shopping experience, including fulfillment and purchasing. Sport Chalet received
a license fee based on a percentage of sales generated by the
website.  The licensing fee was not material to total
revenues.





In March
2009, we re-launched our website at www.sportchalet.com,
providing a fully integrated online/offline shopping experience for
customers.  The site is currently managed by Sport Chalet employees
and will display the complete selection of merchandise available in Sport Chalet
stores by the Fall of this year.  The new site also presents
information about all the services available in our stores and provides product
selection tools, advice and community sharing technologies.  In
developing this new ecommerce strategy, we leveraged our significant investments
in infrastructure and systems including SAP, High Jump and
MarketMax/SAS.  We also partnered with leading technology providers to
maximize the opportunity including:





·
            MarketLive
      – for the ecommerce platform and web site hosting. The Marketlive solution
      includes value added technology services from Endeca, Omniture and
      Scene7.


·
            Sapient
      Interactive – for site design, build and technical
      integration.


·
            Shopatron
      – for order management, payment processing, customer support, and enabling
      of in-store pickup.


·
            Baazarvoice
      – for customer ratings and reviews.


·
            Experian
      Cheetah Mail – for email campaign
management.





Purchases made online are shipped from
the distribution center or our stores, leveraging our inventory
investment.  By the end of the June 2009, customers will be able to
complete purchases online and have merchandise available for in-store
pickup.





Marketing
and Advertising





Historically,
we have generated our marketing and advertising campaigns in-house, with
production support from outside vendors as needed.  The campaigns are
designed to reflect our strategic direction through our brand and product
offerings, as well as communicate a focused and consistent theme/event calendar
through media including email, direct mail, radio, newspaper, magazines and the
internet.Our
marketing leverage has been boosted by vendor payments under cooperative
marketing arrangements as well as vendor participation in sponsoring events,
clinics and athletes’ appearances.   Moving forward, we have
significantly enhanced our online presence with a complete redesign of
sportchalet.com and new initiatives focused on driving consumers to the new
website and building ongoing relationships with our Action Pass
customers.  We seek to strengthen our position as a leading sporting
goods retailer in our markets through high-profile sponsorships with teams such
as the Los Angeles Lakers, University of Southern California and University of
California, Los Angeles while raising our profile in communities where we do
business with contributions to local teams and leagues through our Team Sales
Division.





The
launch of the new sportchalet.com in March 2009 marked the introduction of an
ecommerce strategy to better connect with our customers, capture additional
market share through an online and offline shopping experience, and raise
familiarity with Sport Chalet.  As traditional forms of media become
less relevant and effective, this platform will allow us to leverage our
vendors’ creative resources and web-ready content to our
advantage.  Unlike traditional media, there is less lead time involved
and a social connection can be established with customers, similar to the store
experience. By internally managing the website, we will be able to better
control product assortments, specialty services featured and branding
opportunities offered.  The new site is supported with a program of
online ads combined with search engine marketing and optimization to build
awareness of Sport Chalet with online shoppers, especially around key
promotional periods.




6





Our
customer relationship program, Action Pass, continues to grow following its
rollout in November 2007.  In addition to earning points for each
purchase redeemable towards future purchases, Action Pass members have access to
exclusive merchandise, appearances by athletes, trips and value-added services
related to their particular sporting interest.  The program allows us
to develop targeted marketing vehicles targeted at specific customers to create
excitement around product launches, new technologies and new
services.  We are forming stronger relationships with our customers as
we actively solicit Action Pass members’ feedback regarding their decision to
shop at Sport Chalet and perceptions of our store environment, product
selection, and pricing.  This allows us to understand our customers’
purchasing habits and shopping carts.  We use this information to respond
to our customers’ shopping preferences and patterns with continuous improvement
in merchandise assortments, category adjacencies and other marketing initiatives
across our entire network of stores.  Additionally, we are not
obligated to long term advertising schedules, which can be expensive and we
believe this to be a more efficient way to use vendor support.





Seasonality





The
market for retail sporting goods is seasonal in nature.  As with many
other retailers, our business is heavily affected by sales of merchandise during
the Holiday season.  In addition, our product mix has historically
emphasized cold weather sporting goods merchandise, particularly Winter-sports
related products.  In recent years, our third fiscal quarter, which
includes the Holiday season, represented approximately 30% of our annual net
sales.  Winter-related products and services represent approximately
16% of our annual net sales and have ranged from 25% to 31% of sales in our
fourth fiscal quarter.  We anticipate this seasonal trend in sales
will continue.  We attempt to respond to changes in mid-season weather
by maintaining flexibility in product placement at the stores and the marketing
of product offerings.  See “Item 1A. Risk Factors – Seasonal fluctuations in the sales
of sporting goods could cause our annual operating results to
suffer.”





Purchasing
and Distribution





In order
to provide a full line of specialty and sporting goods brands and a wide
selection, we purchase merchandise from approximately 1,000
vendors.  Vendor payment terms typically range from 30 to 120 days
from our receipt, and there are no long-term purchase commitments. Our largest
vendor, Nike, Inc., accounted for approximately 10% of our total inventory
purchases for fiscal 2009, up from 8% in fiscal 2008, and our 10 largest vendors
collectively accounted for 40% of our total purchases during fiscal
2009.





For
merchandise planning and allocation we use the SAS Marketmax software
solution.  This software includes merchandise planning, open-to-buy
management, assortment planning, store clustering, high performance forecasting,
performance analysis and allocation.  We allocate merchandise to our
stores based on trends and statistical modeling maximizing flow-through at our
distribution center.  We believe this technology package allows us to
better plan and forecast our business and leverage the information to optimize
store assortments and merchandise allocations.





For
replenishment we use a system from JDA Software Group, Inc.  The JDA
E3 system consists of three modules: (i) warehouse replenishment, which manages
purchases from vendors, (ii) store replenishment, which manages shipments from
the warehouse to stores, and (iii) network optimization, which synchronizes the
two systems. In addition, we use the JDA Consumer Outlook and Pinpoint seasonal
profile software to help identify, create and manage the seasonal trends of our
merchandise. Currently, we use the E3 system to manage approximately 54% of our
total inventory.  The remaining 46% of the inventory purchases are
managed by the SAS Marketmax software.





With our EDI capabilities, we now
provide sell through information by individual item size, color, and store to
our key merchandise suppliers so that they can better forecast our inventory
needs and we can better refine our assortments by store.





We
operate one distribution center, a 326,000 square foot facility located in
Ontario, California.  The distribution center serves as the primary
receiving, distribution and warehousing facility.  A minimal amount of
merchandise is shipped directly by vendors to our stores. Most of the product
received at the distribution center is processed by unpacking and verifying the
contents received and then sorting the contents by store for delivery. Some of
the product received at the distribution center is pre-packaged and pre-ticketed
by the vendor so it can be immediately cross-docked to trucks bound for the
stores. Due to the efficiencies cross-docking creates, we encourage vendors to
pre-package their merchandise in a floor-ready manner. Some of the merchandise
is held at the distribution center for future allocation to the stores based on
current sales trends as directed by our computerized replenishment and
allocation systems to optimize inventory levels.  We believe that the
advantages of a single distribution center include reduced individual store
inventory levels and better use of store floor space, timely inventory
replenishment of store inventory needs, consolidated vendor returns, and reduced
transportation costs. Common carriers deliver merchandise to our
stores.





7




CRS
Enterprise Selling software replaced our manual processes of locating and
transferring products for a customer in fiscal 2008.  In the event we
do not stock a particular item in a store, this software allows us to quickly
locate the item in another location, including our distribution center, and
complete the sale by accepting payment from the customer and shipping
merchandise from the most optimal location to the customer’s preferred
destination.





Information
Systems





Historically
we have used a “best of breed” approach to information systems.  All
systems communicated with a legacy system that was the centralized data
repository and the primary financial system.  As part of our comprehensive
review of internal control over financial reporting and also to enhance our
ability to grow, the legacy system has been replaced effective March 31,
2008.





In
October 2006, we selected mySAP2005 ERP from SAP as the replacement system and
began the implementation process.  Selecting SAP was based on a
strategic decision to focus future resources on a single-vendor ERP solution in
lieu of the historical “best of breed” approach.  Our analysis had
revealed that recent improvements in SAP’s solutions provided robust retail
functions, and we anticipate that future releases will provide additional
support for improved retail business processes.  This decision will
eventually permit us to enjoy the efficiencies of a fully integrated solution
without the overhead generally associated with interfacing systems in a
multi-vendor solution.





Store
systems use the Retail Store 3.0 Suite of applications from CRS Retail Systems
that were upgraded to the current release in the Summer 2006, including a
Returns Management application, and IBM SurePOS hardware.  CRS
Enterprise Selling was added in fiscal 2008. The processing of debit/credit card
authorization allows on-line debit and signature capture. A custom rental
program is also a part of the store system.  For merchandise planning
and allocation we use the SAS Marketmax software
solution.  Merchandise replenishment is controlled by E3 software from
JDA.  The distribution center uses warehouse management software from
HighJump Software (a 3M Company).





Our inventory systems track purchasing,
sales and inventory transfers down to the lowest level of detail, individual
items by size, color and store, which allow us to identify and project trends
and replenishment needs on a timely basis.





Recapitalization
Plan





In
September 2005, our stockholders approved a recapitalization plan designed to
facilitate the orderly transition of control from our Founder to certain members
of management and to increase financial flexibility for the Company and its
stockholders. The recapitalization plan consisted of (1) the reclassification of
each outstanding share of common stock as 0.25 share of Class B Common Stock,
(2) the issuance of seven shares of Class A Common Stock for each outstanding
share of Class B Common Stock and (3) the transfer of a portion of the Founder’s
ownership to Craig Levra, Chairman and Chief Executive Officer, and Howard
Kaminsky, Executive Vice President - Finance, Chief Financial Officer and
Secretary.  The recapitalization doubled our total number of shares
outstanding. Therefore, the recapitalization plan had the same effect on
earnings per share as a 2-for-1 stock split.  Shares transferred by
the Founder to Messrs. Levra and Kaminsky were treated as a contribution to the
Company’s capital with the offsetting charge as compensation
expense.




8





Trademarks
and Trade Names





We use
the “Sport Chalet” name as a service mark in connection with our business
operations.  We have registered “Sport Chalet” as a federal service
mark with the United States Patent and Trademark Office, along with the mark
“Action Pass,” among others.  We also own additional common law
trademarks and service marks which are used in commerce without
dispute.





Industry
and Competition





The
market for retail sporting goods is highly competitive, fragmented and
segmented. We compete with a variety of other retailers, including the
following:




·
            specialty
      stores, such as REI, Finish Line and Adventure
  16;




·
            full-line
      sporting goods chains, such as The Sports Authority and Dick's Sporting
      Goods;




·
            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 Nordstrom;
    and




·
            Internet
      retailers and catalog merchandisers, such as Amazon.com, Bass Pro,
      Cabela’s and Sportsman’s Guide.




In 2008,
the sporting goods industry was severely impacted by the weak macro-economic
environment.  Several competitors have closed stores, including Busy
Body, Active Ride Shops, Joe’s and Sportsman’s Warehouse.  Other
competitors have greater financial resources than we do, or better name
recognition in regions into which we might seek to expand. Our industry is
dominated by sporting goods superstore retailers, i.e., full-line sporting goods
chains with stores typically larger than 40,000 square
feet.  Superstore chains generally provide a greater selection of
higher quality merchandise than other retailers, while remaining price
competitive.   Specialty retailers often have the advantage of a
lower cost structure and a smaller "footprint" that can be located in shopping
centers and strip malls, offering more customer convenience.  Many of
these competitors have an online store, offering customers easy access to
merchandise.





Historically,
we have distinguished ourselves from our competitors by providing a broader
selection of higher-end specialty items that require higher levels of customer
service and sales associate expertise.  We believe that our broad
selection of high quality name brands and numerous specialty items at
competitive prices, showcased by our well-trained sales associates,
differentiates us from discount and department stores, traditional and specialty
sporting goods stores and other superstore operations.





Our
format takes advantage of several significant trends and conditions in the
sporting goods industry. These conditions include the size of the industry,
fragmented competition, limited assortments offered by many sporting goods
retailers, consumer preference for one-stop shopping, and the importance of
delivering value through selection, quality, service and price.





Employees





As of
March 29, 2009, we had a total of approximately 3,200 (down from 4,300 at March
30, 2008) full and part-time employees, 2,900 of whom were employed in our
stores and 300 of whom were employed in warehouse and delivery operations or in
corporate office positions.  None of our employees are covered by a
collective bargaining agreement.  We encourage and welcome the
communication of our employees’ ideas, suggestions and concerns and believe this
contributes to our strong employee relations. A typical store has approximately
55 employees (down from 75 in fiscal 2008), of whom 10 to 25 are in the store at
any given time on a normal operating basis.  Generally, each store
employs a general manager, two to three assistant managers, who along with
supervisors and department heads oversee the sales associates in customer
service, merchandising, and operations. Additional part-time employees are
typically hired during the Holiday and other peak seasons.




9





We are
committed to the growth and training of our employees in order to provide “The
Experts” in product knowledge and service to our customers.  Our
“Certified Pro” program encourages employees to attend product-line-specific
clinics and receive hands-on training to improve technical product and service
expertise.  Only after completing all of the clinics and training, in
addition to passing specific testing, may an associate be considered a Certified
Pro. Certified Pro certification is offered in 20 different service disciplines
and is a requirement for new associates in their areas of
expertise.  Being knowledgeable and informed allows our work force to
meet the customer's needs and enhance their shopping experience.





Additional
Information





The
Company makes available free of charge through our website, www.sportchalet.com,
our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) of the Securities Exchange Act of 1934, as soon as reasonably
practicable after those reports are filed with or furnished to the Securities
and Exchange Commission (“SEC”).





The
public may read any of the items we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain
information about the operation of the Public Reference Room by calling the SEC
at 1-800-SEC-0330. The SEC also maintains an Internet site that contains
reports, proxy and information statements, and other information regarding the
Company and other issuers that file electronically with the SEC at www.sec.gov.












10





ITEM
1A.  RISK FACTORS





Our
short-term and long-term success is subject to many factors that are beyond our
control.  Stockholders and prospective stockholders in the Company
should consider carefully the following risk factors, in addition to the
information contained in this report.  This Annual Report on Form 10-K
contains forward-looking statements, which are subject to a variety of risks and
uncertainties.  Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors
including those set forth below.





The
covenants in our revolving credit facility may limit future borrowings to fund
our operations.





Our
credit facility with Bank of America, N.A. (the “Lender”) provides for advances
up to $55.0 million, increasing to $75.0 million from September 1st of each year
through December 31st of each year.  The amount we may borrow under
this credit facility is limited to a percentage of the value of eligible
inventory, minus certain reserves.  The availability on this credit
facility is reduced in July 2010 and expires in June 2012.  Our
obligation to the Lender is presently secured by a first priority lien on
substantially all of our non-real estate assets.  We are subject to an
EBITDA covenant that requires us to exceed certain monthly amounts as defined in
the Fourth Amendment to the Amended and Restated Loan and Security
Agreement.There
can be no assurance that there will not be an event of default and additional
financing may not be available at terms acceptable to us, or at
all.  Failure to obtain financing in such circumstances may require us
to significantly curtail our operations.





The
amount we can borrow under our credit facility with the Lender is limited to a
percentage of the value of eligible inventory, minus certain
reserves.  A significant decrease in eligible inventory due to our
vendors’ unwillingness to ship us product, the aging of inventory, an
unfavorable inventory appraisal or other factors, could have an adverse effect
on our borrowing capabilities under our credit facility, which may adversely
affect the adequacy of our working capital.





If cash
generated by operations does not result in a sufficient level of unused
borrowing capacity, our current operations could be constrained by our ability
to obtain funds under the terms of our revolving credit facility.  In
such a case, we would need to seek other financing alternatives with our bank or
other sources.  Additional financing may not be available at terms
acceptable to us, or at all.  Failure to obtain financing in such
circumstances may require us to significantly curtail our
operations.





If
our vendors do not provide sufficient quantities of products, our net sales and
profitability could suffer.





We
purchase merchandise from approximately 1,000 vendors.  Although only
one vendor accounted for approximately 10% of our total inventory purchases for
fiscal 2009, our dependence on principal vendors involves risk.  Our
10 largest vendors collectively accounted for 40% of our total purchases during
fiscal 2009.  If there is a disruption in supply from a principal
vendor for any reason, including concern over our position with our lender, we
may be unable to obtain merchandise that we desire to sell and that consumers
desire to purchase.  A vendor could discontinue selling products to us
at any time for reasons that may or may not be within our
control.  Our net sales and profitability could decline if we are
unable to promptly replace a vendor who is unwilling or unable to satisfy our
requirements with a vendor providing equally appealing
products.  Moreover, many of our vendors provide us with incentives,
such as return privileges, volume purchase allowances and cooperative marketing
arrangements.  A decline or discontinuation of these incentives could
reduce our profits.





A downturn in the economy has
affected consumer purchases of discretionary items, significantly reducing our
net sales and profitability.





The
retail industry historically has been subject to substantial cyclical
variations. The merchandise sold by us is generally a discretionary expense for
our customers.  The current downturn in the general economy and
uncertainties regarding future economic prospects that affect consumer spending
habits are having, and are likely to continue for some time to have, a
materially adverse effect on our results of operations.  We have
sustained operating losses in seven of the past eight
quarters.  Comparable store sales for the past seven quarters from the
second quarter of fiscal 2008 to the fourth quarter of fiscal 2009 were +2.2%,
-6.9%, -8.8%, -11.1%, -6.7%, -15.4% and -17.7%, respectively.  More
recently, for our first quarter through June 21, 2009, we have experienced a
14.9% decline in comparable store sales.  In the event sales decline
at a rate greater than anticipated to support the loan covenants, we may have
insufficient working capital to continue to operate our business as it has been
operated, or at all.




11





No
assurance can be given that we will be successful in reducing operating expenses
and controlling costs in an amount sufficient to return to
profitability.





In our
efforts to reduce operating expenses and improve liquidity, we have reviewed all
of our store leases and are obtaining rent reductions and lease modifications
from our landlords.  Additionally, we are evaluating our operating
expenses, such as store labor, corporate overhead and advertising, and have
commenced implementing cost reductions.  No assurance can be given
that by reducing operating expenses and controlling costs we will return to
profitability.  Any failure to successfully reduce an adequate amount
of operating expenses and control costs could constrain our ability to continue
to operate our business.





We
may need to record additional impairment losses in the future if our stores'
operating performance does not improve.





We
continually review all our stores' operating performance and evaluate the
carrying value of their assets in relation to their expected future cash
flows.  In those cases where circumstances indicate that the carrying
value of the applicable assets may not be recoverable, we record an impairment
loss related to the long-lived assets.  In fiscal 2008, we incurred a
$2.1 million noncash impairment charge for two stores and in fiscal 2009, we
incurred a $10.7 million noncash impairment charge for eleven
stores.  If our newer stores' operating performance does not improve
in the future or our existing stores’ operating performance continues to
deteriorate in the future, the carrying value of our stores' assets may not be
recoverable in light of future expected cash flows.  Additionally, our
newer stores may not mature at a rate in line with our expectations or past
experience.  This may result in our need to record additional
impairment losses in certain markets where our stores operate and could have a
materially adverse effect on our business, financial condition and results of
operation.





No
assurance can be given that our Board of Directors will be successful in its
evaluation of strategic alternatives.





On
February 2, 2009, we announced that our Board of Directors had commenced an
evaluation of strategic alternatives and retained a financial advisor in this
process.  The review process may include such alternatives as raising
additional capital, amending or replacing our current bank credit facility,
further reducing expenses, or continuing to execute our current operating
plan.  No timetable has been set for completion of the review and no
assurance can be given that the Board of Directors will have sufficient time to
complete its evaluation.  We have no commitment or agreement with
respect to any transaction, and there can be no assurance that any transaction
will result.





Intense
competition in the sporting goods industry could limit our growth and reduce our
profitability.





The
sporting goods business and the retail environment are highly competitive, and
we compete 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 our competitors are larger and have
greater resources.  No assurance can be given that a diminished
competitive environment due to the exit of key competitors throughout the
marketplace will allow us to improve our business and increase our overall
profitability.




12




Our future operations may be
dependent on the availability of additional financing.





We may
not be able to fund our future operations or react to competitive pressures if
we lack sufficient funds.  Unexpected conditions could cause us to be
in violation of our lender’s operating covenants as occurred in fiscal
2009.  Although we have restructured our bank credit facility and we
believe we have sufficient cash available through our bank credit facilities and
cash from operations to fund existing operations for the foreseeable future, we
cannot be certain that additional financing will be available in the future if
necessary.





Because our stores are concentrated
in the western portion of the United States, we are subject to regional
risks.





Currently,
most of our stores are located in Southern California and the remaining are
located in Northern California, Central California, Nevada, Arizona and
Utah.  Accordingly, we are 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 our customers has affected sales in the most recent fiscal
year.  When the region suffers an economic downturn, such as the
mortgage crisis which has been especially strongly felt in California, Arizona
and Nevada, or when other adverse events occur, historically there has been an
adverse effect on our sales and profitability.  In addition, many of
our vendors rely on the Ports of Los Angeles and Long Beach to process our
shipments.  Any disruption or congestion at the ports could impair our
ability to adequately stock our stores. Several of our competitors operate
stores across the United States and, thus, are not as vulnerable to such
regional risks.





If we are unable to predict or react
to changes in consumer demand, we may lose customers and our sales may decline.





If we
fail to anticipate changes in consumer preferences, we will experience lower net
sales, higher inventory markdowns and lower margins.  Products may or
may not appeal to a broad range of consumers whose preferences cannot be
predicted with certainty. These preferences are also subject to
change.  Specialty sporting goods are often subject to short-lived
trends, such as the short-lived popularity of wheeled
footwear.  Apparel is significantly influenced by the latest fashion
trends and styles.  Our success depends upon the ability to anticipate
and respond in a timely manner to trends in specialty merchandise and consumers’
participation in sports on an individual market basis. Failure to identify and
respond to these changes may cause net sales to decline. In addition, because we
generally make commitments to purchase products from vendors up to nine months
in advance of the proposed delivery, misjudging the market may cause us to
over-stock unpopular products and force inventory markdowns that could have a
negative impact on profitability, or cause us to have insufficient inventory of
a popular item that can be sold at full markup.





Failure to protect the integrity and
security of our customers’ information could expose us to litigation and
materially damage our standing with our customers.




The increasing costs associated with
information security — such as increased investment in technology, the
costs of compliance with consumer protection laws and costs resulting from
consumer fraud — could cause our business and results of operations to
suffer materially.  While we are taking significant steps to protect
customer and confidential information, there can be no assurance that advances
in computer capabilities or other developments will prevent the compromise of
our customer transaction processing capabilities and personal
data.  More specifically, as Action Pass, our customer relationship
program, continues to grow, our exposure and risk increase as
well.  If any such compromise of our information security were to
occur, it could have a material adverse effect on our reputation, business,
operating results and financial condition and may increase the costs we incur to
protect against such information security breaches.




13





As a result of the current economic
downturn, we have delayed opening new stores.  Continued growth is uncertain and
subject to numerous risks.





Since our
inception, we have experienced periods of rapid growth.  No assurance
can be given that we will be successful in maintaining or increasing our sales
in the future.  Any future growth in sales will require additional
working capital and may place a significant strain on our management,
information systems, inventory management and distribution
facilities.  Any failure to timely enhance our operating systems, or
unexpected difficulties in implementing such enhancements, could have a material
adverse effect on our results of operations.





In
addition, 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;




·
            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 face
additional challenges in entering new markets, including consumers’ lack of
awareness of the Company, difficulties in hiring personnel and problems due to
our unfamiliarity with local real estate markets and demographics. New markets
may also have different competitive conditions, consumer tastes and
discretionary spending patterns than our existing markets. To the extent that we
are not able to meet these new challenges, sales could decrease and operating
costs could increase. Furthermore, a decline in our overall financial
performance, increased rents or any other adverse effects arising from the
commercial real estate market in our geographical markets may adversely affect
our current growth plan.  There can be no assurance that we will
possess sufficient funds to finance the expenditures related to a growth plan,
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.




If
we lose key management or are unable to attract and retain talent, our operating
results could suffer.





We depend
on the continued service of our senior management.  The loss of the
services of any key employee could hurt our business.  Also, our
future success depends on our ability to identify, attract, hire, train and
motivate other highly skilled personnel.  Failure to do so may
adversely affect future results.





Seasonal fluctuations in the sales of
sporting goods could cause our annual operating results to
suffer.





Our sales
volume increases significantly during the Holiday season as is typical with
other sporting goods retailers.  In addition, our product mix has
historically emphasized cold weather sporting goods increasing the seasonality
of our business.  In recent years, our third fiscal quarter, which
includes the Holiday season, represented approximately 30% of our annual net
sales.  Winter-related products represent approximately 17% of our
annual net sales and have ranged from 27% to 31% of our fourth fiscal
quarter.  We anticipate this seasonal trend in sales will
continue.  The operating results historically have been influenced by
the amount and timing of snowfall at the resorts frequented by our
customers.  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 us to make commitments for purchases of apparel and equipment
by early Spring for Fall delivery, and only limited quantities of merchandise
can be reordered during the Fall.  Consequently, we place our 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, we may be required to mark down our Winter
apparel and equipment.




14





Our
quarterly operating results may fluctuate substantially, which may adversely
affect our business.





We have
experienced, and expect to continue to experience, a substantial variation in
our net sales and operating results from quarter to quarter.  We
believe 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 our introduction of new products, the
level of consumer acceptance of each new product, the seasonality of the markets
in which we participate, the weather and actions of
competitors.  Accordingly, a comparison of our results of operations
from period to period is not necessarily meaningful, and our results of
operations for any period are not necessarily indicative of future
performance.





Declines in the effectiveness ofmarketingcould cause our operating results to
suffer.





Our
marketing campaigns historically relied on direct mail, radio, newspaper,
magazines and more recently, email and the internet.  Also our
marketing leverage has been boosted by vendor payments under cooperative
marketing arrangements as well as vendor participation in sponsoring events,
clinics and athletes’ appearances.  Our recent strategy shift
significantly enhanced our online presence with a complete redesign of
sportchalet.com and new initiatives focused on driving consumers to the new
website and building ongoing relationships with our Action Pass
customers.  We are directly marketing to individual customers based on
their personal shopping information through the customer relationship
program.  No assurance can be given that our recent shift in marketing
strategy will be successful in connecting with our customers, capturing
additional market share through a fully integrated online and offline shopping
experience, and raising familiarity with Sport Chalet.  We are
relatively new to and have fewer resources than our competitors in the ecommerce
arena and our results may not be consistent with our expectations.  In
addition, no assurance can be given that what we learn from our Action Pass
members about their shopping preferences and patterns will increase our ability
to apply this learning to decisions about assortments, category adjacencies, and
other marketing initiatives across our entire network of
stores.





Problems with our information systems
could disrupt our operations and negatively impact our financial results.





Our
ability to successfully manage inventory levels and our centralized distribution
system largely depends upon the efficient operation of our computer hardware and
software systems.  We use management information systems to track
inventory information at the store level, replenish inventory from our
warehouse, and aggregate daily sales information among other
things.  These systems and our operations are vulnerable to damage or
interruption from:





·
            earthquake,
      fire, flood and other natural
disasters;




·
            power
      loss, computer systems failures, internet and telecommunications or data
      network failure, operator negligence, improper operation by or supervision
      of employees, physical and electronic loss of data and similar events;
      and




·
            computer
      viruses, penetration by hackers seeking to disrupt operations or
      misappropriate information and other breaches of
  security.





We seek
to minimize these risks by the use of backup facilities and redundant
systems.  Nevertheless any failure that causes an interruption in our
operations or a decrease in inventory tracking could result in reduced net
sales.





We
are controlled by our Founder and management, whose interests may differ from
other stockholders.





At June
25, 2009, Norbert Olberz, the Company's founder, Craig Levra, the Company’s
Chairman and Chief Executive Officer, and Howard Kaminsky, the Company’s Chief
Financial Officer, owned approximately 21%, 33% and 12%, respectively, of the
voting power of the Company’s outstanding voting Class A and Class B Common
Stock.  Messrs. Olberz, Levra and Kaminsky effectively have 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.  Transactions may be pursued that could enhance Messrs.
Olberz, Levra and Kaminsky’s interests in the Company while involving risks to
the interests of the Company’s other stockholders, and there is no assurance
that their interests will not conflict with the interests of the Company’s other
stockholders.




15


The
price of our Class A Common Stock and Class B Common Stock may be
volatile.





Our Class
A Common Stock and Class B Common Stock are thinly traded making it difficult to
sell large amounts.  The market prices of our Class A Common Stock and
Class B Common Stock are 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 us or our competitors of a
material nature, additions or departures of key personnel, future sales of Class
A Common Stock and Class B 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 our Class A Common Stock and Class B Common Stock.





Provisions
in the Company's charter documents could discourage a takeover that stockholders
may consider favorable.





At June
25, 2009, Norbert Olberz, the Company's founder, Craig Levra, the Company’s
Chairman and Chief Executive Officer, and Howard Kaminsky, the Company’s Chief
Financial Officer, owned approximately 21%, 33% and 12%, respectively, of the
voting power of the Company’s outstanding voting Class A and Class B Common
Stock.  The holder of a share of Class B Common Stock is entitled to
one vote on each matter presented to the stockholders whereas the holder of a
share of Class A Common Stock has 1/20th of one vote on each matter presented to
the stockholders.  Subject to the Class A protection provisions
described below, Messrs. Olberz, Levra and Kaminsky will be able to sell shares
of Class A Common Stock and use the proceeds to purchase additional shares of
Class B Common Stock, thereby increasing their collective voting
power.  Subject to the prohibition on the grant, issuance, sale or
transfer of Class B Common Stock to Messrs. Levra and Kaminsky, the Company will
also be able to issue Class B Common Stock (subject to the applicable rules of
the NASD and the availability of authorized and unissued shares of Class B
Common Stock) to persons deemed by the Board of Directors to be preferable to a
potential acquirer, thereby diluting the voting power of that potential
acquirer.  The Class A protection provisions in the Company's
Certificate of Incorporation could also make acquisition of voting control more
expensive by requiring an acquirer of 10% or more of the outstanding shares of
Class B Common Stock to purchase a corresponding proportion of Class A Common
Stock.





The
Company's Certificate of Incorporation contains certain other provisions that
may have an "anti-takeover" effect.  The Company's Certificate of
Incorporation does not provide for cumulative voting and, accordingly, a
significant minority stockholder could not necessarily elect any designee to the
Board of Directors.  The Company's Certificate of Incorporation also
provides that the Board of Directors shall be divided into three classes, as
nearly equal in number as possible, which are elected for staggered three-year
terms and, accordingly, it could take at least two annual meetings to change a
majority of the Board of Directors.  As a result of these provisions
in the Company's Certificate of Incorporation, stockholders of the Company may
be deprived of an opportunity to sell their shares at a premium over prevailing
market prices and it would be more difficult to replace the directors and
management of the Company.





We may be subject toperiodic litigation that may
adversely affect our business and financial
performance.





We may be
subject to lawsuits resulting from injuries associated with the use of the
products or services we sell, employment matters or violations of government
regulations. There is a risk that claims or liabilities will exceed our
insurance coverage.  In addition, we may be unable to retain adequate
liability insurance in the future.  An unfavorable outcome or
settlement in any such proceeding could, in addition to requiring us to pay any
settlement or judgment amount, increase our operating expense as a consequence
and cause damage to our reputation.




16





Changes in accounting standards and
subjective assumptions, estimates and judgmentsrelated to complex accounting matters
could significantly affect our financial results.





Generally
accepted accounting principles and related accounting pronouncements,
implementation guidelines and interpretations with regard to a wide range of
matters that are relevant to our business, such as revenue recognition; lease
accounting; the carrying amount of property and equipment, inventories and
deferred income tax assets are highly complex and may involve many subjective
assumptions, estimates and judgments by management. Changes in these rules or
their interpretation or changes in underlying assumptions, estimates or
judgments could significantly change our reported or expected financial
performance.





Terrorist attacks or acts of war may
harm our business.





Terrorist
attacks may cause damage or disruption to our 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 us to
suffer in ways that we currently cannot predict. Our geographical focus in
California, Nevada, Arizona and Utah may make us more vulnerable to such
uncertainties than other comparable retailers who may not have similar
geographical concentration.





We rely on one distribution center
and any disruption could reduce our sales.





We
currently rely 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 our
inventory and could materially impair both our ability to adequately stock our
stores and our sales and profitability.





We may pursue strategic acquisitions,
which could have an adverse impact on our business.





We may
from time to time acquire complementary companies or businesses. Acquisitions
may result in difficulties in assimilating acquired companies, and may result in
the diversion of our capital and our management’s attention from other business
issues and opportunities. We may not be able to successfully integrate
operations that we acquire, including their personnel, financial systems,
distribution, operations and general store operating procedures. If we fail to
successfully integrate acquisitions, our business could suffer. In addition, the
integration of any acquired business, and their financial results, into ours may
adversely affect our operating results. We currently do not have any agreements
with respect to any such acquisitions.





Our
comparable store sales will fluctuate and may not be a meaningful indicator of
future performance.





Changes
in our comparable store sales results could affect the price of our Class A
Common Stock and Class B Common Stock. A number of factors have historically
affected, and will continue to affect, our comparable store sales results,
including: competition, our new store openings and remodeling, general regional
and national economic conditions, actions taken by our competitors, consumer
trends and preferences, changes in the shopping centers in which we are located,
new product introductions and changes in our product mix, timing and
effectiveness of promotional events, lack of new product introductions to spur
growth in the sale of various kinds of sports equipment, and weather. Our
comparable store sales may vary from quarter to quarter, and an unanticipated
decline in revenues or comparable store sales may cause the price of our Class A
Common Stock and Class B Common Stock to fluctuate significantly.




17




Global
warming could cause erosion of both our Winter and Summer seasonal businesses
over a long-term basis.





Changes
to our environment, whether natural or man made, could cause significant
disruption in both air temperature and snowfall, limiting our ability to
capitalize on one of our core competencies-the Winter business.  In
addition, lack of proper snowfall could have a negative impact on our fishing
and lake-focused water sports businesses, as these rely on streams, rivers, and
lakes to be at adequate depth and clarity in order to provide enjoyable
experiences for our customers.





ITEM
1B.  UNRESOLVED STAFF COMMENTS





Not
applicable.










18




ITEM
2.  PROPERTIES





At March 29, 2009, we had 55 store
locations.  The following table summarizes the key information on our
retail properties:





Location
                    Opening
    Date
                    Gross Square
      FootageLa
      Cañada (1)(2)
                    June
      1960
                    45,000Huntington
      Beach (2) (5)
                    June
      1981
                    50,000La
      Jolla
                    June
      1983
                    20,400Mission
      Viejo
                    August
      1986
                    29,900Point
      Loma (2)
                    November
      1987
                    34,600Valencia
      (2) (4)
                    November
      1987
                    40,000Marina
      del Rey (3)
                    November
      1989
                    42,300Beverly
      Hills
                    November
      1989
                    40,500Brea
      (2) (4)
                    April
      1990
                    40,500Oxnard
      (2)
                    June
      1990
                    40,500West
      Hills (2) (3)
                    June
      1991
                    44,000Burbank                      
      (7)
                    August
      1992
                    45,000Torrance
      (6)
                    November
      1993
                    43,700Glendora
                    November
      1993
                    40,400Rancho
      Cucamonga (2)
                    June
      1994
                    36,000Irvine
      (2)
                    November
      1995
                    35,000Laguna
      Niguel (5)
                    November
      1997
                    40,000Mission
      Valley (6)
                    June
      1998
                    47,000Long
      Beach (7)
                    May
      1999
                    43,400Porter
      Ranch
                    July
      1999
                    43,000Temecula
      (5)
                    October
      1999
                    40,000Chino
      Hills
                    July
      2000
                    42,000Palmdale
      (2)
                    June
      2001
                    39,400Henderson,
      NV (2)
                    November
      2001
                    42,000Costa
      Mesa – South Coast Plaza
                    November
      2001
                    41,600Summerlin,
      NV (2)
                    November
      2002
                    40,300Riverside
                    November
      2002
                    46,100Antioch
      (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
                    43,400Thousand
      Oaks (2)
                    May  2006
                    40,300Vacaville
      (2)
                    August
      2006
                    41,600San
      Jose
                    November
      2006
                    44,000San
      Marcos (2)
                    November
      2006
                    40,000Mira
      Loma (2)
                    November
      2006
                    39,300Tempe,
      AZ (2)
                    July
      2007
                    42,000Las
      Vegas, NV (2)
                    November
      2007
                    42,000Phoenix,
      AZ
                    May
      2007
                    40.900Bakersfield
                    May
      2007
                    42,000Goodyear,
      AZ (2)
                    November
      2007
                    41,400Peoria,
      AZ (2)
                    November
      2007
                    42,000West
      Jordan, UT (2)
                    November
      2007
                    42,000West
      Los Angeles
                    June
      2008
                    50,500Queen
      Creek, AZ (2)
                    August
      2008
                    42,500Concord
                    November
      2008
                    42,400Menifee
      (2)
                    November
      2008
                    41,200Total
                    2,260,100


(1)
      The original store opened in 1959.  The number of facilities and
      square footage has fluctuated over the years.  In August 2008,
      we completed our plans to relocate four buildings which have served the La
      Cañada Flintridge, California market into a single 45,000 square foot
      store. The four buildings, which the Company has historically reported as
      one store, together totaled 40,000 square feet.  During fiscal
      2008, in preparation for the new store, the four buildings in La Cañada
      Flintridge had been consolidated into a single temporary location which
      was approximately 28,000 square
feet.


(2)
Includes swimming pool facility for SCUBA and kayaking instruction.


(3)
Remodels completed in fiscal 2004.


(4)
Remodels completed in fiscal 2005.


(5)
Remodels completed in fiscal 2006.


(6)
Remodels completed in fiscal 2007.


(7)
Remodels completed in fiscal 2008.




19





We lease
all of our existing store locations.  The leases for most of the
existing stores are for approximately ten-year terms plus multiple option
periods under non-cancelable operating leases with scheduled rent
increases.  The leases provide for contingent rent based upon a
percentage of sales in excess of specified minimums. If there are any free rent
periods, they are accounted for on a straight line basis over the lease term,
beginning on the date of initial possession, which is generally when we enter
the space and begin the construction build-out.  The amount of the
excess of straight line rent expense over scheduled payments is recorded as a
deferred rent liability.  Construction allowances and other such lease
incentives are recorded as deferred credits, and are amortized on a straight
line basis as a reduction of rent expense over the lease term.  All of
the leases obligate us to pay costs of maintenance, utilities, and property
taxes.  In our efforts to reduce operating expenses and improve
liquidity, we have reviewed our store leases and are obtaining rent reductions
and lease modifications from our landlords.  We currently expect to
achieve rent savings totaling approximately $14 million over the next three
years.  These negotiations, which are on-going, include renegotiating
base rent, revising some of our leases to contain percentage rent clauses, which
obligate us to pay rents based on a percentage of sales rather than fixed
amounts, and amending certain leases to feature kick-out clauses, which allow us
to terminate the lease at our option at a specified date if contractually
specified minimum sales volumes are not exceeded.  We are also
exploring the possibility of potentially closing stores that have no rent
concession in place and are underperforming with no significant improvement
foreseen in the near term.





We lease
from corporations controlled by Norbert Olberz, Sport Chalet’s Founder (the
“Founder”), our corporate office space in La Cañada and our stores in La Cañada,
Huntington Beach and Porter Ranch, California.  We have incurred
rental expense to the Founder of $2.8 million, $2.5 million and $2.5 million in
fiscal 2009, 2008 and 2007, respectively.





On June 2, 2008, our Board of Directors
upon recommendation of the Audit Committee approved a lease to relocate and
expand the La Cañada store from a corporation under the control of the
Founder.  Four buildings which have served the La Cañada Flintridge,
California market was relocated into a single 45,000 square foot store in fiscal
2009.  The initial term of the lease is ten years with three five-year
option periods.  Minimum annual rent for the first five years is
$18.00 per square foot, plus common area maintenance and property taxes, with
provisions for additional rent based on sales exceeding preset
amounts.  The existing lease for the old buildings was terminated upon
the opening of the newly relocated store in August 2008.





Management believes that the occupancy
costs under the leases with corporations controlled by the Founder described
above are no higher than those which would be charged by unrelated third parties
under similar circumstances.




20





ITEM
3.  LEGAL PROCEEDINGS





On
April 10, 2008, we were served with a complaint filed in the California
Superior Court in the County of San Diego, entitled Cole v. Sport Chalet, Inc.,
Case No. 37-2008-00081675-CU-BT-CTL, alleging violations of the California
Civil Code and Business & Professions Code, as well as invasion of
privacy.   This complaint was brought as a purported class action on
behalf of persons who made purchases at our stores in California using credit
cards and were requested to provide their zip codes at the time of such
purchases.  The plaintiff alleges, among other things, that this
practice violated California law.  The plaintiff seeks, on behalf of the
class members, statutory penalties, actual damages, punitive damages,
disgorgement of profits, injunctive relief to require us to discontinue the
allegedly improper conduct, and attorneys’ fees and
costs.




On
December 16, 2008, the parties agreed on the core terms of a classwide
settlement of this case and thereafter signed a written settlement
agreement.  On May 1, 2009, the Court issued an order preliminarily
approving the parties' settlement.  The parties are now in the process
of providing notice of the settlement to class members. 
The Court has scheduled a hearing of plaintiff's motion for
final approval of the settlement for July 31, 2009.  If the
settlement receives final approval and is concluded, it should
not have a material adverse impact on our financial condition.  If the
settlement is not concluded for any reason, we intend
to continue to defend the suit vigorously.  We are not able to
evaluate the likelihood of an unfavorable outcome or to estimate a range of
potential loss in the event of an unfavorable outcome at the present time. If
resolved unfavorably to us, this litigation could have a material adverse effect
on our financial condition, and any required change in our business practices,
as well as the costs of defending this litigation, could have a negative impact
on our results of operations.





By letter
dated May 14, 2008, an attorney for a former employee has asserted claims
for sexual harassment by a former supervisor during the former employee’s one
year of employment.  The former employee alleges being subjected to
verbal and physical harassment.  The former employee is seeking
compensatory damages and punitive damages, attorneys' fees and costs. The former
employee has recently requested to submit her claims to
arbitration.  We have just begun a review of the allegations, and we
are not able to evaluate the likelihood of an unfavorable outcome nor can we
estimate a range of potential loss in the event of an unfavorable outcome at the
present time.  If resolved unfavorably to us, this litigation could
have a material adverse effect on our financial condition.





From time
to time, 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 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
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





No matters were submitted to our
stockholders during the fourth quarter of fiscal 2009.




21





PART
II





ITEM
5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES





Market
Price for Common Shares





Pursuant
to the stockholder approved recapitalization plan that established two classes
of common stock, on September 21, 2005, each outstanding share of common stock
was reclassified into 0.25 share of Class B Common Stock.  On
September 30, 2005, a non-taxable stock dividend of seven shares of Class A
Common Stock for each one outstanding share of Class B Common Stock was
paid.  The recapitalization doubled our total number of shares
outstanding and, therefore, had the same impact on earnings per share as a
2-for-1 stock split.  Our Class A Common Stock and Class B Common
Stock are traded on the Nasdaq Global Market System under the symbol “SPCHA” and
“SPCHB,” respectively.  The following table reflects the range of high
and low sale prices of our Class A, and Class B Common Stock for the periods
indicated:




Class
      A
                                                                        
                                                                        
                                                                        Class
      BFiscal
    2008
                                                                        
                                                                        High
                                                                        
                                                                        
                                                                        Low
                                                                        
                                                                        
                                                                        High
                                                                        
                                                                        
                                                                        LowFirst
      Quarter
                                                                        
                                                                        $
                                                                        11.39
                                                                        
                                                                        
                                                                        $
                                                                        9.82
                                                                        
                                                                        
                                                                        $
                                                                        11.29
                                                                        
                                                                        
                                                                        $
                                                                        9.90Second
      Quarter
                                                                        
                                                                        $
                                                                        10.90
                                                                        
                                                                        
                                                                        $
                                                                        8.85
                                                                        
                                                                        
                                                                        $
                                                                        10.88
                                                                        
                                                                        
                                                                        $
                                                                        8.61Third
      Quarter
                                                                        
                                                                        $
                                                                        9.02
                                                                        
                                                                        
                                                                        $
                                                                        5.41
                                                                        
                                                                        
                                                                        $
                                                                        9.25
                                                                        
                                                                        
                                                                        $
                                                                        5.77Fourth
      Quarter
                                                                        
                                                                        $
                                                                        7.25
                                                                        
                                                                        
                                                                        $
                                                                        4.38
                                                                        
                                                                        
                                                                        $
                                                                        7.00
                                                                        
                                                                        
                                                                        $
                                                                        4.30Class
      A
                                                                        
                                                                        
                                                                        Class
      BFiscal
    2009
                                                                        
                                                                        High
                                                                        
                                                                        
                                                                        Low
                                                                        
                                                                        
                                                                        High
                                                                        
                                                                        
                                                                        LowFirst
      Quarter
                                                                        
                                                                        $
                                                                        5.63
                                                                        
                                                                        
                                                                        $
                                                                        4.20
                                                                        
                                                                        
                                                                        $
                                                                        5.25
                                                                        
                                                                        
                                                                        $
                                                                        4.25Second
      Quarter
                                                                        
                                                                        $
                                                                        4.75
                                                                        
                                                                        
                                                                        $
                                                                        2.91
                                                                        
                                                                        
                                                                        $
                                                                        4.58
                                                                        
                                                                        
                                                                        $
                                                                        3.15Third
      Quarter
                                                                        
                                                                        $
                                                                        2.70
                                                                        
                                                                        
                                                                        $
                                                                        0.30
                                                                        
                                                                        
                                                                        $
                                                                        3.37
                                                                        
                                                                        
                                                                        $
                                                                        0.50Fourth
      Quarter
                                                                        
                                                                        $
                                                                        0.50
                                                                        
                                                                        
                                                                        $
                                                                        0.16
                                                                        
                                                                        
                                                                        $
                                                                        0.95
                                                                        
                                                                        
                                                                        $
                                                                        0.41Class
      A
                                                                        
                                                                        
                                                                        Class
      BFiscal
    2010
                                                                        
                                                                        High
                                                                        
                                                                        
                                                                        Low
                                                                        
                                                                        
                                                                        High
                                                                        
                                                                        
                                                                        LowFirst
      Quarter (through June 25, 2009)
                                                                        
                                                                        $
                                                                        1.99
                                                                        
                                                                        
                                                                        $
                                                                        0.16
                                                                        
                                                                        
                                                                        $
                                                                        2.80
                                                                        
                                                                        
                                                                        $
                                                                        0.54




On June 25, 2009, the closing price of
our Class A Common Stock and Class B Common Stock as reported by Nasdaq was
$1.99 and $2.74, respectively.  Stockholders are urged to obtain
current market quotations for the Class A Common Stock and Class B Common
Stock.





Approximate
Number of Holders of Common Shares





The number of stockholders of record of
our Class A Common Stock and Class B Common Stock as of June 5, 2009 was 138 and
145, respectively (excluding individual participants in nominee security
position listings), and as of that date, we estimate that there were
approximately 1,017 beneficial owners for Class A Common Stock and 780
beneficial owners for Class B Common Stock holding stock in nominee or “street”
name.




22





Performance
Graph





The
following graph compares the yearly percentage change in cumulative total
stockholder return of the Company's common stock during the period from
April 1, 2004 to March 29, 2009 with (i) the cumulative total return
of the Nasdaq Composite Stock Market Index and (ii) the cumulative total
return of the S&P Specialty Stores Index.  The comparison assumes
$100 was invested on April 1, 2004 in the common stock and in each of the
foregoing indices and the reinvestment of dividends through March 29,
2009.  The stock price performance on the following graph is not
necessarily indicative of future stock price performance.




In
September 2005, the stockholders of the Company approved amendments to the
Company's Certificate of Incorporation that resulted in the reclassification of
each outstanding share of common stock as 0.25 share of Class B Common Stock and
the issuance of seven shares of Class A Common Stock for each outstanding share
of Class B Common Stock.  For the period commencing on September 30,
2005, the Company has added the share price of one share of Class B Common Stock
and seven shares of Class A Common Stock in calculating its cumulative total
return for purposes of the following graph.




The graph
shall not be deemed incorporated by reference by any general statement
incorporating by reference this Annual Report into any filing under the
Securities Act of 1933 or under the Securities  Exchange Act of 1934,
except to the extent that we specifically incorporate this information by
reference, and shall not otherwise be deemed filed under such Acts.











Dividend
Policy





We have not paid any cash dividends to
stockholders since our initial public offering in November 1992.  We
currently intend to retain any earnings for use in the operation and potential
expansion of our business and, therefore, do not anticipate declaring or paying
any cash dividends in the foreseeable future.  The declaration and
payment of any such dividends in the future will depend upon our earnings,
financial condition, capital needs and other factors deemed relevant by the
Board of Directors.




23


ITEM
6.  SELECTED FINANCIAL DATA





The following table sets forth selected
consolidated financial data as of and for the five most recent fiscal years
ended March 29, 2009.  This data should be read in conjunction with
the financial statements and related notes thereto and other financial
information included herein.  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
      year2009
                                                                              
                                                                              
                                                                              
                                                                              2008
                                                                              
                                                                              
                                                                              
                                                                              2007
                                                                              
                                                                              
                                                                              
                                                                              2006 (3)
                                                                              
                                                                              
                                                                              
                                                                              2005Statements
      of Operations Data:
                                                                              
                                                                              
                                                                              (In
      thousands, except per share, stores and per square foot
      amounts)Net
      sales
                                                                              
                                                                              $
                                                                              372,652
                                                                              
                                                                              
                                                                              $
                                                                              402,534
                                                                              
                                                                              
                                                                              $
                                                                              388,209
                                                                              
                                                                              
                                                                              $
                                                                              343,204
                                                                              
                                                                              
                                                                              $
                                                                              309,090Cost
      of goods sold, buying and occupancycosts
                                                                              
                                                                              
                                                                              284,257
                                                                              
                                                                              
                                                                              
                                                                              285,982
                                                                              
                                                                              
                                                                              
                                                                              268,188
                                                                              
                                                                              
                                                                              
                                                                              237,137
                                                                              
                                                                              
                                                                              
                                                                              213,429Gross
      profit
                                                                              
                                                                              
                                                                              88,395
                                                                              
                                                                              
                                                                              
                                                                              116,552
                                                                              
                                                                              
                                                                              
                                                                              120,021
                                                                              
                                                                              
                                                                              
                                                                              106,067
                                                                              
                                                                              
                                                                              
                                                                              95,661Selling,
      general and administrative expenses
                                                                              
                                                                              
                                                                              107,651
                                                                              
                                                                              
                                                                              
                                                                              105,697
                                                                              
                                                                              
                                                                              
                                                                              96,357
                                                                              
                                                                              
                                                                              
                                                                              92,308
                                                                              
                                                                              
                                                                              
                                                                              77,453Depreciation
      and amortization
                                                                              
                                                                              
                                                                              14,243
                                                                              
                                                                              
                                                                              
                                                                              12,898
                                                                              
                                                                              
                                                                              
                                                                              11,419
                                                                              
                                                                              
                                                                              
                                                                              9,226
                                                                              
                                                                              
                                                                              
                                                                              7,692Impairment
      charge
                                                                              
                                                                              
                                                                              10,730
                                                                              
                                                                              
                                                                              
                                                                              2,077
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -Income
      (loss) from operations
                                                                              
                                                                              
                                                                              (44,229
                                                                              )
                                                                              
                                                                              
                                                                              (4,120
                                                                              )
                                                                              
                                                                              
                                                                              12,245
                                                                              
                                                                              
                                                                              
                                                                              4,533
                                                                              
                                                                              
                                                                              
                                                                              10,516Interest
      expense
                                                                              
                                                                              
                                                                              2,195
                                                                              
                                                                              
                                                                              
                                                                              1,466
                                                                              
                                                                              
                                                                              
                                                                              516
                                                                              
                                                                              
                                                                              
                                                                              267
                                                                              
                                                                              
                                                                              
                                                                              263Income
      (loss) before taxes
                                                                              
                                                                              
                                                                              (46,424
                                                                              )
                                                                              
                                                                              
                                                                              (5,586
                                                                              )
                                                                              
                                                                              
                                                                              11,729
                                                                              
                                                                              
                                                                              
                                                                              4,266
                                                                              
                                                                              
                                                                              
                                                                              10,253Income
      tax provision (benefit)
                                                                              
                                                                              
                                                                              5,823
                                                                              
                                                                              
                                                                              
                                                                              (2,224
                                                                              )
                                                                              
                                                                              
                                                                              4,630
                                                                              
                                                                              
                                                                              
                                                                              4,353
                                                                              
                                                                              
                                                                              
                                                                              4,082Net
      income
      (loss)
                                                                              
                                                                              $
                                                                              (52,247
                                                                              )
                                                                              
                                                                              $
                                                                              (3,362
                                                                              )
                                                                              
                                                                              $
                                                                              7,099
                                                                              
                                                                              
                                                                              $
                                                                              (87
                                                                              )
                                                                              
                                                                              $
                                                                              6,171Class
      A and Class B earnings (loss) pershare
      – basic
                                                                              
                                                                              $
                                                                              (3.70
                                                                              )
                                                                              
                                                                              $
                                                                              (0.24
                                                                              )
                                                                              
                                                                              $
                                                                              0.51
                                                                              
                                                                              
                                                                              $
                                                                              (0.01
                                                                              )
                                                                              
                                                                              $
                                                                              0.46Class
      A and Class B earnings (loss) pershare
      – diluted
                                                                              
                                                                              $
                                                                              (3.70
                                                                              )
                                                                              
                                                                              $
                                                                              (0.24
                                                                              )
                                                                              
                                                                              $
                                                                              0.49
                                                                              
                                                                              
                                                                              $
                                                                              (0.01
                                                                              )
                                                                              
                                                                              $
                                                                              0.44Weighted
      average Class A and Class Bshares
      outstanding:Basic
                                                                              
                                                                              
                                                                              14,123
                                                                              
                                                                              
                                                                              
                                                                              14,075
                                                                              
                                                                              
                                                                              
                                                                              13,850
                                                                              
                                                                              
                                                                              
                                                                              13,506
                                                                              
                                                                              
                                                                              
                                                                              13,361Diluted
                                                                              
                                                                              
                                                                              14,123
                                                                              
                                                                              
                                                                              
                                                                              14,075
                                                                              
                                                                              
                                                                              
                                                                              14,460
                                                                              
                                                                              
                                                                              
                                                                              13,506
                                                                              
                                                                              
                                                                              
                                                                              14,007Selected
      Operating Data:Comparable
      store sales increase (decrease) (1)
                                                                              
                                                                              
                                                                              (12.4
                                                                              )%
                                                                              
                                                                              
                                                                              (4.5
                                                                              )%
                                                                              
                                                                              
                                                                              2.0
                                                                              %
                                                                              
                                                                              
                                                                              1.9
                                                                              %
                                                                              
                                                                              
                                                                              5.7
                                                                              %Gross
      profit margin
                                                                              
                                                                              
                                                                              23.7
                                                                              %
                                                                              
                                                                              
                                                                              29.0
                                                                              %
                                                                              
                                                                              
                                                                              30.9
                                                                              %
                                                                              
                                                                              
                                                                              30.9
                                                                              %
                                                                              
                                                                              
                                                                              30.9
                                                                              %Selling,
      general and administrative expenses aspercentage
      of net sales
                                                                              
                                                                              
                                                                              28.9
                                                                              %
                                                                              
                                                                              
                                                                              26.3
                                                                              %
                                                                              
                                                                              
                                                                              24.8
                                                                              %
                                                                              
                                                                              
                                                                              26.9
                                                                              %
                                                                              
                                                                              
                                                                              25.1
                                                                              %Net
      cash provided by (used in) operatingactivities
                                                                              
                                                                              $
                                                                              (10,739
                                                                              )
                                                                              
                                                                              $
                                                                              16,374
                                                                              
                                                                              
                                                                              $
                                                                              10,664
                                                                              
                                                                              
                                                                              $
                                                                              15,962
                                                                              
                                                                              
                                                                              $
                                                                              17,955Stores
      open at end of period
                                                                              
                                                                              
                                                                              55
                                                                              
                                                                              
                                                                              
                                                                              51
                                                                              
                                                                              
                                                                              
                                                                              45
                                                                              
                                                                              
                                                                              
                                                                              40
                                                                              
                                                                              
                                                                              
                                                                              36Total
      square feet at end of period
                                                                              
                                                                              
                                                                              2,260
                                                                              
                                                                              
                                                                              
                                                                              2,067
                                                                              
                                                                              
                                                                              
                                                                              1,789
                                                                              
                                                                              
                                                                              
                                                                              1,586
                                                                              
                                                                              
                                                                              
                                                                              1,412Net
      sales per square foot (2)
                                                                              
                                                                              $
                                                                              179
                                                                              
                                                                              
                                                                              $
                                                                              218
                                                                              
                                                                              
                                                                              $
                                                                              235
                                                                              
                                                                              
                                                                              $
                                                                              238
                                                                              
                                                                              
                                                                              $
                                                                              241Average
      net sales per store (2)
                                                                              
                                                                              $
                                                                              7,303
                                                                              
                                                                              
                                                                              $
                                                                              8,533
                                                                              
                                                                              
                                                                              $
                                                                              9,232
                                                                              
                                                                              
                                                                              $
                                                                              9,351
                                                                              
                                                                              
                                                                              $
                                                                              9,430
 As
      of fiscal year endBalance
      Sheet Data:
                                
                                2009
                                
                                
                                2008
                                
                                
                                2007
                                
                                
                                2006
                                
                                
                                2005$
                                (415
                                )
                                
                                $
                                39,197
                                
                                
                                $
                                45,493
                                
                                
                                $
                                43,446
                                
                                
                                $
                                43,116Total
      assets
                                
                                
                                151,055
                                
                                
                                
                                171,315
                                
                                
                                
                                171,249
                                
                                
                                
                                132,238
                                
                                
                                
                                118,789Bank
      debt
                                
                                
                                39,140
                                
                                
                                
                                17,216
                                
                                
                                
                                11,776
                                
                                
                                
                                -
                                
                                
                                
                                -Total
      stockholders’ equity
                                
                                $
                                32,086
                                
                                
                                $
                                83,969
                                
                                
                                $
                                86,426
                                
                                
                                $
                                77,468
                                
                                
                                $
                                69,110________________


(1)
            A
      store’s sales are included in the comparable store sales calculation in
      the quarter following 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.




24




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.





The following should be read in
conjunction with “Item 6. Selected Financial Data” and our consolidated
financial statements and related notes thereto.





General
Overview





Sport Chalet, Inc. (referred to as the
“Company,” “Sport Chalet,” “we,” “us,” and “our” unless specified otherwise), is
a leading operator of 55 full-service, specialty sporting goods stores in
California, Nevada, Arizona and Utah, comprising a total of over two million
square feet of retail space.  As of March 29, 2009, we had 33
locations in Southern California, eight in Northern California, two in Central
California, three in Nevada, eight in Arizona and one in Utah. These stores
average approximately 41,000 square feet in size. In addition, we have a retail
e-commerce store at www.sportchalet.com.
Originally we were incorporated in California and we reincorporated as a
Delaware corporation in 1992. Our executive offices are located at One Sport
Chalet Drive, La Cañada, California 91011, and our telephone number is (818)
949-5300.





Operating
History





In 1959, Norbert Olberz, our founder
(the “Founder”), purchased a small ski and tennis shop in La Cañada,
California.  A focus on providing quality merchandise with outstanding
customer service was the foundation of Norbert’s vision.  As a true
pioneer in the industry, Norbert’s mission was three simple
things.  To “see things through the eyes of the customer;” “to do a
thousand things a little bit better;” and to focus on “not being the biggest,
but the best.”  Over the last 50 years, Sport Chalet has grown into a
chain of 55 specialty sporting goods stores serving California, Nevada, Arizona
and Utah.





Our
growth had historically focused on Southern California; but since 2001 we have
expanded our scope to all of California and to Nevada, Arizona and
Utah.  Generally, our new stores were located with the intent of
strengthening our focus on Southern California or in areas characterized by a
large number of housing developments.  We opened seven stores in
fiscal 2008, 17 stores in the last three years and 25 in the last five
years.  In fiscal 2009, we opened four new stores, relocated one and
re-launched our website.  We currently do not anticipate opening new
stores or entering into new lease commitments in the near future.





Store
openings have had a favorable impact on sales volume, but have negatively
affected 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.  We believe our stores historically
have required three to four years to attract a stable, mature customer base;
but, because of our relatively low number of stores, the impact of competitors’
stores and changing economic conditions, reliable statistical trends are not
available and there can be no assurance that our newer stores will mature at
that rate.  We estimate the cash required to open an average new store
is approximately $2.5 million consisting primarily of the investment in
inventory (net of average vendor payables), the cost of leasehold improvements
(net of landlord reimbursement), fixtures and equipment and pre-opening
expenses, which are primarily the costs associated with training employees and
stocking the store.  Cash requirements for opening costs of each new
store can vary significantly depending on how much the landlord has agreed to
contribute to our required improvements.




25





We
believe our stores are located in the geographic regions hardest hit by the
downturn in the housing and credit markets.  Our sales largely depend
on the economic environment and level of consumer spending in the geographic
regions around our stores.  The retail industry historically has been
subject to substantial cyclical variation, and a recession in the general
economy or uncertainties regarding future economic prospects that affect
consumer spending habits in our market areas are having, and may in the future
continue to have, a materially adverse effect on our results of
operations.





The term
comparable store sales is considered a key performance
measurement.  The sales of a store are first included in the
comparable store sales calculation in the quarter following its twelfth full
month of operation.





Beginning
April 1, 2006, our fiscal year end was changed from March 31 to the Sunday
closest to March 31.  Fiscal years 2007 and 2008 consist of four 13
week quarters or 52 weeks.  An extra week will be added onto the
fourth quarter every five or six years.  This fiscal calendar is
widely used in the retail industry.





Recent
Events





Our comparable store sales growth had
been positive for the four fiscal years prior to fiscal
2008.  Comparable store sales declined 4.5% for fiscal 2008 and 12.4%
for fiscal 2009 as we continue to confront a difficult macro-economic
environment, which began with weak housing trends and high gasoline prices in
our core markets and continued with the financial and credit
crisis.  As a result of the reduction in comparable store sales for
fiscal 2009 and the opening of new stores which have not reached maturity, we
incurred a net loss of $52.2 million, or $3.70 per diluted share, compared to a
net loss of $3.4 million, or $0.24 per diluted share, for fiscal
2008.  We have sustained operating losses in seven of the past eight
quarters.  Comparable store sales for the past seven quarters from the
second quarter of fiscal 2008 to the fourth quarter of fiscal 2009 are +2.2%,
-6.9%, -8.8%, -11.1%, -6.7%, -15.4% and -17.7%, respectively.  More
recently, for our first quarter through June 21, 2009, we have experienced a
14.9% decline in comparable store sales.





Non-cash impairment charges of $10.7
million and $2.1 million were recorded in fiscal 2009 and 2008, related to
eleven and two stores, respectively, with significantly lower than expected
sales volume which, based on recent trends, those stores are not expected to
obtain sufficient cash flow over their remaining lease terms to support the net
book value of their leasehold improvements and fixtures.





As of
December 31, 2008, an event of default had occurred under our Amended and
Restated Loan and Security Agreement, as amended, dated as of June 20, 2008 (the
"Loan Agreement") with our existing lender, Bank of America, N.A. (the
“Lender”).  On January 9, 2009, we entered into an amendment to the
Loan Agreement (the "First Amendment") under which, among other things, the
Lender agreed to forbear from exercising its rights in respect of the event of
default until January 31, 2009.  On January 29, 2009, the Lender
agreed to extend the forbearance until March 2, 2009.





On March 2, 2009, we further amended
the Loan Agreement (the “Third Amendment”).  Under the Third
Amendment, (i) the Lender waived the event of default, (ii) the amount we can
borrow against our borrowing base was reduced, (iii) the interest rate was
increased, and (iv) we agreed to maintain a minimum monthly
EBITDA.  The seasonal revolver limits under the credit facility remain
unchanged under the Third Amendment.





On May 4, 2009, we amended the Loan
Agreement (the “Fourth Amendment”).  Under the terms of the Fourth
Amendment, our availability increases by up to an additional $10.0 million
through a special advance facility.  The amount available under the
special advance facility will be reduced by $2.5 million on the first day of
each month commencing on July 1, 2010 and the special advance facility will
terminate on October 1, 2010.  This effectively increases the revolver
limit up to $55 million from January 1st of each year through August 31st and
also allows for seasonal advances up to $75.0 million from September 1st of each
year to December 31st, subject to the scheduled reductions.  For a
more detailed description of our Loan Agreement, see “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital
Resources and Item 1A. Risk Factors – The covenants in our revolving
credit facility may limit future borrowings to fund our
operations.”




26





Company
Initiatives to Manage Macro-Economic Environment





In October 2008, we began aggressively
taking action to address the severe downturn in the macro-economic environment
by examining our practices, assumptions, models and cost structures in an effort
to modify our business model in a manner which makes the Company more efficient,
more focused and better able to navigate the difficult
environment.  We are focused more intently than ever on reducing
operating expenses and improving liquidity through the following core
initiatives:





·
            Amended
      loan agreement with our single source lender, Bank of America, following
      two 30-day forbearance agreements.





·
            Aggressively
      reduced aged inventory, providing fresher and cleaner merchandise on the
      floor and enhancing the collateral
base.





·
            Communicated
      with all vendors regularly throughout in the process to make sure they
      were fully aware of the challenges we are facing and the initiatives taken
      for a turnaround.





·
            Renegotiated
      lease terms across many of our stores, which eliminated the immediate need
      for store closures with reduced base rent payments, percentage rent and
      kick-out clauses.





·
            Significantly
      increased payroll efficiency in our stores and distribution center, which
      delivered lower spend per customer while maintaining the customer
      experience.





·
            Initiated
      significant reductions in corporate overhead, from a personnel and
      discretionary spending standpoint.





·
            Strengthened
      our corporate governance policies and
practices.




Although
no assurance can be given about the ultimate impact of these initiatives or of
the overall  economic climate, we believe these initiatives combined with a
diminished competitive environment due to the exit or diminished capacity of
many key specialty competitors throughout the marketplace will position us for
sustainability, viability and positive results in the future.




In June 2008, we moved from a cash flow
based revolving bank loan to an asset-based loan to improve
liquidity.  We had gone for nine years, through the end of 2006,
without bank debt at the end of any quarter.  This changed as we
invested heavily for growth with twelve new stores over the past two years, a
33% growth rate.  Additionally, there was a $9.5 million investment in
computer systems primarily from SAP along with $2.1 million investment in
ecommerce.  This led to the increased
borrowing.  Subsequently, we defaulted on a loan covenant and received
a Forbearance Agreement from Bank of America in January 2009 and a second
Forbearance Agreement in February 2009.  By March 2, 2009, based on
improving metrics of the Company and the initiatives listed above, we were able
to successfully negotiate an amendment to our loan agreement which waived the
event of default and reset the covenants.  Subsequently, on May 4,
2009, the bank amended the line to increase availability an additional $10
million.





In Fall 2008, we began an aggressive
inventory management program, which led to historic lows of aged Winter apparel
and hardlines, along with footwear, general apparel, and other key categories of
hardlines.  This was due in part to the renewed commitment by us to
better inventory control, new executive leadership in merchandising, along with
the implementation and roll out of SAP computer systems.  The result
was fresh assortments on the floor and an enhanced borrowing base.





In January 2009, we began communicating
with vendors asking for additional dating and credit terms, merchandise returns
and other means of vendor support.   Our requests were reviewed
and approved by a significant number of our vendors.  From January
through May 2009, we received a total of $138.6 million in fresh inventory at
retail.  Combined with the reduction in aged inventory, we believe we
have the freshest and cleanest inventory on our sales floors in our
history.




27





In November 2008, we began approaching
landlords of all 55 stores, as well as of the corporate office, distribution
center, and Team Sales division about restructuring lease terms.  To
date, these efforts have resulted in projected savings of approximately $14
million over the next three years with many leases to include kick-out clauses,
percentage rent and co-tenancy clauses.  We continue to negotiate
aggressively for additional concessions.





In October 2008, we revised our store
operating model by creating four models based on individual store performance,
increasing the number of fulltime versus part-time employees, freezing incentive
and salary programs. This resulted in a $7.2 million payroll reduction in the
second half of fiscal 2009, combined with an expected $10.7 million reduction
throughout fiscal 2010.  We began approaching expense vendors
concerning elimination or reduction of non-critical programs, implementing
aggressive cost containment and renegotiations.  In the second half of
fiscal 2009, we reduced over $2.8 million in annual expenses, which includes
advertising and marketing, professional fees, supplies, utilities, repairs and
maintenance, travel, insurance, computer maintenance agreements, auditor and
attorney fees, alarm monitoring services and shipping costs.  We
expect a $9.4 million reduction throughout fiscal 2010 in those
expenses.  In addition, there were headcount reductions in the
corporate office and distribution center.





We are working toward new corporate
governance policies aimed to provide complete transparency to stockholders, such
as removal of classes for Directors, annual election of Directors by a simple
majority vote, and the elimination of Actions by Written
Consent.  Additionally, we are changing the compensation structure to
decrease the fees paid to the Board of Directors.





Despite the macro-economic environment,
we continued to aggressively move forward with our Sport Chalet Action Pass
program, which was initiated in November 2007 to enhance our customer
relationship management capabilities.  At the beginning of the fiscal
year, we had 278,000 members.  To date, we have 720,000 members and
are signing 6,000 to 8,000 new members each week.  Currently, over 40%
of all sales are being generated by Action Pass members.  We have
shifted a significant portion of our marketing activities away from traditional
channels and towards direct marketing to our Action Pass members, our best
customers, and believe that this will result in a higher return on advertising
investment.





We successfully completed on-time and
on-budget the launch of the new sportchalet.com website on March 23,
2009.  We established a leadership position in ecommerce in the
sporting goods industry by selecting Marketlive, Sapient, Shopatron,
Bazaarvoice, and Experian CheetahMail to run the website.  This new
business is expected to achieve average store sales volume by the end of the
fiscal year and continue to grow.  It is also expected to be one of
our primary advertising and marketing vehicles in the future.





In April 2008, we implemented SAP, our
core finance and merchandising system, replacing a 25-year-old legacy
system.  The cost of this system was $9.5 million.  This
installation provided the platform for us to become Sarbanes-Oxley compliant and
provided the foundation for the ecommerce platform to launch.  The
system provides enhanced cost controls as well as performance data and has been
a key component to manage cash flow and expenses.  We received an
award from SAP as the retailer experiencing the most timely and efficient
implementation for the year.





As
mentioned earlier, as a result of the initiatives taken by us, Bank of America
approved loan amendments favorable to us and agreed to covenants that require a
$19 million EBITDA loss in fiscal 2009 improve to a $5.4 million EBITDA profit
in fiscal 2010, a $24 million improvement.  Performance against this
plan is measured on a monthly cumulative basis and non-compliance could result
in a default.  We have reported to the bank that results have exceeded
plan in the first two months of fiscal 2010.  We believe that these
aggressive actions taken early in the crisis, and in most cases well ahead of
our competitors, positions us for sustainability, viability and positive results
in the future.




28





Results
of Operations





Fiscal
2009 Compared to Fiscal 2008





The
following table sets forth statement of operations data determined in accordance
with generally accepted accounting principals (“GAAP”), the relative percentages
of net sales, and the percentage increase or decrease, for the 2009 and 2008
fiscal years (in thousands, except per share amounts).





Fiscal
      year2009
                                
                                
                                2008
                                
                                
                                Dollar
                                
                                
                                PercentageAmount
                                
                                
                                Percent
                                
                                
                                Amount
                                
                                
                                Percent
                                
                                
                                Change
                                
                                
                                ChangeNet
      sales
                                
                                $
                                372,652
                                
                                
                                
                                100.0
                                %
                                
                                $
                                402,534
                                
                                
                                
                                100.0
                                %
                                
                                $
                                (29,882
                                )
                                
                                
                                (7.4
                                %)Gross
      profit
                                
                                
                                88,395
                                
                                
                                
                                23.7
                                %
                                
                                
                                116,552
                                
                                
                                
                                29.0
                                %
                                
                                
                                (28,157
                                )
                                
                                
                                (24.2
                                %)Selling,
      general and administrative expenses
                                
                                
                                107,651
                                
                                
                                
                                28.9
                                %
                                
                                
                                105,697
                                
                                
                                
                                26.3
                                %
                                
                                
                                1,954
                                
                                
                                
                                1.8
                                %Depreciation
      and amortization
                                
                                
                                14,243
                                
                                
                                
                                3.8
                                %
                                
                                
                                12,898
                                
                                
                                
                                3.2
                                %
                                
                                
                                1,345
                                
                                
                                
                                10.4
                                %Impairment
      charge
                                
                                
                                10,730
                                
                                
                                
                                2.9
                                %
                                
                                
                                2,077
                                
                                
                                
                                0.5
                                %
                                
                                
                                8,653
                                
                                
                                
                                416.6
                                %Loss
      from operations
                                
                                
                                (44,229
                                )
                                
                                
                                (11.9
                                %)
                                
                                
                                (4,120
                                )
                                
                                
                                (1.0
                                %)
                                
                                
                                (40,109
                                )
                                
                                
                                973.5
                                %Interest
      expense
                                
                                
                                2,195
                                
                                
                                
                                0.6
                                %
                                
                                
                                1,466
                                
                                
                                
                                0.4
                                %
                                
                                
                                729
                                
                                
                                
                                49.7
                                %Loss
      before taxes
                                
                                
                                (46,424
                                )
                                
                                
                                (12.5
                                %)
                                
                                
                                (5,586
                                )
                                
                                
                                (1.4
                                %)
                                
                                
                                (40,838
                                )
                                
                                
                                731.1
                                %Net
      loss
                                
                                
                                (52,247
                                )
                                
                                
                                (14.0
                                %)
                                
                                
                                (3,362
                                )
                                
                                
                                (0.8
                                %)
                                
                                
                                (48,885
                                )
                                
                                
                                1,454.0
                                %Class
      A and Class BEarnings
      (loss) per share:Basic
                                
                                $
                                (3.70
                                )
                                
                                
                                
                                
                                
                                $
                                (0.24
                                )
                                
                                
                                
                                
                                
                                $
                                (3.46
                                )
                                
                                
                                1,441.7
                                %Diluted
                                
                                $
                                (3.70
                                )
                                
                                
                                
                                
                                
                                $
                                (0.24
                                )
                                
                                
                                
                                
                                
                                $
                                (3.46
                                )
                                
                                
                                1,441.7
                                %





Sales
decreased $29.9 million, or 7.4%, to $372.7 million for fiscal 2009 from $402.5
million for fiscal 2008.  Sales from eleven new stores, not included
in the comparable store sales calculation, resulted in a $16.2 million increase
in sales, or 4.1%.  This increase was offset by a comparable store
sales decrease of $45.3 million, or 12.4%.  The positive impact on
sales by reducing prices was offset by worsening macro-economic
conditions.





Gross
profit decreased $28.2 million, or 24.2%, primarily as a result of the sales
decrease, an additional $9.7 million in markdowns primarily used to stimulate
the demand for inventory and a $4.4 million increase in rent from new
stores.  As a percent of sales, gross profit decreased 530 basis
points to 23.7% from 29.0%.  The decrease is primarily the result of
increased markdowns, rent as a percent of sales in newer stores which take time
to reach their desired operating efficiency.





Selling,
general and administrative expenses (“SG&A”) increased $2.0 million, or
1.8%, primarily due to $4.7 million from expenses related to additional stores,
$2.1 million for increased professional fees primarily related to new system
implementation support and training as well as professional fees incurred in
obtaining our new bank credit facility and the related amendments, partially
offset by labor savings of $4.8 million.  As a percent of sales,
SG&A increased to 28.9% from 26.3%, primarily from the decrease in
comparable store sales, the expenses associated with new stores, which take time
to reach their desired operating efficiency, and an increase in professional
fees offset by labor savings.





A
non-cash impairment charge of $10.7 million was recorded in the year ended March
29, 2009 related to eleven stores with significantly lower than expected sales
volume and based on recent trends are not expected to obtain sufficient cash
flow over their remaining lease terms to support the net book value of their
leasehold improvements and fixtures.  The existence of the impairment
was assessed by calculating the net cash flow of each individual store on an
undiscounted basis and comparing it to the net book value of the individual
store.  The actual impairment charge was measured by determining
the fair value of the store's assets, calculated based on the discounted net
cash flow of the store over the remaining lease term, and comparing it to the
book value.





A tax
provision of $5.8 million was recorded for fiscal 2009 as there was no valuation
allowance on the net deferred tax assets of $5.8 million at March 30, 2008.
Based largely on the magnitude of this year’s loss, the cumulative losses to
date, the near term outlook and other available objective evidence, management
concluded that a valuation allowance equal to all of the net deferred tax
assets, $24.1 million, should be recorded as the Company’s ability to return to
profitability during the loss carryforward period does not meet the “more likely
than not” standard.




29





Primarily
as a result of the reduction in comparable store sales, the opening of new
stores, the impairment charge and the income tax valuation allowance, we
incurred a net loss of $52.2 million, or $3.70 per diluted share for the year
ended March 29, 2009.  Excluding the non-cash impairment charge and
the affect of the valuation allowance as well as a non-cash impairment charge of
$2.1 million pre-tax, or $0.09 per diluted share, recorded in the prior fiscal
year, net loss was $35.6 million, or $2.53 per diluted share, compared to net
loss of $2.1 million, or $0.15 per diluted share for the same period last
year.





Fourth
Quarter 2009 Compared to Fourth Quarter 2008





The
following tables set forth statement of income data and relative percentages of
net sales, and the percentage increase or decrease, for the fourth quarter of
fiscal 2009 and 2008 (in thousands, except per share amounts).





Fourth
      fiscal quarter2009
                                  
                                  
                                  2008
                                  
                                  
                                  Dollar
                                  
                                  
                                  PercentageAmount
                                  
                                  
                                  Percent
                                  
                                  
                                  Amount
                                  
                                  
                                  Percent
                                  
                                  
                                  Increase
                                  
                                  
                                  IncreaseNet
      sales
                                  
                                  $
                                  84,513
                                  
                                  
                                  
                                  100.0
                                  %
                                  
                                  $
                                  96,753
                                  
                                  
                                  
                                  100.0
                                  %
                                  
                                  $
                                  (12,240
                                  )
                                  
                                  
                                  (12.7
                                  %)Gross
      profit
                                  
                                  
                                  16,766
                                  
                                  
                                  
                                  19.8
                                  %
                                  
                                  
                                  25,443
                                  
                                  
                                  
                                  26.3
                                  %
                                  
                                  
                                  (8,677
                                  )
                                  
                                  
                                  (34.1
                                  %)Selling,
      general and administrative expenses
                                  
                                  
                                  24,069
                                  
                                  
                                  
                                  28.5
                                  %
                                  
                                  
                                  26,629
                                  
                                  
                                  
                                  27.5
                                  %
                                  
                                  
                                  (2,560
                                  )
                                  
                                  
                                  (9.6
                                  %)Depreciation
      and amortization
                                  
                                  
                                  3,276
                                  
                                  
                                  
                                  3.9
                                  %
                                  
                                  
                                  3,131
                                  
                                  
                                  
                                  3.2
                                  %
                                  
                                  
                                  145
                                  
                                  
                                  
                                  4.6
                                  %Loss
      from operations
                                  
                                  
                                  (10,579
                                  )
                                  
                                  
                                  (12.5
                                  %)
                                  
                                  
                                  (4,317
                                  )
                                  
                                  
                                  (4.5
                                  %)
                                  
                                  
                                  (6,262
                                  )
                                  
                                  
                                  145.1
                                  %Interest
      expense
                                  
                                  
                                  545
                                  
                                  
                                  
                                  0.6
                                  %
                                  
                                  
                                  260
                                  
                                  
                                  
                                  0.3
                                  %
                                  
                                  
                                  285
                                  
                                  
                                  
                                  109.6
                                  %Loss
      before taxes
                                  
                                  
                                  (11,124
                                  )
                                  
                                  
                                  (13.2
                                  %)
                                  
                                  
                                  (4,577
                                  )
                                  
                                  
                                  (4.7
                                  %)
                                  
                                  
                                  (6,547
                                  )
                                  
                                  
                                  143.0
                                  %Net
      loss
                                  
                                  
                                  (11,124
                                  )
                                  
                                  
                                  (13.2
                                  %)
                                  
                                  
                                  (2,755
                                  )
                                  
                                  
                                  (2.8
                                  %)
                                  
                                  
                                  (8,369
                                  )
                                  
                                  
                                  303.8
                                  %Class
      A and Class BLoss
      per share:Basic
                                  
                                  $
                                  (0.79
                                  )
                                  
                                  
                                  
                                  
                                  
                                  $
                                  (0.20
                                  )
                                  
                                  
                                  
                                  
                                  
                                  $
                                  (0.59
                                  )
                                  
                                  
                                  295.0
                                  %Diluted
                                  
                                  $
                                  (0.79
                                  )
                                  
                                  
                                  
                                  
                                  
                                  $
                                  (0.20
                                  )
                                  
                                  
                                  
                                  
                                  
                                  $
                                  (0.59
                                  )
                                  
                                  
                                  295.0
                                  %





Sales decreased $12.2 million, or
12.7%, to $84.5 million for the fourth quarter 2009 from $96.8 million for the
same period in fiscal 2008. Sales growth due to four new stores, not included in
the comparable store sales calculation, resulted in a $3.8 million increase in
sales, or 3.9%.  This increase was offset by a comparable store sales
decrease of $16.8 million, or 17.7%.  The positive impact on sales by
reducing prices was offset by worsening macro-economic conditions and a warm
January, as compared to the January 2008, in our markets which impacted the
demand for Winter-related merchandise.





Gross profit decreased $8.7 million, or
34.1%, primarily as a result of the sales decrease, an additional $2.8 million
in markdowns primarily used to stimulate the demand for inventory and a $0.5
million increase in rent from new stores.  As a percent of sales,
gross profit decreased 650 basis points to 19.8% from 26.3%.  The
decrease is primarily the result of increased markdowns.





Selling,
general and administrative expenses decreased $2.6 million, or 9.6%, as $1.1
million from expenses related to additional stores and $0.4 million for
increased professional fees primarily related to amendments to our bank credit
facility and related work from turn-around consultants, was offset by labor
savings of $3.4 million and a reduction in advertising of $1.1
million.  As a percent of sales, SG&A increased to 28.5% from
27.5%, primarily from the decrease in comparable store sales, the expenses
associated with new stores and an increase in professional fees offset by labor
and advertising savings.





Primarily
as a result of the reduction in comparable store sales, we incurred a net loss
of $11.1 million, or $0.79 per diluted share for the quarter ended March 29,
2009 compared to net loss of $2.8 million, or $0.20 per diluted share for the
same period last year.




30





Fiscal
2008 Compared to Fiscal 2007





The
following table sets forth statement of operations data determined in accordance
with generally accepted accounting principals (“GAAP”), the relative percentages
of net sales, and the percentage increase or decrease, for the 2008 and 2007
fiscal years (in thousands, except per share amounts).




Fiscal
      year2008
                                  
                                  
                                  2007
                                  
                                  
                                  Dollar
                                  
                                  
                                  PercentageAmount
                                  
                                  
                                  Percent
                                  
                                  
                                  Amount
                                  
                                  
                                  Percent
                                  
                                  
                                  Change
                                  
                                  
                                  ChangeNet
      sales
                                  
                                  $
                                  402,534
                                  
                                  
                                  
                                  100.0
                                  %
                                  
                                  $
                                  388,209
                                  
                                  
                                  
                                  100.0
                                  %
                                  
                                  $
                                  14,325
                                  
                                  
                                  
                                  3.7
                                  %Gross
      profit
                                  
                                  
                                  116,552
                                  
                                  
                                  
                                  29.0
                                  %
                                  
                                  
                                  120,021
                                  
                                  
                                  
                                  30.9
                                  %
                                  
                                  
                                  (3,469
                                  )
                                  
                                  
                                  (2.9
                                  %)Selling,
      general and administrative expenses
                                  
                                  
                                  105,697
                                  
                                  
                                  
                                  26.3
                                  %
                                  
                                  
                                  96,357
                                  
                                  
                                  
                                  24.8
                                  %
                                  
                                  
                                  9,340
                                  
                                  
                                  
                                  9.7
                                  %Depreciation
      and amortization
                                  
                                  
                                  12,898
                                  
                                  
                                  
                                  3.2
                                  %
                                  
                                  
                                  11,419
                                  
                                  
                                  
                                  2.9
                                  %
                                  
                                  
                                  1,479
                                  
                                  
                                  
                                  13.0
                                  %Impairment
      charge
                                  
                                  
                                  2,077
                                  
                                  
                                  
                                  0.5
                                  %
                                  
                                  
                                  -
                                  
                                  
                                  
                                  0.0
                                  %
                                  
                                  
                                  2,077Income
      (loss) from operations
                                  
                                  
                                  (4,120
                                  )
                                  
                                  
                                  (1.0
                                  %)
                                  
                                  
                                  12,245
                                  
                                  
                                  
                                  3.2
                                  %
                                  
                                  
                                  (16,365
                                  )
                                  
                                  
                                  *Interest
      expense
                                  
                                  
                                  1,466
                                  
                                  
                                  
                                  0.4
                                  %
                                  
                                  
                                  516
                                  
                                  
                                  
                                  0.1
                                  %
                                  
                                  
                                  950
                                  
                                  
                                  
                                  184.1
                                  %Income
      (loss) before taxes
                                  
                                  
                                  (5,586
                                  )
                                  
                                  
                                  (1.4
                                  %)
                                  
                                  
                                  11,729
                                  
                                  
                                  
                                  3.0
                                  %
                                  
                                  
                                  (17,315
                                  )
                                  
                                  
                                  *Net
      income (loss)
                                  
                                  
                                  (3,362
                                  )
                                  
                                  
                                  (0.8
                                  %)
                                  
                                  
                                  7,099
                                  
                                  
                                  
                                  1.8
                                  %
                                  
                                  
                                  (10,461
                                  )
                                  
                                  
                                  *Class
      A and Class BEarnings
      (loss) per share:Basic
                                  
                                  $
                                  (0.24
                                  )
                                  
                                  
                                  
                                  
                                  
                                  $
                                  0.51
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  (0.75
                                  )
                                  
                                  
                                  *Diluted
                                  
                                  $
                                  (0.24
                                  )
                                  
                                  
                                  
                                  
                                  
                                  $
                                  0.49
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  (0.73
                                  )
                                  
                                  
                                  **  Percentage
      change not meaningful.




Sales increased $14.3 million, or 3.7%,
to $402.5 million for fiscal 2008 from $388.2 million for fiscal
2007.  The sales growth is due to twelve new stores, not included in
the comparable store sales calculation, which resulted in a $32.3 million
increase in sales, or 8.5%, partially offset by a comparable store sales
decrease of $16.8 million, or 4.5%.  Comparable store sales were
primarily impacted by macro-economic conditions,which include
weak housing trends and rising gas prices in our core markets.  In
addition, the opening of new stores by the Company and competitors, along with
continued growth in viable ecommerce competitors, contributed to the decline in
comparable store sales.  We believe the macro-economic trends also
negatively affected our new stores.





Gross profit decreased $3.5 million, or
2.9%, as gross profit from increased sales of approximately $7.3 million was
offset primarily by increased rent of $5.7 million, primarily from new stores,
and increased markdowns of $3.4 million taken to stimulate demand and reduce
excess inventory.  As a percent of sales, gross profit decreased 190
basis points to 29.0% from 30.9%.  The decrease is primarily the
result of increased rent as a percent of sales in newer stores which take time
to reach operating efficiency and increased markdowns taken to stimulate
demand.





Selling,
general and administrative expenses (“SG&A”) increased $9.3 million, or
9.7%, primarily from expenses related to additional stores, $10.5 million,
offset by labor savings of $1.2 million in mature stores.  As a
percent of sales, SG&A expenses increased to 26.3% in fiscal 2008 from 24.8%
in fiscal 2007 primarily from the decrease in sales from our mature stores
described above and the expenses associated with new stores which take time to
reach operating efficiency.





Depreciation and amortization increased
$1.5 million primarily from new stores.





A non-cash impairment charge of $2.1
million was recorded in fiscal 2008 related to certain California stores which
opened with significantly lower than expected sales volume and based on recent
trends are not expected to obtain sufficient cash flow over their remaining
lease terms to support the net book value of their leasehold improvements and
fixtures. The existence of the impairment was assessed by calculating the net
cash flow of the individual store on an undiscounted basis and comparing it to
the net book value of the individual store. The actual impairment charge was
measured by determining the fair value of the store's assets and comparing
it to the book value.  Fair value for fixtures is based on
the book value less the cost of moving those assets to another store,
while the fair value of leasehold improvements is based on the discounted
net cash flow of the store over the remaining term of the lease.




31





The
effective income tax rate was 39.8% for fiscal 2008 compared to 39.5% for fiscal
2007.  Generally these rates differ from the statutory rates as a
result of permanent differences between financial reporting and tax-basis
income. Our statutory rate has decreased to 39.8% for fiscal 2008 from 40.7% in
fiscal 2007 as a result of a rate decrease related to the reduction in our
taxable income.





As a result of the reduction in
comparable store sales, the opening of new stores and the impairment loss, we
incurred a net loss of $3.4 million, $0.24 per diluted share for fiscal 2008,
compared to net income of $7.1 million, $0.49 per diluted share for fiscal
2007.





Liquidity
and Capital Resources





Our primary capital requirements are
for inventory, store relocation and remodeling.  Historically, cash
from operations, credit terms from vendors and bank borrowing have met our
liquidity needs.  Comparable store sales for the past seven quarters
from the second quarter of fiscal 2008 to the fourth quarter of fiscal 2009 are
+2.2%, -6.9%, -8.8%, -11.1%, -6.7%, -15.4% and -17.7%,
respectively.  More recently, for our first quarter through June 21,
2009, we have experienced a 14.9% decline in comparable store
sales.  In the event sales decline at a rate greater than anticipated
to support the loan covenants, we may have insufficient working capital to
continue to operate our business as it has been operated, or at
all.





As a
result of the comparable store sales decline, we are focused on reducing
operating expenses and improving liquidity.  We have reviewed our
store leases and are seeking rent reductions and lease modifications from our
landlords.  We currently expect to achieve rent savings totaling
approximately $14 million over the next three years.  These
negotiations, which are on-going, include renegotiating base rent, revising some
of our leases to contain percentage rent clauses, which obligate us to pay rents
based on a percentage of sales rather than fixed amounts, and amending certain
leases to feature kick-out clauses, which allow us to terminate the lease at our
option at a specified date if contractually specified minimum sales volumes are
not exceeded.  We are also exploring the possibility of potentially
closing stores that have no rent concession in place and are underperforming
with no significant improvement foreseen in the near
term.  Additionally, we have evaluated our operating expenses, such as
store labor, corporate overhead and advertising, and have commenced implementing
cost reductions expected to exceed $20 million in fiscal 2010.  For a
more detailed description of our cost containment, revenue enhancement and
corporate governance initiatives, see “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Company Initiatives to Manage
Macro-Economic Environment.”  For a more detailed description
of the associated risks, see “Item 1A. Risk Factors – A downturn in the economy has
affected consumer purchases of discretionary items, significantly reducing our
net sales and profitability;” “– No assurance can be given that we will be
successful in reducing operating expenses and controlling costs in an amount
sufficient to return to profitability;”and“– The covenants in our revolving
credit facility may limit future borrowings to fund our
operations.”




32




Net cash
used in or provided by operating activities has generally been the result of net
income or loss, adjusted for depreciation and amortization, and changes in
inventory along with related accounts payable.  The following table
shows the more significant items for years ended March 29, 2009 and March 30,
2008:




Fiscal year2009
                      
                      
                      2008(in
      thousands)Net
      (loss) income
                      
                      $
                      (52,247
                      )
                      
                      $
                      (3,362
                      )Depreciation
      and amortization
                      
                      
                      14,243
                      
                      
                      
                      12,898Impairment
      charge
                      
                      
                      10,730
                      
                      
                      
                      2,077Merchandise
      inventories
                      
                      
                      (2,286
                      )
                      
                      
                      922Accounts
      payable
                      
                      
                      1,602
                      
                      
                      
                      (1,373
                      )Accounts
      receivable
                      
                      
                      (75
                      )
                      
                      
                      5,535Prepaid
      expenses and other current assets
                      
                      
                      3,992
                      
                      
                      
                      (1,343
                      )Other
      accrued expense
                      
                      
                      6,125
                      
                      
                      
                      (2,327
                      )Deferred
      tax
                      
                      
                      5,723
                      
                      
                      
                      1,928Other
                      
                      
                      1,454
                      
                      
                      
                      1,419Net
      cash (used in) provided by operating activites
                      
                      $
                      (10,739
                      )
                      
                      $
                      16,374




Typically,
inventory levels increase from year to year due to the addition of new stores,
while improvements in inventory management decrease inventory required for each
store.  Total inventory increased $2.3 million from the addition of 4
new stores, offset by a reduction in the average inventory per store of 4.8% to
$1.6 million from $1.7 million at the end of fiscal 2009 and fiscal 2008,
respectively, in spite of the significant decrease in sales as compared to our
plan.





Historically,
accounts payable increases as inventory increases.  However, the
timing of vendor payments or receipt of merchandise near the end of the period
influences this relationship.  As a result of insufficient cash
available during the fourth quarter of fiscal 2009, we slowed payments to our
vendors which is the primary reason for an increase of $1.6 million in accounts
payable as compared to fiscal 2008.





Significant
changes in accounts receivable are from the timing of payments due from
landlords for tenant improvements.





Prepaid
expenses and other current assets normally include approximately one month’s
rent as most leases require payment at the beginning of each
month.  As a result of insufficient cash available during the fourth
quarter of fiscal 2009, we held all rent payments for one month which is the
primary reason for an increase of $4.0 million in prepaid expenses and other
current assets as compared to fiscal 2008.





Additionally,
the insufficient cash available during the fourth quarter of fiscal 2009 also
caused other accrued expenses to increase $6.1 million as compared to fiscal
2008.





A tax
provision of $5.8 million was recorded for fiscal 2009 as there was no valuation
allowance on the net deferred tax assets of $5.8 million at March 30, 2008.
Based largely on the magnitude of this year’s loss, the cumulative losses to
date, the near term outlook and other available objective evidence, management
concluded that a valuation allowance equal to all of the net deferred tax
assets, $24.1 million, should be recorded as the Company’s ability to return to
profitability during the loss carryforward period does not meet the “more likely
than not” standard.  A new bill, the Net Operating Loss Carryback Act
(H.R. 2452) has been introduced in the house which would permit a carryback of
losses from 2008 or 2009 for up to five years.  In the event this bill
becomes a law, we believe we could obtain an income tax refund of up to $10.0
million.




33





Net cash
used in investing activities is primarily for capital expenditures as shown
below:





Fiscal
      year2009
                            
                            
                            2008
                            
                            
                            2007(in
      thousands)New
      stores and relocations
                            
                            $
                            13,895
                            
                            
                            $
                            11,722
                            
                            
                            $
                            11,466Remodels
                            
                            
                            230
                            
                            
                            
                            2,343
                            
                            
                            
                            2,366Existing
      stores
                            
                            
                            505
                            
                            
                            
                            1,198
                            
                            
                            
                            2,276Information
      systems
                            
                            
                            1,475
                            
                            
                            
                            6,627
                            
                            
                            
                            5,291Rental
      equipment
                            
                            
                            9
                            
                            
                            
                            433
                            
                            
                            
                            1,321Other
                            
                            
                            131
                            
                            
                            
                            110
                            
                            
                            
                            136Total
                            
                            $
                            16,245
                            
                            
                            $
                            22,433
                            
                            
                            $
                            22,856





We opened
four new stores and relocated one store in fiscal 2009 compared to seven new
stores in the same period last year.  The costs to open new stores can
vary significantly depending on the terms of the lease.  Two of the
stores opened in fiscal 2009 were significantly more expensive to open than our
historical average as they are in highly desirable locations.  We
currently do not anticipate opening new stores or entering into new lease
commitments in the near future. Forecasted capital expenditures for fiscal 2010
are expected to be $2 million as all nonessential projects have been
curtailed.





Net cash
provided by financing activities reflects advances and repayments of borrowings
under our revolving credit facility.  The outstanding balance as of
March 29, 2009 is $39.1 million compared to $17.2 million at the end of fiscal
2008.  The increase is primarily the result of funding new and
relocated stores in addition to cash used in operations.





In June
2008, we negotiated a new credit facility with our existing lender, Bank of
America, N.A. (the “Lender”) which was amended on March 2, 2009 and May 4, 2009
which provides for advances up to $55.0 million from January 1st of each year
through August 31st, increasing up to $75.0 million, from September 1st of each
year through December 31st of each year, and up to a $10.0 million maximum in
authorized letters of credit.  The amount we may borrow under this
credit facility is limited to a percentage of the value of eligible inventory,
minus certain reserves.  Interest accrues at the Lender’s prime rate
plus 2.0% (5.25% at March 29, 2009) or at our option we can fix the rate for a
period of time at LIBOR plus 4.5%.  In addition, there is an unused
commitment fee of 0.25% per year, based on a weighted average formula, a
one-time, non-refundable commitment fee of $350,000 and an early termination fee
of 1.50% in year one, 0.75% in year two and 0.25% in year three which is waived
if the loan is refinanced by the Lender or any of its
affiliates.  Under this credit facility, $45.0 million will be
available to the Company, increasing up to $70.0 million, from September 1st of
each year through December 31st of each year, and up to an additional $10.0
million will be available to the Company through a special advance
facility.  The amount available under the special advance facility
will be reduced by $2.5 million on the first day of each month commencing on
July 1, 2010 and the special advance facility will terminate on October 1,
2010.  This effectively increases the revolver limit up to $55 million
from January 1st of each year through August 31st and also allows for seasonal
advances up to $75.0 million from September 1st of each year to December 31st,
subject to the scheduled reductions.  Our obligation to the Lender is
presently secured by a first priority lien on substantially all of our non-real
estate assets, and we are subject to a covenant that we maintain a minimum
monthly EBITDA.





The
amount we can borrow under our credit facility with the Lender is limited to a
percentage of the value of eligible inventory, minus certain
reserves.  A significant decrease in eligible inventory due to the
aging of inventory, an unfavorable inventory appraisal or other factors, could
have an adverse effect on our borrowing capabilities under our credit facility,
which may adversely affect the adequacy of our working capital.




34





As of
December 31, 2008, an event of default had occurred under our Amended and
Restated Loan and Security Agreement, as amended, dated as of June 20, 2008 (the
"Loan Agreement") with our existing Lender due to our failure to maintain a
"Fixed Charge Coverage Ratio" (as defined in the Loan Agreement) of not less
than 1.00 to 1.00 (the “Event of Default”).  On December 28, 2008,
availability under the Loan Agreement was less than $10.5 million, thereby
requiring the testing of the Fixed Charge Coverage Ratio.  We
acknowledged, among other things, that we had no defenses, claims or set-offs to
the obligations under the Loan Agreement and provided the Lender a general
release of claims.  On January 9, 2009, we entered into an amendment
to the Loan Agreement and Limited Forbearance Agreement (the "First Amendment")
dated as of December 28, 2008, with the Lender under which (i), the Lender
agreed to forbear from exercising its rights in respect of the Event of Default
described in the Loan Agreement, (ii) we may not select a LIBOR-based interest
rate under the Loan Agreement, and (iii) the Lender agreed to permit an
overadvance in the amount of $1.5 million until January 13, 2009.  The
forbearance period under the First Amendment ended on January 31,
2009.  On January 29, 2009, the Lender agreed to extend the period
during which it forbear from exercising its rights in respect of certain
defaults under the Loan Agreement from January 31, 2009 until the earlier to
occur of any further default under the Loan Agreement or March 2,
2009.




On March 2, 2009, we amended our Loan
Agreement (the “Third Amendment”) with our existing Lender.  Under the
terms of the Third Amendment, (i) the Lender waived an existing event of default
and certain potential defaults by us, (ii) the amount we can borrow against our
borrowing base has been reduced by approximately 3% to between 61% and 66% of
eligible inventory (varying from month to month), (iii) the interest rate has
been increased from the Lender's prime rate plus 0.5% or LIBOR plus 2.5%
(subject to reduction depending upon our financial performance) to prime rate
plus 2.0% or LIBOR plus 4.5%, at our option, (iv) we have agreed to maintain a
minimum monthly EBITDA ranging from -$3.5 million to $5.6 million depending on
the measurement date, and (v) we have agreed to continue to retain an acceptable
turnaround professional until specified financial milestones are
met.  The seasonal revolver limits under the credit facility remain
unchanged under the Third Amendment.





On May 4,
2009, we amended our Loan Agreement (the “Fourth Amendment”) with our existing
lender.  Under the terms of the Fourth Amendment, our availability
increases by up to an additional $10.0 million through a special advance
facility.  The amount available under the special advance facility
will be reduced by $2.5 million on the first day of each month commencing on
July 1, 2010 and the special advance facility will terminate on October 1,
2010.  This effectively increases the revolver limit up to $55 million
from January 1st of each year through August 31st and also allows for seasonal
advances up to $75.0 million from September 1st of each year to December 31st,
subject to the scheduled reductions.





EBITDA represents (loss) income before
provision (benefit) for income taxes, interest expense, depreciation and
amortization, and non-cash charges.  EBITDA is one of the key measures
used in calculating compliance with covenants in our credit
facility.  Non-compliance with financial covenants could result in a
default under our credit agreement and restrict our ability to finance
operations or capital needs.  Based on the strategic initiatives taken
by management, we believe we can improve a $19 million EBITDA loss in fiscal
2009 to exceed the Lender’s minimum EBITDA requirement of $5.4 million EBITDA
profit in fiscal 2010, a $24 million improvement.  Performance against
this plan is measured on a monthly cumulative basis and we have reported to the
Lender that results have exceeded plan in the first two months of fiscal
2010.  The monthly minimum EBITDA requirements are not necessarily
indicative of future results, nor are they our projection of future results and
our actual results may or may not differ materially.  We can satisfy
our monthly EBITDA requirement through a number of different combinations of any
of the following components: net sales, gross margins, and operating
expenses.  A deterioration of any component(s) can be offset by an
improvement of any other component(s) and vice versa.  The
relationships between the components as they actualize will determine whether
the minimum EBITDA requirement is met.




35





EBITDA is
not a measure of financial performance under generally accepted accounting
principals (“GAAP”), is not intended to represent cash flow from operations
under GAAP, and should not be used as an alternative to net income as an
indicator of operating performance or to cash flow from operating, investing or
financing activities as a measure of liquidity.  We compensate for the
limitations of using EBITDA by using it only to supplement our GAAP results to
provide a more complete understanding of the factors and trends affecting our
business.  EBITDA has limitations as an analytical tool, and investors
should not consider it in isolation or as a substitute for analysis of our
results of operations and cash flows as reported under GAAP.  While
EBITDA is frequently used as a measure of operations and of our ability to meet
indebtedness service requirements, it is not necessarily comparable to other
similarly titled captions of other companies due to potential inconsistencies in
the method of calculation.  The following table reconciles EBITDA to
net loss (income) as presented in our consolidated statements of operations and
in accordance with GAAP:




Fiscal
      year2009
                            
                            
                            2008
                            
                            
                            2007(in
      thousands)Net
      (loss) income
                            
                            $
                            (52,247
                            )
                            
                            $
                            (3,362
                            )
                            
                            $
                            7,099Income
      tax provision (benefit)
                            
                            
                            5,823
                            
                            
                            
                            (2,224
                            )
                            
                            
                            4,630Interest
      expense
                            
                            
                            2,195
                            
                            
                            
                            1,466
                            
                            
                            
                            516Depreciation
      and amortization
                            
                            
                            14,243
                            
                            
                            
                            12,898
                            
                            
                            
                            11,419Impairment
      charge
                            
                            
                            10,730
                            
                            
                            
                            2,077
                            
                            
                            
                            -EBITDA
                            
                            $
                            (19,256
                            )
                            
                            $
                            10,855
                            
                            
                            $
                            23,664


Our
off-balance sheet contractual obligations and commitments relate to operating
lease obligations, employment contracts and letters of credit which are excluded
from the balance sheet in accordance with generally accepted accounting
principles.
  The
following table summarizes such obligations as of March 29, 2009:


Payment
      due by periodContractual Obligations
      (in thousands)
                    
                    Total
                    
                    
                    Less than 1 year
                    
                    
                    2-3 years
                    
                    
                    4-5 years
                    
                    
                    More than 5 yearsOperating
      Leases (a)
                    
                    $
                    231,887
                    
                    
                    $
                    32,104
                    
                    
                    $
                    62,650
                    
                    
                    $
                    54,420
                    
                    
                    $
                    82,713Employment
      Contracts
                    
                    
                    848
                    
                    
                    
                    170
                    
                    
                    
                    339
                    
                    
                    
                    339
                    
                    
                    
                    -Total
      Contractual Obligations
                    
                    $
                    232,735
                    
                    
                    $
                    32,274
                    
                    
                    $
                    62,989
                    
                    
                    $
                    54,759
                    
                    
                    $
                    82,713


We lease
all of our existing store locations.  The leases for most of the
existing stores are for approximately ten-year terms with multiple option
periods under non-cancelable operating leases with scheduled rent
increases.  The leases provide for contingent rent based upon a
percentage of sales in excess of specified minimums.  If there are any
free rent periods, they are accounted for on a straight line basis over the
lease term, beginning on the date of initial possession, which is generally when
we enter the space and begin the construction build-out.  The amount
of the excess of straight line rent expense over scheduled payments is recorded
as a deferred rent liability.  Construction allowances and other such
lease incentives are recorded as deferred credits, and are amortized on a
straight line basis as a reduction of rent expense over the lease
term.  In our efforts to reduce operating expenses and improve
liquidity, we have reviewed all of our store leases and are obtaining rent
reductions and lease modifications from our landlords.  We currently
expect to achieve savings totaling approximately $14 million over the next three
years.  These negotiations, which are on-going, include renegotiating
base rent, revising some of our leases to contain percentage rent clauses, which
obligate us to pay rents based on a percentage of sales rather than fixed
amounts, and amending certain leases to feature kick-out clauses, which allow us
to terminate the lease at our option at a specified date when contractually
defined minimum sales volumes are not exceeded.  We are also exploring
the possibility of potentially closing stores that have no rent concession in
place and are underperforming with no significant improvement foreseen in the
near term.




36





Generally,
our purchase obligations are cancelable 45 days prior to shipment from our
vendors.  Letters of credit amounting to approximately $1.8 million
relating to workers’ compensation insurance were outstanding as of March 29,
2009 and expire within one year.





No cash
dividends have been declared on Class A Common Stock and Class B Common Stock as
we intend to retain earnings for use in the operation of our business and,
therefore, do not anticipate paying any cash dividends in the foreseeable
future.





Critical
Accounting Policies and Use of Estimates





Our consolidated financial statements
are prepared in accordance with accounting principles generally accepted in the
United States.  In connection with the preparation of our financial
statements, we are required to make assumptions and estimates about future
events, and apply judgments that affect the reported amounts of assets,
liabilities, revenue, expenses and the related disclosures. We base our
assumptions, estimates and judgments on historical experience, current trends
and other factors that management believes to be relevant at the time our
consolidated financial statements are prepared. On a regular basis, management
reviews the accounting policies, assumptions, estimates and judgments to ensure
that our financial statements are presented fairly and in accordance with
accounting principles generally accepted in the United States. However, because
future events and their effects cannot be determined with certainty, actual
results could differ from our assumptions and estimates, and such differences
could be material.





Our significant accounting policies are
discussed in Note 2, Summary of Significant Accounting Policies, of the Notes to
Consolidated Financial Statements, included in Item 8, Financial Statements and
Supplementary Data, of this Annual Report on Form 10-K. Management believes
that the following accounting estimates are the most critical to aid in fully
understanding and evaluating our reported financial results, and they require
management’s most difficult, subjective or complex judgments, resulting from the
need to make estimates about the effect of matters that are inherently
uncertain. Management has reviewed these critical accounting estimates and
related disclosures with the Audit Committee of our Board.





Inventory Valuation. In
connection with the implementation of a new financial and merchandising system,
effective March 31, 2008, we have changed the inventory valuation method from
the first-in, first-out “FIFO” basis determined by the retail method of
accounting to a weighted-average cost basis, using the retail
method.  We have accounted for the change in accounting principle
prospectively, in accordance with Statement of Financial Accounting Standards
(“SFAS”) No.154, “Accounting Changes and Error Corrections.”  The
cumulative effect of this change is not determinable as we do not have the
ability to recalculate average cost for prior periods.  We began
fiscal 2009 with the FIFO costs as used for the ending fiscal 2008 inventory
valuation; going forward these amounts are updated as new purchases are
made.  This change has not had a material effect on our results of
operations, and we chose this method based on our new system
capabilities.





We
consider cost to include direct cost of merchandise and inbound freight, plus
internal costs associated with merchandise procurement, storage and handling.
The retail method is widely used in the retail industry due to its practicality.
Current owned retail represents the retail price for which merchandise is
offered for sale on a regular basis reduced for any permanent or clearance
markdowns. As a result, the retail method normally results in an inventory
valuation that is lower than a traditional cost basis.




Inherent
in the retail method calculation are certain significant management judgments
and estimates including initial mark-up, markdowns and shrinkage, which can
significantly impact the owned retail and, therefore, the ending inventory
valuation at cost. Specifically, the failure to take permanent or clearance
markdowns on a timely basis can result in an overstatement of carrying cost
under the retail method. Management believes that its application of the retail
method reasonably states inventory at the lower of cost or market.




37




We
regularly review 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 our historical markdown experience and
anticipated markdowns based on future merchandising and advertising plans,
seasonal considerations, expected business trends and other
factors.





Shrinkage
is accrued as a percentage of sales based on historical shrinkage
trends.  We perform physical inventories twice per year at our stores,
near our second quarter and near the end of our fiscal year.  The
reserve for shrinkage represents an estimate since the last physical inventory
date through the reporting date and actual results can vary from this reserve
based on internal and external factors.  The shrinkage at fiscal year
end is immaterial.





We have
not made any material changes in the accounting methodology used to establish
our inventory valuation, except as described previously or the related markdown
or inventory loss reserves during the past three fiscal years. We do not believe
there is a reasonable likelihood that there will be a material change in future
estimates or assumptions we use to calculate our inventory. However, if
estimates regarding consumer demand are inaccurate or our ability to maintain
our cost complement percentages for certain products changes in an unforeseen
manner, we may be exposed to losses or gains that could be material. A 10%
change in our reserve for slow moving inventories would not be material to the
Company’s financial statements for the past three years.





Revenue Recognition. Sales are
recognized upon the purchase by customers at our retail store locations, less
merchandise returned by customers. Revenue from gift cards, gift certificates
and store merchandise credits is recognized at the time of redemption. We
generally accept returns up to 30 days from the date of purchase with a
sales receipt or proof of purchase. Typically refunds are in the same form of
payment originally received from the customer. We accommodate customers who do
not have a receipt or proof of purchase by offering an exchange or store credit.
When available we track the original sale date with each return and provide a
reserve for projected merchandise returns based on this historical experience.
As the reserve for merchandise returns is based on estimates, the actual returns
could differ from the reserve, which could impact sales.




We have
not made any material changes in the accounting methodology used to recognize
revenue during the past three fiscal years. We do not believe there is a
reasonable likelihood that there will be a material change in the estimates we
use to reserve for returns. Additionally, we believe that a 10% change in our
reserves for merchandise returns would not be material to the Company’s
financial statements for the past three years.





We have
recently implemented a customer loyalty program, Action Pass, which allows
members to earn points for each purchase completed at our stores. Points earned
enable members to receive a certificate that may be redeemed on future
purchases. The value of points earned are included in accrued expenses and
recorded as a reduction in sales at the time the points are earned, based on the
retail value of points that are projected to be redeemed. A 10% change in our
customer loyalty program liability at March 30, 2008, would not have been
material to the Company’s financial statements.





Gift Card/Certificate Redemption.We offer our customers the option of purchasing gift cards and, in the
past, gift certificates which may be used toward the future purchase of our
products. Revenue from gift cards, gift certificates and store merchandise
credits (the “Gift Cards”) is recognized at the time of redemption. The Gift
Cards have no expiration dates. We record unredeemed Gift Cards as a liability
until the point of redemption.




Our
historical experience indicates that not all issued Gift Cards are redeemed (the
“Breakage”). Based upon over five years of redemption data, approximately 90% of
Gift Cards are redeemed within the year after issuance, and approximately 95%
are redeemed within 36 months of the date of issuance, after which redemption
activity is negligible. Accordingly, we recognize Breakage as revenue by
periodically decreasing the carrying value of the Gift Card liability by
approximately 5% of the aggregate amount. A 10% change in our breakage estimates
at March 29, 2009, would not have been material to the Company’s financial
statements.




38





We
recognize Breakage at the time of redemption of Gift Cards. The revenue from
Breakage is included in the income statement line item net sales and amounted to
approximately $627,000, $552,000 and $532,000 for fiscal years 2009, 2008 and
2007, respectively.





Self-insurance. Property,
general liability and workers' compensation insurance coverage is self-insured
for various levels. When estimating our self-insured liabilities, we consider a
number of factors, including historical claims experience, demographic factors,
severity factors and valuations provided by independent third-party actuaries.
Self-insurance accruals include claims filed, as well as estimates of claims
incurred but not yet reported based on historical trends.





We have
not made any material changes in the accounting methodology used to establish
our self-insured liabilities during the past three fiscal years. We do not
believe there is a reasonable likelihood that there will be a material change in
the estimates or assumptions we use to calculate our self-insured liabilities.
However, if actual results are not consistent with our estimates or assumptions,
we may be exposed to losses or gains that could be material. A 10% change in our
self-insured accruals at March 29, 2009, would not have been material to the
Company’s financial statements.





Impairment of Long-Lived Assets.We account 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.”  We review
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.




Our impairment loss calculations
contain uncertainties because they require management to make assumptions and to
apply judgment to estimate future cash flows and asset fair values, including
forecasting useful lives of the assets and selecting the discount rate that
reflects the risk inherent in future cash flows.  We have not made any
material changes in our impairment loss assessment methodology during the past
three fiscal years.  We do not believe there is a reasonable
likelihood that there will be a material change in the estimates or assumptions
we use to calculate long-lived asset impairment losses. However, if actual
results are not consistent with our estimates and assumptions used in estimating
future cash flows and asset fair values, we may be exposed to losses that could
be material.  Using the impairment evaluation methodology described
herein, we recorded long-lived asset impairment charges totaling $10.7 million
and $2.1 million, in the aggregate, during fiscal 2009 and 2008,
respectively.  The carrying value of property and equipment was
approximately $57.7 million as of March 29, 2009.





Accounting for Income
Taxes.  As part of the process of preparing the consolidated
financial statements, income taxes are estimated for each of the jurisdictions
in which we operate. 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.





Based
largely on the magnitude of this year’s loss, the cumulative losses to date, the
near term outlook and other available objective evidence, management concluded
that a valuation allowance equal to all of the net deferred tax assets, $24.1
million, should be recorded as the Company’s ability to return to profitability
during the loss carryforward period does not meet the “more likely than not”
standard.  The net deferred assets include $15.1 million in net
operating losses which can be carried forward for a period of 20 years under
current regulations.  A new bill, the Net Operating Loss Carryback Act
(H.R. 2452) has been introduced in the house which would permit a carryback of
losses from 2008 or 2009 for up to five years.  In the event this bill
becomes a law, we believe we could obtain an income tax refund of up to $10.0
million.




39





Provisions
for income taxes 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 we do business.





Although
management believes that the judgments and estimates discussed herein are
reasonable, actual results could differ, and we may be exposed to losses or
gains that could be material.  An unfavorable tax settlement would
require use of our cash and would result in an increase in our effective income
tax rate in the period of resolution.





Stock-Based Compensation.
Prior to the April 1, 2006 adoption of the Financial Accounting Standards Board
(“FASB”) Statement No. 123(R), “Share-Based Payment” (“SFAS 123R”), the
Company accounted for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion (“APB”) No. 25,
“Accounting for Stock Issued to Employees,” and related interpretations. As
permitted by SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS
123”), stock-based compensation was included as a pro forma disclosure in the
notes to the consolidated financial statements. Effective April 1, 2006, the
Company adopted the fair value recognition provisions of SFAS 123R, using the
modified-prospective transition method. Under this transition method,
stock-based compensation expense was recognized in the consolidated financial
statements for granted, modified or settled stock options. The provisions of
SFAS 123R apply to new stock options and stock options outstanding, but not yet
vested, on the effective date of April 1, 2006. Results for prior periods have
not been restated, as provided for under the modified-prospective transition
method. On March 31, 2006 we accelerated the vesting of options to purchase an
aggregate of 209,514 shares of Class A Common Stock and 29,931 shares of Class B
Common Stock. The purpose of accelerating the vesting of the options is to
reduce the non-cash compensation expense that we otherwise would be required to
recognize. Total stock-based compensation expense recognized for the 2009, 2008
and 2007 fiscal years was $354,000, $233,000 and $166,000 before income taxes,
and the related tax benefit for fiscal 2008 and 2007 was $91,000 and $68,000 for
each year respectively.





We do not
believe there is a reasonable likelihood that there will be a material change in
the future estimates or assumptions we use to determine stock-based compensation
expense. A 10% change in our stock-based compensation expense for the 2009
fiscal year, would not have been material to our financial
statements.





Recently
Issued Accounting Pronouncements





In September 2006, the FASB issued
SFAS No. 157, “Fair Value Measurements.”  SFAS No. 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements.  SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute.  Accordingly, SFAS No. 157 does
not require any new fair value measurements.  There are numerous
previously issued statements dealing with fair values that are amended by SFAS
No. 157. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007. In February 2008, the
FASB issued Staff Position (“FSP”) FAS 157-1, “Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements
That Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13,” which scopes out leasing transactions accounted
for under SFAS No. 13, “Accounting for Leases.” In February 2008, FSP
FAS 157-2, “Effective Date of FASB Statement No. 157,” was issued, which
delays the effective date of SFAS No. 157 to fiscal years and interim
periods within those fiscal years beginning after November 15, 2008 for
nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually).  In October 2008, FSP FAS 157-3,
“Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active” was issued.  FSP FAS 157-3 clarifies the application of
SFAS No. 157, in determining the fair value of a financial asset when the
market for that financial asset is not active.  FSP FAS 157-3 became
effective upon issuance and includes prior periods for which financial
statements have not been issued. The adoption of the applicable provisions of
SFAS No. 157 at the beginning of fiscal 2009 has not had a material impact
on our financial condition.  We do not expect the adoption of the
remaining provisions of SFAS No. 157 to have a material impact on our results of
operations, cash flows, or financial position.




40





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities.”  SFAS No. 159
permits companies to choose to measure many financial instruments and certain
other items at fair value.  The objective is to improve financial
reporting by providing companies with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions.  SFAS
No. 159 is effective for fiscal years beginning after November 15,
2007.  We have adopted SFAS No. 159 at the beginning of fiscal
2009 but elected not to apply the Fair Value Option of SFAS
No. 159.





In December 2007, the FASB issued SFAS
No. 141(R), “Business Combinations” (“FAS 141(R)”), to replace FAS 141,
“Business Combinations.”  FAS 141(R) requires use of the acquisition
method of accounting, defines the acquirer, establishes the acquisition date and
broadens the scope to all transactions and other events in which one entity
obtains control over one or more other businesses.  This statement is
effective for financial statements issued for fiscal years beginning on or after
December 15, 2008 with earlier adoption prohibited.  While we do not
expect the adoption of FAS 141(R) to have a material impact to our consolidated
financial statements for transactions completed prior to December 31, 2008, the
impact of the accounting change could be material for business combinations
which may be consummated subsequent thereto.





In December 2007, the FASB issued SFAS
No. 160, “Non controlling Interests in Consolidated Financial Statements — an
amendment of ARB No. 51” (“FAS 160”).  FAS 160 establishes accounting
and reporting standards for the non-controlling interest in a subsidiary and for
the retained interest and gain or loss when a subsidiary is
deconsolidated.  This statement is effective for financial statements
issued for fiscal years beginning on or after December 15, 2008 with earlier
adoption prohibited.  We currently do not have any non-controlling
interests or deconsolidated subsidiaries and therefore FAS 160 will not have any
impact on our consolidated financial statements.





In May 2008, the FASB issued SFAS No.
162, “Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). This
statement is intended to improve financial reporting by identifying a consistent
framework, or hierarchy, for selecting accounting principles to be used in
preparing financial statements of nongovernmental entities that are presented in
conformity with GAAP.  This statement will be effective 60 days
following the U.S. Securities and Exchange Commission’s approval of the Public
Company Accounting Oversight Board amendment to AU Section 411, “The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting
Principles.”  We believe that FAS 162 will have no effect on our
financial statements.





ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Our exposure to interest rate risk
consists primarily of borrowings under our credit facility, which bears interest
at floating rates (primarily LIBOR 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.





Although we cannot precisely determine
the overall effect of inflation, our operations are influenced by general
economic conditions.  We do not believe that, historically, inflation
has had a material impact on our results of operations as we are generally able
to pass along inflationary increases in costs to our
customers.  However, in recent periods, we have experienced an impact
on overall sales due to a consumer spending slowdown as a result of
macro-economic circumstances which include weak housing trends and rising
unemployment in our core markets





ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





The financial statements required by
this section are submitted as part of Item 15 of this report.





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





None.




41





ITEM
9A(T).  CONTROLS AND PROCEDURES





Disclosure
Controls and Procedures





The Company’s principal executive
officer, Craig Levra, Chief Executive Officer, and principal financial officer,
Howard Kaminsky, Chief Financial Officer, have evaluated the Company’s
disclosure controls and procedures as of March 29, 2009, and have concluded that
these controls and procedures are effective to ensure that information required
to be disclosed by the company in the reports that it files or submits under the
Securities Exchange Act of 1934 (15 USC § 78a et seq) is recorded,
processed, summarized, and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms. This conclusion followed
the remediation of a previously reported material weakness associated with the
timing of the implementation of the Company’s new ERP system, and is based upon
the subsequent documentation and testing of our disclosure controls and
procedures. These disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the company in the reports that it files or submits is
accumulated and communicated to management, including the principal executive
officer and the principal financial officer, as appropriate to allow timely
decisions regarding required disclosure.





Management’s
Annual Report on Internal Control Over Financial Reporting





Management
of Sport Chalet, Inc. (the Company) prepared and is responsible for the
consolidated financial statements and all related financial information
contained in this Annual Report and for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial
reporting is a process designed by, or under the supervision of, the Company's
Chief Executive Officer and the Chief Financial Officer and implemented by the
Company's Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of
America.





The
Company’s internal control over financial reporting includes those policies and
procedures that: (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the Company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles in the United States of
America, and that receipts and expenditures of the Company are being made only
in accordance with authorizations of management and directors of the Company;
and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that could
have a material effect on the financial statements.





Because
of its inherent limitations, internal control over financial reporting can
provide only reasonable assurance and may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.





Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework and criteria established in Internal
Control — Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. This evaluation included review of the
documentation of controls, evaluation of the design effectiveness of controls,
testing of the operating effectiveness of controls and a conclusion on this
evaluation. Based on this evaluation, management concluded that the Company’s
internal control over financial reporting is effective as of March 29,
2009.





This
Annual Report on Form 10-K does not include an attestation report of the
Company's registered public accounting firm regarding internal control over
financial reporting.  Management's report was not subject to
attestation by the Company's registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
Company to provide only management's report in this Annual Report on Form
10-K.




42





Changes
in Internal Control Over Financial Reporting





There
were no changes in the Company's internal controls over financial reporting,
identified by the Chief Executive Officer or the Chief Financial Officer that
occurred during the fiscal quarter ended March 29, 2009that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.





ITEM
9B.  OTHER INFORMATION





None.










43




PART
III





ITEM
10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





The information concerning the
directors and executive officers of the Company is incorporated herein by
reference from the section entitled “Proposal 1 - Election of Directors”
contained in the definitive proxy statement of the Company to be filed pursuant
to Regulation 14A within 120 days after the end of the Company’s last fiscal
year (the “Proxy Statement”).





ITEM
11.  EXECUTIVE COMPENSATION





The information concerning executive
compensation is incorporated herein by reference from the sections entitled
“Proposal 1 - Election of Directors,” “Compensation Discussion and Analysis” and
“Executive Compensation” contained in the Proxy Statement.





ITEM
12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS





The information concerning the security
ownership of certain beneficial owners and management is incorporated herein by
reference from the sections entitled “General Information - Security Ownership
of Principal Stockholders and Management” and “Executive Compensation” contained
in the Proxy Statement.





ITEM
13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE





The
information concerning certain relationships and related transactions is
incorporated herein by reference from the section entitled “Proposal 1 -
Election of Directors” contained in the Proxy Statement.





ITEM
14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES





The
information concerning principal accountant fees and services is incorporated
herein by reference from the section entitled “Independent Registered Public
Accounting Firm” contained in the Proxy Statement.




44




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.





For
fiscal years 2009, 2008 and 2007, in thousands.





Allowance
      for
                    Sales
      Returns
                    (Year
      ended)
                  Balance
      at
                    Beginning
      of
                    Period
                  Additions
                  Deductions
                  Balance
      at
                    End
      of Period3/29/2009
                  $443
                  $21,222
                  $21,291
                  $3743/30/2008
                  $394
                  $20,738
                  $20,689
                  $4434/1/2007
                  $386
                  $19,764
                  $19,756
                  $394Allowances
      for estimated returns are recorded at the estimated gross profit based
      upon our historical return patterns.  Sales return allowances are
      recorded in other accrued expenses on the Consolidated Balance
      Sheets.





(b)           Exhibits
- See Index on Page 69.




45





Sport
Chalet, Inc.





Index
to Audited Consolidated Financial Statements




PageReport
      of Independent Registered Public Accounting Firm
                      47Consolidated
      Statements of Operations for each of the three years in theperiod
      ended March 29, 2009
                      48Consolidated
      Balance Sheets as of March 29, 2009 and March 30, 2008
                      49Consolidated
      Statements of Stockholders’ Equity for each of the threeyears in
      the period ended March 29, 2009
                      50Consolidated
      Statements of Cash Flows for each of the three years in theperiod
      ended March 29, 2009
                      51Notes
      to Consolidated Financial Statements
                      52


46




Report
of Independent Registered Public Accounting Firm




To the
Stockholders and Board of Directors


Sport
Chalet, Inc.







We have
audited the accompanying consolidated balance sheets of Sport Chalet, Inc. as of
March 29, 2009 and March 30, 2008 and the related consolidated statements of
operations, stockholders’ equity and cash flows for each of the years in the
three-year period ended March 29, 2009. Our audits also included the financial
statement schedule listed in the Index at Item 15(a). These consolidated
financial statements are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.





We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States).  Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement.  The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting.  An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting.  Accordingly, we express no such
opinion.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe
that our audits provide a reasonable basis for our opinion.





In our opinion, the consolidated
financial statements and schedule referred to above present fairly, in all
material respects, the consolidated financial position of Sport Chalet, Inc. as
of March 29, 2009 and March 30, 2008, and the consolidated results of its
operations and its cash flows for each of the years in the three-year period
ended March 29, 2009, in conformity with accounting principles generally
accepted in the United States of America.  Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.




/s/
      Moss Adams LLPLos
      Angeles, California
                        June
      25, 2009




47




Sport
Chalet, Inc.





Consolidated
Statements of Operations





Fiscal
      year2009
                  
                  
                  2008
                  
                  
                  2007(in
      thousands, except per share amounts)Net
      sales
                  
                  $
                  372,652
                  
                  
                  $
                  402,534
                  
                  
                  $
                  388,209Cost
      of goods sold, buying and occupancy costs
                  
                  
                  284,257
                  
                  
                  
                  285,982
                  
                  
                  
                  268,188Gross
      profit
                  
                  
                  88,395
                  
                  
                  
                  116,552
                  
                  
                  
                  120,021Selling,
      general and administrative expenses
                  
                  
                  107,651
                  
                  
                  
                  105,697
                  
                  
                  
                  96,357Depreciation
      and amortization
                  
                  
                  14,243
                  
                  
                  
                  12,898
                  
                  
                  
                  11,419Impairment
      charge
                  
                  
                  10,730
                  
                  
                  
                  2,077
                  
                  
                  
                  -(Loss)
      income from operations
                  
                  
                  (44,229
                  )
                  
                  
                  (4,120
                  )
                  
                  
                  12,245Interest
      expense
                  
                  
                  2,195
                  
                  
                  
                  1,466
                  
                  
                  
                  516(Loss)
      income before taxes
                  
                  
                  (46,424
                  )
                  
                  
                  (5,586
                  )
                  
                  
                  11,729Income
      tax provision (benefit)
                  
                  
                  5,823
                  
                  
                  
                  (2,224
                  )
                  
                  
                  4,630Net
      (loss) income
                  
                  $
                  (52,247
                  )
                  
                  $
                  (3,362
                  )
                  
                  $
                  7,099(Loss)
      earnings per share:Basic
                  
                  $
                  (3.70
                  )
                  
                  $
                  (0.24
                  )
                  
                  $
                  0.51Diluted
                  
                  $
                  (3.70
                  )
                  
                  $
                  (0.24
                  )
                  
                  $
                  0.49Weighted
      average number of common shares outstanding:Basic
                  
                  
                  14,123
                  
                  
                  
                  14,075
                  
                  
                  
                  13,850Diluted
                  
                  
                  14,123
                  
                  
                  
                  14,075
                  
                  
                  
                  14,460




See
accompanying notes.




48




Sport
Chalet, Inc.





Consolidated
Balance Sheets





March
      29,
                      
                      
                      March
      30,2009
                      
                      
                      2008Assets
                      
                      (in
      thousands, except share amounts)Current
      assets:Cash
      and cash equivalents
                      
                      $
                      290
                      
                      
                      $
                      3,894Accounts
      receivable
                      
                      
                      1,434
                      
                      
                      
                      1,359Merchandise
      inventories
                      
                      
                      88,431
                      
                      
                      
                      86,145Prepaid
      expenses and other current assets
                      
                      
                      2,178
                      
                      
                      
                      6,170Income
      tax receivable
                      
                      
                      1,004
                      
                      
                      
                      1,405Deferred
      income taxes
                      
                      
                      –
                      
                      
                      
                      3,349Total
      current assets
                      
                      
                      93,337
                      
                      
                      
                      102,322Fixed
      assets, net
                      
                      
                      57,718
                      
                      
                      
                      66,619Deferred
      income taxes
                      
                      
                      –
                      
                      
                      
                      2,374Total
      assets
                      
                      $
                      151,055
                      
                      
                      $
                      171,315Liabilities
      and stockholders’ equityCurrent
      liabilities:Accounts
      payable
                      
                      $
                      31,083
                      
                      
                      $
                      28,035Loan
      payable to bank
                      
                      
                      39,140
                      
                      
                      
                      17,216Salaries
      and wages payable
                      
                      
                      4,150
                      
                      
                      
                      4,620Other
      accrued expenses
                      
                      
                      19,379
                      
                      
                      
                      13,254Total
      current liabilities
                      
                      
                      93,643
                      
                      
                      
                      63,125Deferred
      rent
                      
                      
                      25,217
                      
                      
                      
                      24,221Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, $.01 par value:Authorized
      shares – 2,000,000Issued
      and outstanding shares – none
                      
                      
                      –
                      
                      
                      
                      –Class
      A Common stock, $.01 par value:Authorized
      shares – 46,000,000 Issued
      and outstanding shares –12,359,990
      in 2009 and12,252,654
      in 2008
                      
                      
                      124
                      
                      
                      
                      124Class
      B Common stock, $.01 par value:Authorized
      shares – 2,000,000 Issued
      and outstanding shares –1,763,321
      in 2009 and1,741,489
      in 2008
                      
                      
                      18
                      
                      
                      
                      18Additional
      paid-in capital
                      
                      
                      34,458
                      
                      
                      
                      34,094Retained
      earnings (deficit)
                      
                      
                      (2,514
                      )
                      
                      
                      49,733Total
      stockholders’ equity
                      
                      
                      32,086
                      
                      
                      
                      83,969Total
      liabilities and stockholders’ equity
                      
                      $
                      151,055
                      
                      
                      $
                      171,315




See
accompanying notes.




49




Sport
Chalet, Inc.





Consolidated
Statements of Stockholders’ Equity





Common
      Stock
                            
                            
                            
                            
                            
                            RetainedClass A
                            
                            
                            
                            
                            
                            Class B
                            
                            
                            
                            
                            
                            Additional
                            
                            
                            EarningsShares
                            
                            
                            Amount
                            
                            
                            Shares
                            
                            
                            Amount
                            
                            
                            Paid-in
      Capital
                            
                            
                            (Deficit)
                            
                            
                            Total(in
      thousands, except share amounts)Balance
      at March 31, 2006
                            
                            
                            11,927,146
                            
                            
                            $
                            119
                            
                            
                            
                            1,703,909
                            
                            
                            $
                            17
                            
                            
                            $
                            31,335
                            
                            
                            $
                            45,997
                            
                            
                            $
                            77,468Options
      exercised
                            
                            
                            325,508
                            
                            
                            
                            3
                            
                            
                            
                            37,580
                            
                            
                            
                            -
                            
                            
                            
                            1,354
                            
                            
                            
                            -
                            
                            
                            
                            1,357Related
      income tax benefit
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            1,226
                            
                            
                            
                            -
                            
                            
                            
                            1,226Optionee
      withholdingtaxes
      from exercise of stock options
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (890
                            )
                            
                            
                            -
                            
                            
                            
                            (890
                            )Share-based
      compensation
                            
                            
                            
                            
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            -
                            
                            
                            
                            166
                            
                            
                            
                            -
                            
                            
                            
                            166Net
      income for 2007
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            7,099
                            
                            
                            
                            7,099Balance
      at April 1, 2007
                            
                            
                            12,252,654
                            
                            
                            $
                            123
                            
                            
                            
                            1,741,489
                            
                            
                            $
                            17
                            
                            
                            $
                            33,191
                            
                            
                            $
                            53,095
                            
                            
                            $
                            86,426Options
      exercised
                            
                            
                            107,336
                            
                            
                            
                            1
                            
                            
                            
                            21,832
                            
                            
                            
                            -
                            
                            
                            
                            371
                            
                            
                            
                            -
                            
                            
                            
                            372Related
      income tax benefit
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            300
                            
                            
                            
                            -
                            
                            
                            
                            300Share-based
      compensation
                            
                            
                            
                            
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            -
                            
                            
                            
                            233
                            
                            
                            
                            -
                            
                            
                            
                            233Net
      loss for 2008
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (3,362
                            )
                            
                            
                            (3,362
                            )Balance
      at March 30, 2008
                            
                            
                            12,359,990
                            
                            
                            $
                            124
                            
                            
                            
                            1,763,321
                            
                            
                            $
                            18
                            
                            
                            $
                            34,094
                            
                            
                            $
                            49,733
                            
                            
                            $
                            83,969Options
      exercised
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Related
      income tax benefit
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            10
                            
                            
                            
                            -
                            
                            
                            
                            10Share-based
      compensation
                            
                            
                            
                            
                            
                            
                            -
                            
                            
                            
                            
                            
                            
                            
                            -
                            
                            
                            
                            354
                            
                            
                            
                            -
                            
                            
                            
                            354Net
      loss for 2008
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (52,247
                            )
                            
                            
                            (52,247
                            )Balance
      at March 29, 2009
                            
                            
                            12,359,990
                            
                            
                            $
                            124
                            
                            
                            
                            1,763,321
                            
                            
                            $
                            18
                            
                            
                            $
                            34,458
                            
                            
                            $
                            (2,514
                            )
                            
                            $
                            32,086





See
accompanying notes.




50





Sport
Chalet, Inc.





Consolidated
Statements of Cash Flows





Fiscal
      year2009
                  
                  
                  2008
                  
                  
                  2007Operating
      activities
                  
                  (in
      thousands)Net
      (loss) income
                  
                  $
                  (52,247
                  )
                  
                  $
                  (3,362
                  )
                  
                  $
                  7,099Adjustments
      to reconcile net (loss) income to net cash (used in) provided by operating
      activities:Depreciation
      and amortization
                  
                  
                  14,243
                  
                  
                  
                  12,898
                  
                  
                  
                  11,419Loss
      on disposal of equipment
                  
                  
                  173
                  
                  
                  
                  326
                  
                  
                  
                  315Impairment
      charge
                  
                  
                  10,730
                  
                  
                  
                  2,077
                  
                  
                  
                  –Share-based
      compensation
                  
                  
                  354
                  
                  
                  
                  233
                  
                  
                  
                  166Deferred
      income taxes
                  
                  
                  5,723
                  
                  
                  
                  1,928
                  
                  
                  
                  (456
                  )Changes
      in operating assets and liabilities:Accounts
      receivable
                  
                  
                  (75
                  )
                  
                  
                  5,535
                  
                  
                  
                  (4,415
                  )Merchandise
      inventories
                  
                  
                  (2,286
                  )
                  
                  
                  922
                  
                  
                  
                  (19,290
                  )Prepaid
      expenses and other current assets
                  
                  
                  3,992
                  
                  
                  
                  (1,343
                  )
                  
                  
                  (970
                  )Income
      tax receivable
                  
                  
                  401
                  
                  
                  
                  77
                  
                  
                  
                  (1,482
                  )Accounts
      payable
                  
                  
                  1,602
                  
                  
                  
                  (1,373
                  )
                  
                  
                  12,941Salaries
      and wages payable
                  
                  
                  (470
                  )
                  
                  
                  (379
                  )
                  
                  
                  (474
                  )Other
      accrued expenses
                  
                  
                  6,125
                  
                  
                  
                  (2,327
                  )
                  
                  
                  671Income
      taxes payable
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  (302
                  )Deferred
      rent
                  
                  
                  996
                  
                  
                  
                  1,162
                  
                  
                  
                  5,442Net
      cash (used in) provided by operating activities
                  
                  
                  (10,739
                  )
                  
                  
                  16,374
                  
                  
                  
                  10,664Investing
      activitiesPurchases
      of fixed assets
                  
                  
                  (16,245
                  )
                  
                  
                  (22,433
                  )
                  
                  
                  (22,856
                  )Net
      cash used in investing activities
                  
                  
                  (16,245
                  )
                  
                  
                  (22,433
                  )
                  
                  
                  (22,856
                  )Financing
      activitiesProceeds
      from bank borrowings
                  
                  
                  321,979
                  
                  
                  
                  110,573
                  
                  
                  
                  70,380Repayment
      of bank borrowings
                  
                  
                  (300,055
                  )
                  
                  
                  (105,133
                  )
                  
                  
                  (58,604
                  )Checks
      drawn in excess of cash in balances
                  
                  
                  1,446Proceeds
      from exercise of stock options
                  
                  
                  –
                  
                  
                  
                  372
                  
                  
                  
                  1,357Optionee
      withholding taxes from exercise of stock options
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  (890
                  )Tax
      benefit on employee stock options
                  
                  
                  10
                  
                  
                  
                  300
                  
                  
                  
                  1,226Net
      cash provided by financing activities
                  
                  
                  23,380
                  
                  
                  
                  6,112
                  
                  
                  
                  13,469(Decrease)
      increase in cash and cash equivalents
                  
                  
                  (3,604
                  )
                  
                  
                  53
                  
                  
                  
                  1,277Cash
      and cash equivalents at beginning of year
                  
                  
                  3,894
                  
                  
                  
                  3,841
                  
                  
                  
                  2,564Cash
      and cash equivalents at end of year
                  
                  $
                  290
                  
                  
                  $
                  3,894
                  
                  
                  $
                  3,841Cash
      paid during the year for:Income
      taxes
                  
                  $
                  52
                  
                  
                  $
                  30
                  
                  
                  $
                  5,645Interest
                  
                  $
                  1,716
                  
                  
                  $
                  1,247
                  
                  
                  $
                  357





See
accompanying notes.




51


Sport
Chalet, Inc.
 
 Notes
to Consolidated Financial Statements


1.
Description of Business





Sport
Chalet, Inc. (the “Company”), founded in 1959, is a leading operator of 55
full-service, specialty sporting goods stores in California, Nevada, Arizona and
Utah.  The Company has 33 locations in Southern California, eight in
Northern California, two in Central California, three in Nevada, eight in
Arizona and one in Utah.





In the
second quarter of fiscal 2006, the Company’s Board of Directors approved a
recapitalization plan designed to facilitate the orderly transition of control
from the Company’s founder (the “Founder”) to certain members of management and
to increase financial flexibility for the Company and its
stockholders.  The recapitalization established two classes of common
stock. Each share of Class B Common Stock entitles the holder to one vote, and
each share of Class A Common Stock entitles the holder to 1/20th of one
vote.  The Class A Common Stock and the Class B Common Stock will
generally vote on all matters as a single class.  The holders of the
Class A Common Stock and Class B Common Stock vote as a separate class on any
reverse stock split which results in holders of more than 5% of such class being
converted into fractional shares.  The holders of Class A Common
Stock, voting as a separate class, are also entitled to elect one director, and
the affirmative vote of the holders of a majority of the shares of Class A
Common Stock, voting as a separate class, will be required to amend certain
provisions of the Company's Certificate of Incorporation.





Each
share of Class A Common Stock and each share of Class B Common Stock
shall have identical rights with respect to dividends and distributions;
provided, however, that the holder of each share of Class A Common Stock shall
be entitled to receive a regular cash dividend equal to 110% of any regular cash
dividend paid with respect to a share of Class B Common Stock; and provided,
further, that dividends or other distributions payable on the common stock in
shares of common stock shall be made to all holders of common stock and may be
made only as follows:  (i) in shares of Class A Common Stock
to the record holders of Class A Common Stock and to the record holders of
Class B Common Stock, (ii) in shares of Class A Common Stock to
the record holders of Class A Common Stock and in shares of Class B
Common Stock to the record holders of Class B Common Stock solely in
connection with a proportionate dividend to effectuate a split of the common
stock, or (iii) in any other authorized class or series of capital
stock to the holders of both classes of common stock.





The Founder along with certain members
of management collectively own approximately 65% of the outstanding shares of
the Class A Common Stock and Class B Common Stock at March 29,
2009.





Economic
Environment and Recent Events





Comparable
store sales declined 4.5% for fiscal 2008 and 12.4% for fiscal 2009 as we
continue to confront a difficult macro-economic environment, which began with
weak housing trends and high gasoline prices in our core markets and continued
with the financial and credit crisis.  Also, non-cash impairment
charges of $10.7 million and $2.1 million were recorded in fiscal 2009 and 2008,
related to eleven and two stores, respectively, with significantly lower than
expected sales volume.  A tax provision of $5.8 million was recorded
for fiscal 2009 to establish a valuation allowance equal to all of the net
deferred tax assets of $24.1 million.  As a result we incurred a net
loss of $52.2 million, or $3.70 per diluted share, compared to a net loss of
$3.4 million, or $0.24 per diluted share, for fiscal 2008.




52


Sport
Chalet, Inc.
 
 Notes
to Consolidated Financial Statements


In October 2008, we began aggressively
taking action to address the severe downturn in the macro-economic environment
by examining our practices, assumptions, models and cost structures in an effort
to modify our business model in a manner which makes the Company more efficient,
more focused and better able to navigate the difficult
environment.  We are focused more intently than ever on reducing
operating expenses and improving liquidity through the following core
initiatives:





·
            Amended
      loan agreement with our single source lender, Bank of America, following
      two 30-day forbearance agreements.





·
            Aggressively
      reduced aged inventory, providing fresher and cleaner merchandise on the
      floor and enhancing the collateral
base.





·
            Communicated
      with all vendors regularly throughout in the process to make sure they
      were fully aware of the challenges we are facing and the initiatives taken
      for a turnaround.





·
            Renegotiated
      lease terms across many of our stores, which eliminated the immediate need
      for store closures with reduced base rent payments, percentage rent and
      kick-out clauses.





·
            Significantly
      increased payroll efficiency in our stores and distribution center, which
      delivered lower spend per customer while maintaining the customer
      experience.





·
            Initiated
      significant reductions in corporate overhead, from a personnel and
      discretionary spending standpoint.





·
            Strengthened
      our corporate governance policies and
practices.





Although
no assurance can be given about the ultimate impact of these initiatives or of
the overall  economic climate, we believe these initiatives combined with a
diminished competitive environment due to the exit or diminished capacity of
many key specialty competitors throughout the marketplace will position us for
sustainability, viability and positive results in the future..





Segments
of an Enterprise





The
Company reports segment information in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 131, “Disclosures about Segments of an
Enterprise and Related Information. Under SFAS No. 131 all publicly traded
companies are required to report certain information about the operating
segments, products, services and geographical areas in which they operate and
their major customers.  The Company operates in a single business
segment and operates only in the United States.




2.
Summary of Significant Accounting Policies





Principles
of Consolidation





The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
significant inter-company transactions and balances have been eliminated in
consolidation.





Cash
and Cash Equivalents





The
Company considers all highly liquid investments with maturities of less than
three months when purchased to be cash equivalents.





Our
management of cash provides for the reimbursement of all bank disbursement
accounts on a daily basis.  Accounts payable at March 29, 2009
includes $1.5 million of checks drawn in excess of cash balances not yet
presented for payment.




53


Sport
Chalet, Inc.
  Notes
to Consolidated Financial Statements


The
Company has a concentration of credit risk when cash deposits in banks are in
excess of federally insured limits in the event of nonperformance by the related
financial institution. However, management does not anticipate nonperformance by
these financial institutions.





Merchandise
Inventories





In
connection with the implementation of a new financial and merchandising system,
effective March 31, 2008, we have changed the inventory valuation method from
the first-in, first-out “FIFO” basis determined by the retail method of
accounting to a weighted-average cost basis, using the retail
method.  We have accounted for the change in accounting principle
prospectively, in accordance with SFAS No.154,
“Accounting Changes and Error Corrections.”  The cumulative
effect of this change is not determinable as we do not have the ability to
recalculate average cost for prior periods.  We began fiscal 2009 with
the FIFO costs as used for the ending fiscal 2008 inventory valuation; going
forward these amounts are updated as new purchases are made.  This
change has not had a material effect on our results of operations, and we chose
this method based on our new system capabilities.





We consider cost to include direct cost
of merchandise and inbound freight, plus internal costs associated with
merchandise procurement, storage and handling. The retail method is widely used
in the retail industry due to its practicality. Current owned retail represents
the retail price for which merchandise is offered for sale on a regular basis
reduced for any permanent or clearance markdowns. As a result, the retail method
normally results in an inventory valuation that is lower than a traditional cost
basis.




Inherent
in the retail method calculation are certain significant management judgments
and estimates including initial mark-up, markdowns and shrinkage, which can
significantly impact the owned retail and, therefore, the ending inventory
valuation at cost. Specifically, the failure to take permanent or clearance
markdowns on a timely basis can result in an overstatement of carrying cost
under the retail method. Management believes that its application of the retail
method reasonably states inventory at the lower of cost or market.




We
regularly review 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 our historical markdown experience and
anticipated markdowns based on future merchandising and advertising plans,
seasonal considerations, expected business trends and other
factors.





Shrinkage
is accrued as a percentage of sales based on historical shrinkage
trends.  We perform physical inventories twice per year at our stores,
near our second quarter and near the end of our fiscal year.  The
reserve for shrinkage represents an estimate since the last physical inventory
date through the reporting date and actual results can vary from this reserve
based on internal and external factors.  The shrinkage at fiscal year
end is immaterial.




54


Sport
Chalet, Inc.
 
 Notes
to Consolidated Financial Statements


Accounts
Receivable





Accounts
receivable is reported net of an allowance for doubtful accounts. The allowance
for doubtful accounts represents an estimate of the losses inherent in accounts
receivable based on several factors, including historical trends of aging of
accounts, write-off experience and expectations of future
performance.   Accounts receivable consists of amounts due from
customers, vendors and landlords, in thousands, as follows:





March 29, 2009
                    
                    
                    March 30, 2008Customers
                    
                    $
                    1,470
                    
                    
                    $
                    1,298Vendors
                    
                    
                    -
                    
                    
                    
                    246Landlords
                    
                    
                    -
                    
                    
                    
                    23Other
                    
                    
                    340
                    
                    
                    
                    1011,810
                    
                    
                    
                    1,668Allowance
      for doubtful accounts
                    
                    
                    (376
                    )
                    
                    
                    (309
                    )Net
      accounts receivable
                    
                    $
                    1,434
                    
                    
                    $
                    1,359


Fixed
Assets





Fixed
assets are primarily fixtures, equipment, and leasehold improvements which are
stated on the basis of cost. Depreciation of fixtures and equipment is computed
primarily on the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized on the straight-line method over
the shorter of the life of the asset or the remaining lease term. The estimated
useful lives of the assets are as follows:





Fixtures
      and equipment
                5-7
      yearsComputer
      software and equipment
                3-7
      yearsRental
      equipment
                3
      yearsVehicles
                5
      yearsLeasehold
      improvements
                10-15
      years





The
following is a summary of the components of fixed assets, in
thousands:





March
      29,
                    
                    
                    March
      30,2009
                    
                    
                    2008Fixtures
      and equipment
                    
                    $
                    39,903
                    
                    
                    $
                    37,676Computer
      software and equipment
                    
                    
                    31,271
                    
                    
                    
                    27,182Rental
      equipment
                    
                    
                    6,831
                    
                    
                    
                    6,811Vehicles
                    
                    
                    438
                    
                    
                    
                    460Leasehold
      improvements
                    
                    
                    62,799
                    
                    
                    
                    56,533141,242
                    
                    
                    
                    128,662Accumulated
      depreciation
                    
                    
                    (83,524
                    )
                    
                    
                    (62,043
                    )Net
      fixed assets
                    
                    $
                    57,718
                    
                    
                    $
                    66,619





Maintenance
and repairs are charged to expense as incurred and the costs of additions and
betterments that increase the useful lives of the assets are capitalized. When
leasehold improvements or equipment are disposed of, the cost and related
accumulated depreciation and amortization are removed from the accounts and any
gain or loss is included in operations.




55


Sport
Chalet, Inc.
 
 Notes
to Consolidated Financial Statements (continued)


Long
Lived Assets





The Company accounts for
long-lived assets in accordance with the provisions of 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.





Non-cash
impairment charges of $10.7 million and $2.1 million were recorded in fiscal
2009 and 2008, related to eleven and two stores, respectively, with
significantly lower than expected sales volume and based on recent trends are
not expected to obtain sufficient cash flow over their remaining lease terms to
support the net book value of their leasehold improvements and
fixtures.  The existence of the impairment was assessed by calculating
the net cash flow of each individual store on an undiscounted basis and
comparing it to the net book value of the individual store.  The
actual impairment charge was measured by determining the fair value of the
store's assets, calculated based on the discounted net cash flow of the store
over the remaining lease term, and comparing it to the book value.





Financial
Instruments





Cash and
cash equivalents, marketable securities, accounts receivable and accounts
payable are carried at cost which approximates fair value due to their
short-term nature.




Pre-opening
Costs




Non-capital
expenditures incurred prior to the opening of a new store are charged to
operations as incurred.




Revenue
Recognition




Revenue
from retail sales are recognized at the time the customer receives the
merchandise, net of sales tax and an allowance for estimated returns. Issuance
of gift cards and store credits are recorded as a liability until redeemed for
merchandise. Revenues from services and licensing agreements are generally
recorded on a cash basis, which approximates when the revenue is earned, and are
not material.





The
Company has a customer loyalty program, Action Pass, which allows members to
earn points for each purchase completed at our stores.  Points earned
enable members to receive a certificate that may be redeemed on future
purchases.  The value of points earned are included in accrued
expenses and recorded as a reduction in sales at the time the points are earned,
based on the retail value of points that are projected to be
redeemed.




Gift
Card/Certificate Redemption





Gift cards and certificates are issued
by the Company to be used toward the future purchase of the Company’s products.
Revenue from gift cards, gift certificates and store merchandise credits (the
“Gift Cards”) are recognized at the time of redemption.   The
Gift Cards have no expiration dates.





The Company’s experience indicates that
not all issued Gift Cards are redeemed (the “Breakage”).  Accordingly,
Breakage is recognized as revenue by periodically decreasing the carrying value
of the Gift Card liability by approximately 5% of the aggregate
amount.  The Company recognizes Breakage at the time of redemption of
Gift Cards. The revenue from Breakage is included in the income statement line
item net sales and amounted to $627,000, $552,000 and $532,000 for fiscal years
2009, 2008 and 2007, respectively.




56


Sport
Chalet, Inc.
 
 Notes
to Consolidated Financial Statements (continued)


Cost
of Goods Sold, Buying and Occupancy




Cost of goods sold, buying and
occupancy includes product costs, net of discounts and allowances, and inbound
freight charges, as well as distribution center, purchasing, and occupancy
costs.  Distribution center costs include receiving costs, internal
transfer costs, labor, building rent, utilities, depreciation, repairs and
maintenance for the Company’s distribution center and distribution system. 
Purchasing costs include both labor and administrative expense associated with
the purchase of the Company’s products.  Occupancy costs primarily consist
of store rent.  All these costs reflect, in management’s opinion, the
direct cost involved in bringing the Company’s product to market.





Vendor
Allowances





Vendor
allowances include consideration received from vendors, such as volume rebates
and cooperative advertising funds. Vendor rebates other than for cooperative
advertising are immaterial and accounted for when received. The majority of this
consideration is based on contract terms. Amounts that represent the
reimbursement of costs incurred for advertising are recorded as a reduction of
the related expense in the period incurred. Amounts expected to be received from
vendors relating to the purchase of merchandise are recognized as a reduction of
cost of goods sold as the merchandise is sold.




Advertising
Costs




Advertising costs are expensed as
incurred. Advertising expense, net of vendor reimbursement, amounted to $9.9
million, $10.1 million and $9.6 million for fiscal years 2009, 2008 and 2007,
respectively.  The amount of vendor reimbursements amounted to $4.1
million, $5.8 million and $5.1 million for fiscal years 2009, 2008 and 2007,
respectively.




Income
Taxes




The
Company utilizes the liability method of accounting to compute the difference
between the tax basis of assets and liabilities and the related financial
reporting amounts using currently enacted tax laws and rates.




Deferred
Rent




Rent
expense under non-cancelable operating leases with scheduled rent increases or
free rent periods is accounted for on a straight line basis over the lease term,
beginning on the date of initial possession, which is generally when the Company
begins construction build-out.  The amount of the excess of straight
line rent expense over scheduled payments is recorded as a deferred rent
liability. Construction allowances and other such lease incentives are recorded
as deferred credits, and are amortized on a straight line basis as a reduction
of rent expense over the lease term.




Self-insurance
Accruals




The Company self insures a significant
portion of expected losses under workers’ compensation and general liability
programs.  Accrued liabilities have been recorded based on estimates
of the ultimate costs to settle incurred claims, both reported and
unreported.




57


Sport
Chalet, Inc.
 
 Notes
to Consolidated Financial Statements (continued)


Earnings
Per Share





Earnings
per share has been computed in accordance with SFAS No. 128, “Earnings Per
Share” (“EPS”). Basic EPS equals net income divided by the number of weighted
average common shares. Diluted EPS includes potentially dilutive securities such
as stock options and convertible securities.  The Company does not
utilize the two-class method to report its earnings per share. The two-class
method is an earnings allocation formula that determines earnings per share for
each class of common stock according to participation rights in undistributed
earnings. Our Class A Common Stock is entitled to receive a regular cash
dividend equal to 110% of any regular cash dividend paid with respect to a share
of Class B Common Stock, which could result in the two-class method of computing
earnings per share. However the application of this method would result in an
immaterial change in earnings per share and is therefore not
presented.





A
reconciliation of the numerators and denominators of the basic and diluted EPS
computations are illustrated below:





Fiscal
      year2009
                    
                    
                    2008
                    
                    
                    2007(in
      thousands, except per share data)Basic
      EPS computation:Numerator
                    
                    $
                    (52,247
                    )
                    
                    $
                    (3,362
                    )
                    
                    $
                    7,099Denominator:Weighted
      average common shares outstanding
                    
                    
                    14,123
                    
                    
                    
                    14,075
                    
                    
                    
                    13,850Basic
      earnings (loss) per share
                    
                    $
                    (3.70
                    )
                    
                    $
                    (0.24
                    )
                    
                    $
                    0.51Diluted
      EPS computation:Numerator
                    
                    $
                    (52,247
                    )
                    
                    $
                    (3,362
                    )
                    
                    $
                    7,099Denominator:Weighted
      average common shares outstanding
                    
                    
                    14,123
                    
                    
                    
                    14,075
                    
                    
                    
                    13,850Incremental
      shares from assumed conversion of options
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    610Total
      weighted average common shares – assuming dilution
                    
                    
                    14,123
                    
                    
                    
                    14,075
                    
                    
                    
                    14,460Diluted
      earnings (loss) per share
                    
                    $
                    (3.70
                    )
                    
                    $
                    (0.24
                    )
                    
                    $
                    0.49





Options to purchase an aggregate of
1,906,705, 1,432,055 and 88,000 shares for fiscal years 2009, 2008 and 2007,
respectively, are excluded from the computation of diluted earnings per share as
their effect would have been anti-dilutive.





Use
of Estimates





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.




58


Sport
Chalet, Inc.
 
 Notes
to Consolidated Financial Statements (continued)


Share-Based
Compensation





Prior to
the April 1, 2006 adoption of the Financial Accounting Standards Board (“FASB”)
Statement No. 123(R), “Share-Based Payment” (“SFAS 123R”), the Company
accounted for share-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion (“APB”) No. 25,
“Accounting for Stock Issued to Employees,” and related
interpretations.  As permitted by SFAS No. 123, “Accounting for
Stock-Based Compensation” (“SFAS 123”), share-based compensation was included as
a pro forma disclosure in the notes to the consolidated financial statements.
Effective April 1, 2006, the Company adopted the fair value recognition
provisions of SFAS 123R, using the modified-prospective transition method. Under
this transition method, share-based compensation expense was recognized in the
consolidated financial statements for granted, modified or settled stock
options. The provisions of SFAS 123R apply to new stock options and stock
options outstanding, but not yet vested, on the effective date of April 1, 2006.
Results for prior periods have not been restated, as provided for under the
modified-prospective transition method. Total stock-based compensation expense
recognized for the 2009, 2008 and 2007 fiscal years was $354,000, $233,000 and
$166,000 before income taxes, and the related tax benefit for fiscal 2008 and
2007 was $91,000 and $68,000 for each year respectively.





The fair
value of each option granted is estimated on the date of grant using the
Black-Scholes option-valuation model. The Black-Scholes option valuation 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.  The following weighted average
assumptions are used to estimate the fair value for stock options granted in the
years listed below:





Fiscal year2009
                      
                      
                      2008
                      
                      
                      2007Risk-free
      interest rate
                      
                      
                      3.0
                      %
                      
                      
                      4.9
                      %
                      
                      
                      4.9
                      %Expected
      volatility
                      
                      
                      39.1
                      %
                      
                      
                      36.6
                      %
                      
                      
                      41.1
                      %Expected
      dividend yield
                      
                      
                      0.0
                      %
                      
                      
                      0.0
                      %
                      
                      
                      0.0
                      %Expected
      life in years
                      
                      
                      7.5
                      
                      
                      
                      7.5
                      
                      
                      
                      7.5





The
weighted average fair value of options granted during fiscal 2009, 2008 and 2007
was $2.19   $5.02 and $4.32, respectively.





Recently
Issued Accounting Pronouncements





In September 2006, the FASB issued
SFAS No. 157, “Fair Value Measurements.”  SFAS No. 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements.  SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute.  Accordingly, SFAS No. 157 does
not require any new fair value measurements.  There are numerous
previously issued statements dealing with fair values that are amended by SFAS
No. 157. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007. In February 2008, the
FASB issued Staff Position (“FSP”) FAS 157-1, “Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements
That Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13,” which scopes out leasing transactions accounted
for under SFAS No. 13, “Accounting for Leases.” In February 2008, FSP
FAS 157-2, “Effective Date of FASB Statement No. 157,” was issued, which
delays the effective date of SFAS No. 157 to fiscal years and interim
periods within those fiscal years beginning after November 15, 2008 for
nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually).  In October 2008, FSP FAS 157-3,
“Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active” was issued.  FSP FAS 157-3 clarifies the application of
SFAS No. 157, in determining the fair value of a financial asset when the
market for that financial asset is not active.  FSP FAS 157-3 became
effective upon issuance and includes prior periods for which financial
statements have not been issued. The adoption of the applicable provisions of
SFAS No. 157 at the beginning of fiscal 2009 has not had a material impact
on our financial condition.  We do not expect the adoption of the
remaining provisions of SFAS No. 157 to have a material impact on our results of
operations, cash flows, or financial position.




59


Sport
Chalet, Inc.
 
 Notes
to Consolidated Financial Statements (continued)


In February 2007, the FASB issued
SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities.”  SFAS No. 159 permits companies to choose to
measure many financial instruments and certain other items at fair
value.  The objective is to improve financial reporting by providing
companies with the opportunity to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently without having to
apply complex hedge accounting provisions.  SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007.  We
have adopted SFAS No. 159 at the beginning of fiscal 2009 but elected not
to apply the Fair Value Option of SFAS No. 159.





In December 2007, the FASB issued SFAS
No. 141(R), “Business Combinations” (“FAS 141(R)”), to replace FAS 141,
“Business Combinations.”  FAS 141(R) requires use of the acquisition
method of accounting, defines the acquirer, establishes the acquisition date and
broadens the scope to all transactions and other events in which one entity
obtains control over one or more other businesses.  This statement is
effective for financial statements issued for fiscal years beginning on or after
December 15, 2008 with earlier adoption prohibited.  While we do not
expect the adoption of FAS 141(R) to have a material impact to our consolidated
financial statements for transactions completed prior to December 31, 2008, the
impact of the accounting change could be material for business combinations
which may be consummated subsequent thereto.





In December 2007, the FASB issued SFAS
No. 160, “Non controlling Interests in Consolidated Financial Statements — an
amendment of ARB No.
51” (“SFAS 160”).  SFAS 160 establishes accounting and
reporting standards for the non-controlling interest in a subsidiary and for the
retained interest and gain or loss when a subsidiary is
deconsolidated.  This statement is effective for financial statements
issued for fiscal years beginning on or after December 15, 2008 with earlier
adoption prohibited.  We currently do not have any non-controlling
interests or deconsolidated subsidiaries and therefore SFAS 160 will not
have any impact on our consolidated financial statements.





In May 2008, the FASB issued SFAS No.
162, “Hierarchy of Generally Accepted Accounting Principles” (“SFAS No.
162”). This statement is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements of nongovernmental
entities that are presented in conformity with GAAP.  This statement
will be effective 60 days following the U.S. Securities and Exchange
Commission’s approval of the Public Company Accounting Oversight Board amendment
to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles.”  We believe that SFAS No. 162
will have no effect on our financial statements.





3.
Loans Payable to Bank





In June
2008, we negotiated a new credit facility with our existing lender, Bank of
America, N.A. (the “Lender”) which was amended on March 2, 2009 and May 4, 2009
which provides for advances up to $55.0 million from January 1st of each year
through August 31st, increasing up to $75.0 million, from September 1st of each
year through December 31st of each year, and up to a $10.0 million maximum in
authorized letters of credit.  The amount we may borrow under this
credit facility is limited to a percentage of the value of eligible inventory,
minus certain reserves.  Interest accrues at the Lender’s prime rate
plus 2.0% (5.25% at March 29, 2009) or at our option we can fix the rate for a
period of time at LIBOR plus 4.5%.  In addition, there is an unused
commitment fee of 0.25% per year, based on a weighted average formula, a
one-time, non-refundable commitment fee of $350,000 and an early termination fee
of 1.50% in year one, 0.75% in year two and 0.25% in year three which is waived
if the loan is refinanced by the Lender or any of its
affiliates.  Under this credit facility, $45.0 million will be
available to the Company, increasing up to $70.0 million, from September 1st of
each year through December 31st of each year, and up to an additional $10.0
million will be available to the Company through a special advance
facility.  The amount available under the special advance facility
will be reduced by $2.5 million on the first day of each month commencing on
July 1, 2010 and the special advance facility will terminate on October 1,
2010.  This effectively increases the revolver limit up to $55 million
from January 1st of each year through August 31st and also allows for seasonal
advances up to $75.0 million from September 1st of each year to December 31st,
subject to the scheduled reductions.  Our obligation to the Lender is
presently secured by a first priority lien on substantially all of our non-real
estate assets, and we are subject to a covenant that we maintain a minimum
monthly EBITDA.




60


Sport
Chalet, Inc.
 
 Notes
to Consolidated Financial Statements (continued)


The
amount we can borrow under our credit facility with the Lender is limited to a
percentage of the value of eligible inventory, minus certain
reserves.  A significant decrease in eligible inventory due to the
aging of inventory, an unfavorable inventory appraisal or other factors, could
have an adverse effect on our borrowing capabilities under our credit facility,
which may adversely affect the adequacy of our working capital.





As of
December 31, 2008, an event of default had occurred under our Amended and
Restated Loan and Security Agreement, as amended, dated as of June 20, 2008 (the
"Loan Agreement") with our existing Lender due to our failure to maintain a
"Fixed Charge Coverage Ratio" (as defined in the Loan Agreement) of not less
than 1.00 to 1.00 (the “Event of Default”).  On December 28, 2008,
availability under the Loan Agreement was less than $10.5 million, thereby
requiring the testing of the Fixed Charge Coverage Ratio.  We
acknowledged, among other things, that we had no defenses, claims or set-offs to
the obligations under the Loan Agreement and provided the Lender a general
release of claims.  On January 9, 2009, we entered into an amendment
to the Loan Agreement and Limited Forbearance Agreement (the "First Amendment")
dated as of December 28, 2008, with the Lender under which (i), the Lender
agreed to forbear from exercising its rights in respect of the Event of Default
described in the Loan Agreement, (ii) we may not select a LIBOR-based interest
rate under the Loan Agreement, and (iii) the Lender agreed to permit an
overadvance in the amount of $1.5 million until January 13, 2009.  The
forbearance period under the First Amendment ended on January 31,
2009.  On January 29, 2009, the Lender agreed to extend the period
during which it forbear from exercising its rights in respect of certain
defaults under the Loan Agreement from January 31, 2009 until the earlier to
occur of any further default under the Loan Agreement or March 2,
2009.





On March 2, 2009, we amended our Loan
Agreement (the “Third Amendment”) with our existing Lender.  Under the
terms of the Third Amendment, (i) the Lender waived an existing event of default
and certain potential defaults by us, (ii) the amount we can borrow against our
borrowing base has been reduced by approximately 3% to between 61% and 66% of
eligible inventory (varying from month to month), (iii) the interest rate has
been increased from the Lender's prime rate plus 0.5% or LIBOR plus 2.5%
(subject to reduction depending upon our financial performance) to prime rate
plus 2.0% or LIBOR plus 4.5%, at our option, (iv) we have agreed to maintain a
minimum monthly EBITDA ranging from -$3.5 million to $5.6 million depending on
the measurement date, and (v) we have agreed to continue to retain an acceptable
turnaround professional until specified financial milestones are
met.  The seasonal revolver limits under the credit facility remain
unchanged under the Third Amendment.





On May 4,
2009, we amended our Loan Agreement (the “Fourth Amendment”) with our existing
lender.  Under the terms of the Fourth Amendment, our availability
increases by up to an additional $10.0 million through a special advance
facility.  The amount available under the special advance facility
will be reduced by $2.5 million on the first day of each month commencing on
July 1, 2010 and the special advance facility will terminate on October 1,
2010.  This effectively increases the revolver limit up to $55 million
from January 1st of each year through August 31st and also allows for seasonal
advances up to $75.0 million from September 1st of each year to December 31st,
subject to the scheduled reductions.




At March
29, 2009, there is $39.1 million outstanding under the facility as well as
letters of credit amounting to $1.8 million relating to purchase
commitments.





The
weighted average interest rate on borrowings during the 2009, 2008 and 2007
fiscal years were 4.97%, 6.09% and 7.19%, respectively.




61


Sport
Chalet, Inc.
 
 Notes
to Consolidated Financial Statements (continued)


4.
Commitments and Contingencies





The
Company leases all buildings (including its corporate office space and three
stores from the Company’s Founder). The leases for most of the existing stores
are approximately ten-year terms plus multiple option periods under
non-cancelable operating leases with scheduled rent increases.  The
leases provide for contingent rent based upon a percentage of sales in excess of
specified minimums. If there are any free rent periods, they are accounted for
on a straight line basis over the lease term, beginning on the date of initial
possession, which is generally when the Company enters the space to begin the
construction build-out.  The amount of the excess of straight line
rent expense over scheduled payments is recorded as a deferred rent liability.
Construction allowances and other such lease incentives are recorded as deferred
credits, and are amortized on a straight line basis as a reduction of rent
expense over the lease term.  All of the leases obligate the Company
to pay costs of maintenance, utilities, and property taxes.





In the
Company’s efforts to reduce operating expenses and improve liquidity, it has
reviewed all of its store leases and is obtaining rent reductions and lease
modifications from its landlords. These negotiations, which are on-going,
include renegotiating base rent, revising some of the Company’s leases to
contain percentage rent clauses, which obligate the Company to pay rents based
on a percentage of sales rather than fixed amounts, and amending certain leases
to feature kick-out clauses, which allow the Company to terminate the lease at
its option at a specified date when contractually defined minimum sales volumes
are not exceeded.  The Company is also exploring the possibility of
potentially closing stores that have no rent concession in place and are
underperforming with no significant improvement foreseen in the near
term.





Future
minimum payments, including lease modifications, by year and in the aggregate,
under those leases with terms of one year or more, in thousands, consist of the
following at March 29, 2009:





Leases
      with
                    Founder
                  
                  
                  Unrelated
                    Leases
                  
                  
                  Total2009
                  
                  $
                  2,537
                  
                  
                  $
                  29,567
                  
                  
                  $
                  32,1042010
                  
                  
                  2,428
                  
                  
                  
                  29,004
                  
                  
                  
                  31,4322011
                  
                  
                  1,886
                  
                  
                  
                  29,332
                  
                  
                  
                  31,2182012
                  
                  
                  1,649
                  
                  
                  
                  27,316
                  
                  
                  
                  28,9652013
                  
                  
                  1,459
                  
                  
                  
                  23,997
                  
                  
                  
                  25,456Thereafter
                  
                  
                  4,808
                  
                  
                  
                  77,905
                  
                  
                  
                  82,713$
                  14,767
                  
                  
                  $
                  217,121
                  
                  
                  $
                  231,888





Total
rent expense amounted to $44.8 million, $39.8 million and $34.0 million for
fiscal years 2009, 2008 and 2007, respectively, which include $2.8 million, $2.5
million and $2.5 million, respectively, for the leases with the Founder. Also,
total rent expense includes contingent rentals calculated as a percentage of
gross sales over certain base amounts of $568,000, $591,000 and $672,000 for
fiscal years 2009, 2008 and 2007, respectively. Included in the accompanying
balance sheets are amounts representing prepaid rent to the Founder of $148,000
at March 30, 2008, no amount was prepaid at March 29, 2009.





Pursuant
to his amended employment contract dated April 1, 2000, the Founder is paid a
base salary of $150,000 per year until March 31, 2014.





On April 10, 2008, we were served
with a complaint filed in the California Superior Court in the County of San
Diego, entitled Cole v. Sport Chalet, Inc., Case
No. 37-2008-00081675-CU-BT-CTL, alleging violations of the California Civil
Code and Business & Professions Code, as well as invasion of
privacy.   This complaint was brought as a purported class action on
behalf of persons who made purchases at our stores in California using credit
cards and were requested to provide their zip codes at the time of such
purchases.  The plaintiff alleges, among other things, that this
practice violated California law.  The plaintiff seeks, on behalf of the
class members, statutory penalties, actual damages, punitive damages,
disgorgement of profits, injunctive relief to require us to discontinue the
allegedly improper conduct, and attorneys’ fees and
costs.




62


Sport
Chalet, Inc.
 
 Notes
to Consolidated Financial Statements (continued)


On December 16, 2008, the parties
agreed on the core terms of a classwide settlement of this case and thereafter
signed a written settlement agreement.  On May 1, 2009, the
Court issued an order preliminarily approving the parties' settlement.  The
parties are now in the process of providing notice of the
settlement to class members.  The Court has scheduled
a hearing of plaintiff's motion for final approval of the
settlement for July 31, 2009.  If the settlement receives
final approval and is concluded, it should not have a material adverse
impact on our financial condition.  If the settlement is not concluded
for any reason, we intend to continue to defend the suit
vigorously.  We are not able to evaluate the likelihood of an unfavorable
outcome or to estimate a range of potential loss in the event of an unfavorable
outcome at the present time. If resolved unfavorably to us, this litigation
could have a material adverse effect on our financial condition, and any
required change in our business practices, as well as the costs of defending
this litigation, could have a negative impact on our results of
operations.





By letter dated May 14, 2008, an
attorney for a former employee has asserted claims for sexual harassment by a
former supervisor during the former employee’s one year of
employment.  The former employee alleges being subjected to verbal and
physical harassment.  The former employee is seeking compensatory
damages and punitive damages, attorneys' fees and costs. The former employee has
recently requested to submit her claims to arbitration.  We have just
begun a review of the allegations, and we are not able to evaluate the
likelihood of an unfavorable outcome nor can we estimate a range of potential
loss in the event of an unfavorable outcome at the present time.  If
resolved unfavorably to us, this litigation could have a material adverse effect
on our financial condition.





From time
to time, 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 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.





5.
Income Taxes





The provision (benefit) for income
taxes for fiscal years 2009, 2008 and 2007, in thousands, consists of the
following:





2009
                  
                  
                  2008
                  
                  
                  2007Federal:Current
                  
                  $
                  (32
                  )
                  
                  $
                  (4,033
                  )
                  
                  $
                  4,001Deferred
                  
                  
                  3,565
                  
                  
                  
                  2,395
                  
                  
                  
                  (389
                  )3,533
                  
                  
                  
                  (1,638
                  )
                  
                  
                  3,612State:Current
                  
                  
                  83
                  
                  
                  
                  (117
                  )
                  
                  
                  1,085Deferred
                  
                  
                  2,207
                  
                  
                  
                  (469
                  )
                  
                  
                  (67
                  )2,290
                  
                  
                  
                  (586
                  )
                  
                  
                  1,018$
                  5,823
                  
                  
                  $
                  (2,224
                  )
                  
                  $
                  4,630





In
accordance with SFAS No. 109, "Accounting for Income Taxes," we evaluate
whether a valuation allowance should be established against our net deferred tax
assets based on the consideration of all available evidence using a "more likely
than not" standard.  Significant weight is given to evidence that can
be objectively verified.  The determination to record a valuation
allowance is based on the recent history of cumulative losses and losses
expected in the near future.  In conducting our analysis, we utilize a
consistent approach which considers our current year loss, including an
assessment of the degree to which any losses are driven by items that are
unusual in nature and incurred to improve future profitability.  In
addition, we review changes in near-term market conditions and any other factors
arising during the period which may impact our future operating
results.




63


Sport
Chalet, Inc.
 
 Notes
to Consolidated Financial Statements (continued)


As a
result of our analysis, we determined that a full valuation allowance against
our net deferred tax assets for fiscal 2009 was required.  We will not
record income tax benefits in the consolidated financial statements until it is
determined that it is more likely than not that we will generate sufficient
taxable income to realize our deferred income tax assets.  As of March
29, 2009, our net deferred tax assets and related valuation allowance totaled
$24.1 million.The Company has
federal and state net operating loss carry forwards of $35.6 million and $34.7
million, respectively, which can
be carried forward for a period of 20 years.





Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company’s deferred tax liabilities and assets as of fiscal year end 2009 and
2008, in thousands, are as follows:




2009
                                
                                
                                2008Current
                                
                                
                                Non-current
                                
                                
                                Current
                                
                                
                                Non-currentDeferred
      tax assets:Fixed
      assets
                                
                                $
                                –
                                
                                
                                $
                                4,655
                                
                                
                                $
                                –
                                
                                
                                $
                                1,181Net
      operating loss carryforward
                                
                                
                                
                                
                                
                                
                                14,112Uniform
      cost capitalization
                                
                                
                                593
                                
                                
                                
                                –
                                
                                
                                
                                510
                                
                                
                                
                                –Inventory
      reserves
                                
                                
                                1,195
                                
                                
                                
                                –
                                
                                
                                
                                1,235
                                
                                
                                
                                –Accrued
      vacation
                                
                                
                                500
                                
                                
                                
                                –
                                
                                
                                
                                467
                                
                                
                                
                                –Bonus
      accrual
                                
                                
                                12
                                
                                
                                
                                –
                                
                                
                                
                                101
                                
                                
                                
                                –Self-insurance
      accruals
                                
                                
                                767
                                
                                
                                
                                –
                                
                                
                                
                                539
                                
                                
                                
                                –Allowance
      for bad debt andsales
      returns
                                
                                
                                298
                                
                                
                                
                                –
                                
                                
                                
                                300
                                
                                
                                
                                –State
      income taxes
                                
                                
                                –
                                
                                
                                
                                –
                                
                                
                                
                                (26
                                )
                                
                                
                                –Deferred
      rent
                                
                                
                                –
                                
                                
                                
                                1,378
                                
                                
                                
                                –
                                
                                
                                
                                1,193Other
                                
                                
                                553
                                
                                
                                
                                –
                                
                                
                                
                                223
                                
                                
                                
                                –Total
      deferred tax assets before valuation allowance
                                
                                
                                3,918
                                
                                
                                
                                20,145
                                
                                
                                
                                3,349
                                
                                
                                
                                2,374Valuation
      allowance
                                
                                
                                (3,918
                                )
                                
                                
                                (20,145
                                )
                                
                                
                                –
                                
                                
                                
                                –Total
      deferred tax assets
                                
                                $
                                –
                                
                                
                                $
                                –
                                
                                
                                $
                                3,349
                                
                                
                                $
                                2,374





A
reconciliation of the provision for income taxes for fiscal years 2009, 2008 and
2007 with the amount computed using the federal statutory rate, in thousands,
follows:





2009
                  
                  
                  2008
                  
                  
                  2007Statutory
      rate, 34% in 2009 and 2008, 35% in 2007 applied to income before
      taxes
                  
                  $
                  (15,663
                  )
                  
                  $
                  (1,899
                  )
                  
                  $
                  4,105State
      taxes, net of federal tax effect
                  
                  
                  (2,688
                  )
                  
                  
                  (321
                  )
                  
                  
                  674Deferred
      tax valuation allowance
                  
                  
                  24,063
                  
                  
                  
                  –
                  
                  
                  
                  –Other,
      net
                  
                  
                  111
                  
                  
                  
                  (4
                  )
                  
                  
                  (149
                  )$
                  5,823
                  
                  
                  $
                  (2,224
                  )
                  
                  $
                  4,630





For the
years ended March 29, 2009, March 30, 2008 and April 1, 2007, we recorded tax
benefits related to the exercise of non-qualified stock options which were
recorded as a credit to additional paid-in capital in the amount of $10,000,
$300,000 and $1.2 million, respectively.




64


Sport
Chalet, Inc.
 
 Notes
to Consolidated Financial Statements (continued)


We adopted the provisions
of Financial Accounting Standards Board (“FASB”) Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of
FASB Statement No. 109 (“SFAS 109”), on April 2, 2007. The Company determined
that there is no FIN 48 liability related to uncertain tax positions. When
applicable, we recognize interest and penalties related to uncertain tax
positions in income tax expense.  The tax year ending March 30, 2008
remains open to examination by the Internal Revenue Service.  The tax
years ending March 31, 2005 to March 30, 2008 remain open to examination by the
state of California.  The tax years ending March 31, 2006 to March 30,
2008 remain open to examination by the state of Arizona.  The tax year
ending March 30, 2008 remains open to examination by the state of
Utah.





6.
Award Plan and Stock Award





Award
Plan





The
Company’s 2004 Equity Incentive Plan (“2004 Plan”) became effective on
August 2, 2004 and terminated its prior plan (“1992
Plan”).  Awards outstanding under the 1992 Plan may be exercised or
settled in accordance with their original terms.  Any shares not
issued under the 1992 Plan were added to the shares available for issuance under
the 2004 Plan.




Under the
2004 Plan, awards may be granted to employees, directors and consultants of the
Company and its affiliates under which stock options or other awards to purchase
or receive shares of the Company’s common stock may be granted. Generally the
option price per share shall not be less than fair market value at the date of
grant and options vest for periods up to five years and if not exercised, expire
ten years from the date of grant. The 2004 Plan also provides for issuance by
the Company of stock appreciation rights, restricted stock and performance
awards.





Stock
options generally vest over five years in 20% increments from the date of grant
and expire 10 years from the date of grant. As of March 29, 2009, there were
1,053,121 shares of common stock available for issuance pursuant to future stock
option grants. The stock option activity during the 2009 fiscal year is
presented in the following table:





Options
                              
                              
                              WeightedAverage
                                Exercise
      Price
                              
                              
                              Weighted-Average
                                Remaining
      Contractual
                                Term
    (Years)
                              
                              
                              Aggregate
      Intrinsic
                                Value (in
      000's)Outstanding
      as of March 30, 2008
                              
                              
                              1,432,055
                              
                              
                              $
                              5.28Granted
                              
                              
                              545,650
                              
                              
                              
                              4.73Exercised
                              
                              
                              -
                              
                              
                              
                              0.00Forfeited
      or expired
                              
                              
                              (69,750
                              )
                              
                              
                              6.07Outstanding
      as of March 29, 2009
                              
                              
                              1,907,955
                              
                              
                              $
                              5.06
                              
                              
                              
                              5.3
                              
                              
                              $
                              -





Options
to purchase Class A Common Stock and Class B Common Stock are combined in the
table above.  The aggregate intrinsic value is based on the Company’s
closing stock price of $0.17 and $0.73 for Class A Common Stock and Class B
Common Stock, respectively, as of the last trading day of the period ended March
29, 2009.  During the 2009 fiscal year, the total fair value of
options vested was $186,000.




65


Sport
Chalet, Inc.
 
 Notes
to Consolidated Financial Statements (continued)


The
non-vested stock option activity during the 2009 fiscal year is presented in the
following table:





Shares
                        
                        
                        Weighted
      Average
                          Fair
    ValueNonvested,
      March 30, 2008
                        
                        
                        160,200
                        
                        
                        $
                        4.71Granted
                        
                        
                        545,650
                        
                        
                        
                        4.73Vested
                        
                        
                        (46,300
                        )
                        
                        
                        7.82Forfeited
                        
                        
                        (60,100
                        )
                        
                        
                        2.30Nonvested,
      March 29, 2009
                        
                        
                        599,450
                        
                        
                        
                        2.66





As of
March 29, 2009, total unrecognized share-based compensation expense related to
non-vested stock options was $1,305,000, which is expected to be recognized over
a weighted average period of approximately 3.7 years.





The
Company issues new shares of common stock upon exercise of stock
options.





Additional
information regarding options outstanding as of March 29, 2009, is as
follows:





Options
      Outstanding
                                
                                
                                
                                
                                
                                Options
      ExercisableRange
      of Exercise Price
                                
                                
                                Shares
                                
                                
                                Weighted
      Average
                                  Remaining
      Contractual
                                  Life
      (Years)
                                
                                
                                Weighted
      Average
                                  Exercise
      Price
                                
                                
                                Shares
                                
                                
                                Weighted
      Average
                                  Exercise
      PriceUnder
      $3
                                
                                
                                
                                466,250
                                
                                
                                
                                0.91
                                
                                
                                $
                                2.22
                                
                                
                                
                                445,750
                                
                                
                                $
                                2.29$
                                3.00
      to $4.490
                                
                                
                                
                                325,500
                                
                                
                                
                                3.15
                                
                                
                                
                                4.08
                                
                                
                                
                                315,500
                                
                                
                                
                                4.07$
                                4.50
      to $5.99
                                
                                
                                
                                463,300
                                
                                
                                
                                9.15
                                
                                
                                
                                4.79
                                
                                
                                
                                1,250
                                
                                
                                
                                4.55$
                                6.00
      to $7.50
                                
                                
                                
                                367,505
                                
                                
                                
                                6.33
                                
                                
                                
                                7.00
                                
                                
                                
                                363,505
                                
                                
                                
                                7.00$
                                7.51
      to $10.00
                                
                                
                                
                                284,150
                                
                                
                                
                                7.15
                                
                                
                                
                                8.73
                                
                                
                                
                                181,250
                                
                                
                                
                                8.40$
                                0.00
      to $10.00
                                
                                
                                
                                1,906,705
                                
                                
                                
                                5.27
                                
                                
                                
                                5.05
                                
                                
                                
                                1,307,255
                                
                                
                                
                                4.88




66


Sport
Chalet, Inc.
 
 Notes
to Consolidated Financial Statements (continued)


7.
Employee Retirement Plan





The Sport
Chalet, Inc. Employee Retirement Savings Plan (the “401(k) Plan”) covers all
eligible employees.  Employees who have completed three months of
service and are 21 years of age or older are eligible to
participate.  Employees may contribute from 2% to 100% of their
eligible earnings or the government limit (whichever is less).  The
Company matches 25% of the first 4% of employee pre-tax earnings deferred into
the 401(k) Plan.  The Company expense related to this plan was
$88,000, $115,000 and $114,000 for fiscal years 2009, 2008 and 2007,
respectively.





8.
Other Accrued Expenses





Other
accrued expenses consist of the following, in thousands:





March
      29,
                      
                      
                      March
      30,2009
                      
                      
                      2008Amount
      due to customers
                      
                      $
                      5,923
                      
                      
                      $
                      5,861Accrued
      sales tax
                      
                      
                      2,572
                      
                      
                      
                      2,837Self-insurance
      accruals
                      
                      
                      1,601
                      
                      
                      
                      1,062Other
                      
                      
                      9,283
                      
                      
                      
                      3,494Other
      accrued expenses
                      
                      $
                      19,379
                      
                      
                      $
                      13,254





9.
Quarterly Results of Operations (Unaudited)





A summary
of the unaudited quarterly results of operations follows (dollar amounts in
thousands, except per share amounts).





First
                        Quarter
                      
                      
                      Second
                        Quarter
                      
                      
                      Third
                        Quarter
                      
                      
                      Fourth
                        QuarterFiscal
      2009Net
      sales
                      
                      $
                      87,120
                      
                      
                      $
                      96,457
                      
                      
                      $
                      104,562
                      
                      
                      $
                      84,513Gross
      profit
                      
                      
                      22,708
                      
                      
                      
                      25,596
                      
                      
                      
                      23,325
                      
                      
                      
                      16,766Loss
      from operations
                      
                      
                      (6,872
                      )
                      
                      
                      (6,566
                      )
                      
                      
                      (20,212
                      )
                      
                      
                      (10,579
                      )Net
      loss
                      
                      
                      (4,526
                      )
                      
                      
                      (4,221
                      )
                      
                      
                      (32,376
                      )
                      
                      
                      (11,124
                      )Basic
      loss per share
                      
                      
                      (0.32
                      )
                      
                      
                      (0.30
                      )
                      
                      
                      (2.29
                      )
                      
                      
                      (0.79
                      )Diluted
      loss per share
                      
                      $
                      (0.32
                      )
                      
                      $
                      (0.30
                      )
                      
                      $
                      (2.29
                      )
                      
                      $
                      (0.79
                      )First
                        Quarter
                      
                      
                      Second
                        Quarter
                      
                      
                      Third
                        Quarter
                      
                      
                      Fourth
                        QuarterFiscal
      2008Net
      sales
                      
                      $
                      91,554
                      
                      
                      $
                      97,669
                      
                      
                      $
                      116,558
                      
                      
                      $
                      96,753Gross
      profit
                      
                      
                      26,153
                      
                      
                      
                      29,710
                      
                      
                      
                      35,247
                      
                      
                      
                      25,443Income
      (loss) from operations
                      
                      
                      (756
                      )
                      
                      
                      1,608
                      
                      
                      
                      (655
                      )
                      
                      
                      (4,317
                      )Net
      income (loss)
                      
                      
                      (664
                      )
                      
                      
                      739
                      
                      
                      
                      (682
                      )
                      
                      
                      (2,755
                      )Basic
      earnings (loss) per share
                      
                      
                      (0.05
                      )
                      
                      
                      0.05
                      
                      
                      
                      (0.05
                      )
                      
                      
                      (0.20
                      )Diluted
      earnings (loss) per share
                      
                      $
                      (0.05
                      )
                      
                      $
                      0.05
                      
                      
                      $
                      (0.05
                      )
                      
                      $
                      (0.20
                      )
  67





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.




SPORT
      CHALET, INC.
                        (Registrant)Date:  June
      25, 2009
                      By:
                      /s/ Howard
      K. KaminskyHoward
      K. Kaminsky, Executive Vice President –
                        Finance,
      Chief Financial Officer and Secretary
                        (Principal
      Financial and Accounting Officer)




KNOW ALL PERSONS BY THESE PRESENTS,
that each person whose signature appears below hereby constitutes and appoints
Howard K. Kaminsky, Executive Vice President, Chief Financial Officer and
Secretary, his true and lawful attorney-in-fact and agent, with full power of
substitution, to sign and execute on behalf of the undersigned any and all
amendments to this report, and to perform any acts necessary in order to file
the same, with all exhibits thereto and other documents in connection therewith
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requested and necessary to be done in connection therewith, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or their or his or her
substitutes, shall do or cause to be done by virtue hereof.





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




/s/
      Craig L. Levra
                          
                          Date:  June
      25, 2009Craig
      L. Levra, Chairman,
                              Chief
      Executive Officer and President
                              (Principal
      Executive Officer)


/s/
      Howard K. Kaminsky
                            
                            Date:  June
      25, 2009Howard
      K. Kaminsky, Executive Vice President –
                                Finance,
      Chief Financial Officer and Secretary
                                (Principal
      Financial and Accounting Officer)
 /s/
      John R. Attwood
                          
                          Date:  June
      25, 2009John
      R. Attwood, Director
 /s/
      Donald J. Howard
                            
                            Date:  June
      25, 2009Donald
      J. Howard, Director
 /s/
      Eric S. Olberz
                                
                                Date:  June
      25, 2009Eric
      S. Olberz , Director
 /s/
      Frederick H. Schneider
                              
                              Date:  June
      25, 2009Frederick
      H. Schneider, Director
 /s/
      Kevin J. Ventrudo
                                
                                Date:  June
      25, 2009Kevin
      J. Ventrudo, Director


68




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 as of November 5, 2007.
                (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.
                (21)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.
                (21)10.6
                Lease
      for La Cañada store dated as of January 11, 2008, between the Company and
      La Cañada Properties, Inc.
                (29)10.7
                Lease
      for Huntington Beach store dated as of August 25, 1994, between the
      Company and Huntington Beach Properties, Inc.
                (8)10.8
                Amendment
      to Lease for Huntington Beach store dated as of June 12, 2006, between the
      Company and Huntington Beach Properties, Inc.
                (21)10.9
                Lease
      for Porter Ranch store dated as of May 7, 1999, between the Company and
      North San Fernando Valley Properties, Inc.
                (9)10.10
                Lease
      for La Cañada offices dated as of October 1, 2002, between the Company and
      La Cañada Properties, Inc.
                (10)10.11
                Business
      Loan Agreement dated as of June 19, 1998, between the Company and Bank of
      America, N.A.
                (11)10.12
                Amendment
      No. 2 to Business Loan Agreement dated as of June 19,1998, between the
      Company and Bank of America, N.A.
                (12)10.13
                Amendment
      No. 3 to Business Loan Agreement dated as of November 20, 2001, between
      the Company and Bank of America, N.A.
                (13)10.14
                Amendment
      No. 4 to Business Loan Agreement dated as of June 10, 2002, between the
      Company and Bank of America, N.A.
                (14)10.15
                Amendment
      No. 5 to Loan Agreement dated as of September 25, 2003, between the
      Company and Bank of America, N.A.
                (15)10.16
                Amendment
      No. 6 to Loan Agreement dated as of September 30, 2006, between the
      Company and Bank of America, N.A.
                (16)10.17
                Amendment
      No. 7 to Loan Agreement dated as of March 31, 2007, between the Company
      and Bank of America, N.A.
                (21)10.18
                Amendment
      No. 8 to Loan Agreement dated as of April 19, 2007, between the Company
      and Bank of America, N.A.
                (23)10.19
                Loan
      Agreement dated as of August 31, 2007, between the Company and Bank of
      America, N.A.
                (24)  69
 
  Exhibit Index
 Number
                    Description10.20
                    Security
      Agreement dated August 31, 2007, between the Company and Bank of America,
      N.A.
                    (24)10.21
                    Amended
      and Restated Loan and Security Agreement dated June 20, 2008, between the
      Company, together with each of the other Obligated Parties party thereto
      from time to time, certain financial institutions, as Lenders thereunder,
      and Bank of America, N.A., as Agent.
                    (29)10.22
                    Pledge
      Agreement dated June 20, 2008, between the Company and Bank of America,
      N.A., as administrative agent for the Lenders.
                    (29)10.23
                    Amendment
      No. 1 to Loan Agreement dated as of January 9, 2009, between the Company
      and Bank of America, N.A.
                    (25)10.24
                    Amendment
      No. 2 to Loan Agreement dated as of January 29, 2009, between the Company
      and Bank of America, N.A.
                    (26)10.25
                    Amendment
      No. 3 to Loan Agreement dated as of March 2, 2009, between the Company and
      Bank of America, N.A.
                    (27)10.26
                    Amendment
      No. 4 to Loan Agreement dated as of May 4, 2009, between the Company and
      Bank of America, N.A.
                    (28)10.27
                    Secured
      Continuing Guaranty dated June 20, 2008, by Sport Chalet Value Services,
      LLC in favor of Bank of America, N.A., as administrative agent for the
      Lenders.
                    (29)10.28
                    Website
      Security Agreement and Power of Attorney dated June 20, 2008, between the
      Company and Bank of America, N.A., as administrative agent for the
      Lenders.
                    (29)10.29
                    Post
      Closing Agreement dated June 20, 2008, between the Company and Bank of
      America, N.A., as administrative agent for the Lenders.
                    (29)10.30
                    Trademark
      Security Agreement dated June 20, 2008, between the Company and Bank of
      America, N.A., as administrative agent for the Lenders.
                    (29)10.31*
                    Employment
      Agreement dated as of April 1, 2000, between the Company and Norbert J.
      Olberz.
                    (17)10.32*
                    Amendment
      No. 1 to Employment Agreement dated as of December 9, 2005,
      between the Company and Norbert J. Olberz.
                    (18)10.33*
                    Employment
      Agreement dated as of December 31, 2008, between the Company and Craig L.
      Levra.
                    (19)10.34*
                    Employment
      Agreement dated as of December 31, 2008, between the Company and Howard K.
      Kaminsky.
                    (19)10.35*
                    Employment
      Agreement dated as of December 31, 2008, between the Company and Dennis D.
      Trausch.
                    (19)10.36*
                    Employment
      Agreement dated as of December 31, 2008, between the Company and Thomas H.
      Tennyson.
                    (19)10.37*
                    Employment
      Agreement dated as of December 31, 2008, between the Company and Tim
      Anderson.
                    (19)10.38*
                    Form
      of letter agreement re acceleration of vesting of options between the
      Company and certain of its executive officers and key
      employees.
                    (22)14.1
                    Code
      of Conduct
                    (20)23.1
                    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.
                    †
  70
 
  Exhibit Index
 Number
                        Description32.1
                        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 3.1 to the Company's current report on From 8-K
      filed on September 22, 2005.(3)
                        Incorporated
      by reference to Exhibit 3.2 to the Company’s Quarterly report on Form 10-Q
      for the quarter ended September 30, 2007(4)
                        Incorporated
      by reference to Exhibits 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 2005 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.(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 99.1, 99.2, 99.3, 99.4 and 99.5 to the Company’s
      Current Report on Form 8-K filed on January 8, 2009.(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,
      2005.
  71
  Exhibit
Index
  Number
                Description(21)
                Incorporated
      by reference to Exhibit 10.3, 10.5, 10.7 and 10.16 to the Company’s Annual
      Report on Form 10-K for the fiscal year ended April 1,
    2007.(22)
                Incorporated
      by reference to Exhibit 99.1to the Company’s Current Report on Form 8-K
      filed on April 3, 2006.(23)
                Incorporated
      by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K
      for the fiscal year ended April 1, 2007.(24)
                Incorporated
      by reference to Exhibits 10.1 and 10.2 to the Company’s Current Report on
      Form 8-K filed on August 31, 2007.(25)
                Incorporated
      by reference to Exhibits 99.1 and 99.2 to the Company’s Current Report on
      Form 8-K filed on January 16, 2009.(26)
                Incorporated
      by reference to Exhibits 99.1 to the Company’s Current Report on Form 8-K
      filed on February 3, 2009.(27)
                Incorporated
      by reference to Exhibits 99.1 to the Company’s Current Report on Form 8-K
      filed on March 2, 2009.(28)
                Incorporated
      by reference to Exhibits 99.1 to the Company’s Current Report on Form 8-K
      filed on May 7, 2009.(29)
                Incorporated
      by reference to Exhibit 10.3, 10.5, 10.7 and 10.16 to the Company’s Annual
      Report on Form 10-K for the fiscal year ended March 30,
    2008.   72