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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  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 ended March 31, 2004 [   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period fromto. Commission file number: 0-20736 Sport Chalet, Inc.  Delaware
    
    95-4390071(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification Number)
 One Sport Chalet Drive, La Canada, California
    
    91011(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (818) 949-5300 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value.
(Title of class) 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 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. [X] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of Act). [   ] Yes [X] No The aggregate market value of the Common Stock held by non-affiliates of the
registrant as of September 30, 2003, was approximately $14.2 million based upon
the closing price of the Common Stock on that date. The number of shares of the registrants Common Stock outstanding as of June 7,
2004 was 6,673,534. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrants definitive proxy statement relating to its 2004
annual meeting of stockholders, which will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days of the close of
the registrants last fiscal year, are incorporated by reference into Part III
of this Report.




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TABLE OF CONTENTS Item
    
    PagePART I1. Business
    
    
    12. Properties
    
    
    63. Legal Proceedings
    
    
    74. Submission of Matters to a Vote of Security Holders
    
    
    7PART II5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    86. Selected Consolidated Financial Data
    
    
    97. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    107A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    198. Financial Statements and Supplementary Data
    
    
    199. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    199A. Controls and Procedures
    
    
    19PART III10. Directors and Executive Officers of the Registrant
    
    
    2011. Executive Compensation
    
    
    2012. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    2013. Certain Relationships and Related Transactions
    
    
    2014. Principal Accountant Fees and Services
    
    
    20PART IV15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    21Exhibit 14.1Exhibit 23.1Exhibit 31.1Exhibit 31.2Exhibit 32.1




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PART I This Annual Report onForm 10-Kcontains 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 statements include comments regarding the intent,
belief or current expectations of the Company and its management. Prospective
investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those projected in the
forward-looking statements. See Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations  Factors That May Affect
Future Results. 
 ITEM 1. BUSINESS General Sport Chalet, Inc. (referred to as the Company, Sport Chalet, we,
us, and our unless specified otherwise), founded in 1959, is a leading
operator of 31 full service, specialty sporting goods superstores in California
and Nevada. As of March 31, 2004, we had 27 locations in Southern California,
two in Northern California and two in Nevada. These stores average 38,800
square feet in size. In addition, we operate a retail e-commerce store through
GSI Commerce, Inc. at www.sportchalet.com. Our executive offices are located at
One Sport Chalet Drive, La Canada, California 91011, and our telephone number
is (818) 949-5300. Operating History and Growth Plans In 1959, Norbert Olberz, our Chairman Emeritus and principal stockholder
(the Principal Stockholder), purchased a small ski and tennis shop in La
Canada, California. A focus on providing quality merchandise with outstanding
customer service was the foundation of Norberts vision. 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 being the best, not the biggest. Over the last 45
years, Sport Chalet has grown into a chain of 31 specialty retail superstores
serving both California and Nevada. Our growth strategy had historically focused on Southern California, but
now includes opening new stores throughout California and Nevada as suitable
locations are found. Over the past three years, we have opened eight new
stores, two of which include our recent expansion into the Northern California
market and two in the Las Vegas, Nevada, market. We currently plan to open at
least five stores during the next 12 months, of which three will continue our

expansion into Northern California, one will be in Central California and one
in Southern California. Future store openings are subject to availability of
satisfactory store locations based on local competitive conditions, site
availability and cost and our ability to provide and maintain high service
levels and quality brand merchandising at competitive prices. For fiscal 2004,
average sales per store for stores open throughout both fiscal 2004 and fiscal
2003 were $9.2 million, with corresponding average sales per square foot of
$239. Store openings are expected to have a favorable impact on sales volume,
but will negatively affect profit in the short term. New stores tend to have
higher costs in the early years of operation, due primarily to increased
promotional costs and lower sales on a per employee basis until the store
matures. As the store matures, sales tend to level off and expenses decline as
a percentage of sales. Our stores generally require three to four years to
attract a stable, mature customer base. We estimate the cost of opening an
average new store to be approximately $2.8 million consisting primarily of the
investment in inventory (net of average vendor payables), the cost of fixtures
and equipment and pre-opening expenses, such as the costs associated with
training employees and stocking the store. Opening costs for each new store
can vary significantly depending on how much the landlord has agreed to
contribute to our required improvements. 1




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Our sales partially depend on the economic environment and level of
consumer spending in California and Nevada. 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 have had, and may in the
future have, a materially adverse effect on our results of operations. Stores and Merchandising Our prototype stores range in size from 40,000 to 45,000 square feet and
showcase each product category with the feel of a specialty shop all contained
under one roof. The full service approach to customer service and product
knowledge is enhanced by fixtures which feature specific categories, and give
the customer an enhanced shopping experience. 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 professional 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 watersports instruction and demonstrations, and a 100 foot
shoe wall, among other improvements. In coming years we plan to retro-fit
certain mature stores to conform to the prototype. During fiscal 2005, four
stores will be remodeled, with expected grand re-openings in fall of 2004 and
spring of 2005. 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 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, competition trends
and the availability of adequate capital. Once a store is selected for remodel,
an estimate of fixtures and leasehold improvements requiring disposal is
prepared. The remaining book-value of these items are fully expensed through
accelerated depreciation over the period prior to the completion of the
remodel. For fiscal 2005 this additional expense is expected to be
approximately $700,000. With the scheduled new store openings and remodels,
44% of our store base will be three years old or less. Our stores feature a number of distinct, specialty sporting goods
divisions, 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
nontraditional merchandise such as downhill skiing, mountaineering and SCUBA.
The merchandise appeals to both experts and beginners. In addition, our stores
offer over 40 services for the serious sports enthusiast, including
backpacking, canyoneering, and kayaking instruction, custom golf club fitting
and repair, ski rental and repair, SCUBA training and certification, SCUBA boat
charters, team sales, racquet stringing, and bicycle tune-up and repair. Our
stores are open seven days a week, typically from 9:30 a.m. to 9:30 p.m. Monday
through Saturday, and 10:00 a.m. to 7:00 p.m. on Sunday. The following table sets forth the percentage of total net sales for each
major category for each of the last three fiscal years: Year Ended March 31,2004
    
    2003
    
    2002Hardlines
    
    
    53
    %
    
    
    53
    %
    
    
    53
    %Apparel
    
    
    28
    %
    
    
    28
    %
    
    
    29
    %Footwear
    
    
    19
    %
    
    
    19
    %
    
    
    18
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 2




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We operate our online store through GSI Commerce, Inc. (GSI) at
www.sportchalet.com. GSI creates and operates all aspects of the
www.sportchalet.com shopping experience, including fulfillment and purchasing,
while remaining transparent to the customer. We receive a license fee based on
a percentage of sales generated by the website. 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, the months of November, December and
January represented between 30% and 34% of our total net sales, while
winter-related products ranged from 15% to 19% of total net sales. Management
anticipates that this seasonal trend in sales will persist. To be less
dependent upon winter business, management continues to emphasize a broadened
product mix that offers merchandise generally purchased by consumers in the
spring, summer and fall seasons. See Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations  Factors That May
Affect Future Results  Seasonality. Marketing and Advertising We generate all of 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
vehicles including newspaper, direct mail, radio, billboards, magazines and the
Internet. Through the Team Sales Division, we reach out to communities in
which our stores do business, contributing to local teams and leagues. Our
advertising leverage has been boosted by vendor payments under cooperative
advertising arrangements as well as vendor participation in sponsoring sporting
events and programs. Purchasing and Distribution In order to provide a full line of specialty and sporting goods brands and
a wide selection, we purchase merchandise from over 1,200 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 8.4% and 7.7% of our total inventory purchases for
fiscal 2004 and 2003, respectively. In January 2002, we moved our distribution operations to a new 326,000
square foot facility located in Ontario, California. This facility replaced
our 150,000 square foot warehouse and a 30,000 square foot satellite facility,
and has been designed to support growth plans for the foreseeable future.
Labor savings from operating efficiency provided by the new facility have
offset increases in occupancy costs in the short term and installation of
warehouse management software should continue to improve warehousing and
logistical cost management. The distribution center serves as the primary receiving, distribution and
warehousing facility. Common carriers deliver merchandise to our stores outside
of Southern California, while our own trucks deliver merchandise from the
distribution center to the Southern California stores. For fiscal 2005, we will
completely outsource our intra-company trucking. 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 system 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. 3




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We use a sophisticated computerized replenishment system from JDA. The
JDA E3 system consists of three modules: (i) advanced warehouse replenishment,
which manages purchases from vendors, (ii) advanced store replenishment, which
manages warehouse to store replenishment, and (iii) network optimization, which
synchronizes the two systems. In addition, we utilize the JDA Consumer Outlook
and Pinpoint seasonal profile software to help identify, create and manage the
seasonal trends of our merchandise. Currently, inventory management utilizes
the E3 system to manage approximately 47% of our total inventory. The
remaining 53% of the inventory purchases are managed by traditional methods
conducted by the buying staff on a short-term purchase order basis. Information Systems We use a best of breed approach to information systems. All new systems
communicate with a legacy system that has become the centralized data
repository and the primary financial system. Our inventory systems track
purchasing, sales and inventory transfers down to the stock keeping unit or
SKU level and allow us to improve overall inventory management by identifying
individual SKU activity and projecting trends and replenishment needs on a
timely basis. We believe these systems enable us to increase margins by
reducing inventory and markdowns while strengthening our in-stock positions. Consistent with the stated direction to upgrade the legacy systems, those
applications were migrated to a new Sun computer in May 2002. In October 2000,
store systems were upgraded to the Encore Retail Suite of applications from CRS
Retail Systems, an open technology allowing flexibility for the future. A
custom rental program was added to the store system in October 2001.
Merchandise replenishment is controlled by E3 software from the JDA Software
Group, Inc., running on an IBM AS 400. In fiscal 2003, the processing of
debit/credit card authorization was upgraded to allow on-line debit and
signature capture, and the distribution center was enhanced with warehouse
management software from HighJump. HighJump is web-enabled, real-time,
scaleable software that can expand to meet the demands of our growth plans. We
continue ongoing enhancements to the legacy system as well as the evaluation,
procurement and integration of new systems in order to keep pace with our
growth plan. 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 service mark with
the State of California, and have obtained federal registration for certain
purposes, which has been successfully defended in the past against attack by
third parties. We also retain common law rights to the name, which we have
used since 1959. The lack of federal registration for certain purposes might
pose a problem if we were to expand into a geographic area where the name or
any confusingly similar name is used by someone with prior rights. 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:  
    
    full-line sporting goods chains, such as The Sports
Authority, Galyans, Dicks Sporting Goods and Big 5;
    
    specialty stores, such as REI, Foot Locker and West Marine;
    
    supplier-owned stores, such as Nike, The North Face, adidas and New Balance;
    
    mass merchandisers, club stores, discount stores and
department stores, such as Wal-Mart, Costco, Target, Macys and
Sears; and
    
    Internet retailers and catalog merchandisers. Many of these competitors have greater financial resources than we do, or
better name recognition in regions into which we seek to expand. Our industry
is dominated by sporting goods superstore retailers, i.e., full-line sporting
goods chains with stores typically larger than 30,000 square feet, 4




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often in freestanding locations. 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. 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 than other superstore
retailers in the California and Nevada areas. 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, superstore dominance, 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 31, 2004, we had a total of approximately 2,654 full and
part-time employees, 2,420 of whom were employed in our stores and 234 of whom
were employed in warehouse and delivery operations or in executive 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 75 employees, of whom 20 to 40 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 area managers and department heads supervise the sales associates in
customer service, merchandising, and operations. Additional part-time employees
are typically hired during the Holiday and other peak seasons. We are committed to the growth and training of our employees in order to
provide The Expert product knowledge and service to our customers. Our
Certified Pro program ensures that employees 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 19 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. Financial Information about Segments For financial reporting purposes the Company operates in a single business
segment. 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 and 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 450 Fifth Street, NW, 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 http://www.sec.gov. 5




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ITEM 2. PROPERTIES At June 7, 2004, we had 31 store locations. The following table
summarizes the key information on our retail properties: GrossSquareLocation
    
    Opening Date
    
    FootageLa Canada (1)
    
    June 1960
    
    
    40,300Huntington Beach (2)
    
    June 1981
    
    
    50,000La Jolla
    
    June 1983
    
    
    20,000Mission Viejo
    
    August 1986
    
    
    30,000Point Loma (2)
    
    November 1987
    
    
    34,600Valencia (2)
    
    November 1987
    
    
    40,000Marina del Rey
    
    November 1989
    
    
    42,300Beverly Hills
    
    November 1989
    
    
    39,300Brea (2)
    
    April 1990
    
    
    34,200Oxnard (2)
    
    June 1990
    
    
    40,100West Hills (2)
    
    June 1991
    
    
    44,000Burbank
    
    August 1992
    
    
    45,000Montclair (3)
    
    November 1992
    
    
    18,000Torrance
    
    November 1993
    
    
    38,700Glendora
    
    November 1993
    
    
    40,000Rancho Cucamonga (2)
    
    June 1994
    
    
    36,000Irvine (2)
    
    November 1995
    
    
    35,000Laguna Niguel
    
    November 1997
    
    
    40,000Mission Valley
    
    June 1998
    
    
    47,000Long Beach
    
    May 1999
    
    
    43,000Porter Ranch
    
    July 1999
    
    
    43,000Temecula
    
    October 1999
    
    
    40,000Chino Hills
    
    July 2000
    
    
    40,000Palmdale (2)
    
    June 2001
    
    
    40,000Henderson, NV (2)
    
    November 2001
    
    
    42,000Costa Mesa  South Coast
Plaza
    
    November 2001
    
    
    40,300Summerlin, NV (2)
    
    November 2002
    
    
    40,300Riverside (2)
    
    November 2002
    
    
    44,000Antioch (2)
    
    November 2003
    
    
    40,000Redlands (2)
    
    November 2003
    
    
    42,000Sacramento (2)
    
    December 2003
    
    
    40,600Total
    
    
    1,209,700
   (1)
    
    The original store opened in 1959. The existing store includes four
facilities.(2)
    
    Includes swimming pool facility for SCUBA and kayaking instruction.(3)
    
    Outlet store relocated to a nearby regional shopping center in October
2000. 6




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All facilities are located on leased property. The initial terms of the
retail leases expire in 2005 through 2020 and typically provide for multiple
five-year renewal options. All retail store leases provide for base rent which
may or may not be credited against percentage rent based upon gross sales from
the premises. In some of the leases, base rental amounts increase as the lease
term progresses, although in some cases, we expect that percentage rent will
more than offset the base rental amounts. We lease from corporations controlled by Norbert Olberz, Sport Chalets
Chairman Emeritus and principal stockholder (the Principal Stockholder), our
corporate office space in La Canada and our stores in La Canada, Huntington
Beach and Porter Ranch, California. In prior years, we also leased from him
our warehouse and distribution facility in Montclair, California. Although the
term of this lease ran to 2007, the Principal Stockholder agreed to cancel the
lease when we moved to the new distribution center in January 2002. The new
distribution center located in Ontario, California, is leased from an unrelated
third party. We have incurred rental expense to the Principal Stockholder of
$2.5 million, $2.2 million and $2.4 million in fiscal 2004, 2003 and 2002,
respectively. Our corporate offices in prior years were spread over seven nearby
buildings in La Canada, California, neighboring our original store. To
facilitate our expansion plans, we leased a new 27,500 square foot corporate
office in La Canada from La Canada Properties, Inc., a corporation controlled
by the Principal Stockholder, in October 2002. We expect this building to
support our growth plans for the foreseeable future. Management believes that the occupancy costs under the leases with
corporations controlled by the Principal Stockholder described above are no
higher than those which would be charged by unrelated third parties under
similar circumstances. 
 ITEM 3. LEGAL PROCEEDINGS We are involved in various routine legal proceedings incidental to the
conduct of our 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, either due to the nature of the claims, or
because management believes that such claims should not exceed the limits of
our 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 2004. 7




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PART II 
  ITEM 5.
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Price for Common Shares Our Common Stock is traded on the Nasdaq Stock Market under the symbol
SPCH. The following table reflects the range of high and low sale prices of
our Common Stock by quarter over the last two fiscal years as reported by
Nasdaq: Fiscal 2003
    
    High
    
    LowFirst Quarter
    
    $
    9.40
    
    
    $
    8.49Second Quarter
    
    $
    9.05
    
    
    $
    6.54Third Quarter
    
    $
    7.34
    
    
    $
    6.12Fourth Quarter
    
    $
    7.41
    
    
    $
    6.50
 Fiscal 2004
    
    High
    
    LowFirst Quarter
    
    $
    7.42
    
    
    $
    6.50Second Quarter
    
    $
    7.55
    
    
    $
    6.81Third Quarter
    
    $
    10.93
    
    
    $
    6.96Fourth Quarter
    
    $
    15.08
    
    
    $
    9.40
 Fiscal 2005
    
    High
    
    LowFirst Quarter (through June 7, 2004)
    
    $
    13.90
    
    
    $
    9.65
 On June 7, 2004, the closing price of our Common Stock as reported by
Nasdaq was $12.99. Stockholders are urged to obtain current market quotations
for the Common Stock. Approximate Number of Holders of Common Shares The approximate number of stockholders of record of our Common Stock as of
June 7, 2004 was 176 (excluding individual participants in nominee security
position listings), and as of that date, we estimate that there were
approximately 1,000 beneficial owners holding stock in nominee or street
name. Dividend Policy We have not paid any dividends to stockholders since our initial public
offering in November 1992. We currently intend to retain 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. 8




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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following sets forth selected consolidated financial data as of and
for the five most recent fiscal years ended March 31, 2004. This data should
be read in conjunction with the financial statements and related notes thereto
and other financial information included herein. Year Ended March 312004
    
    2003
    
    2002
    
    2001
    
    2000(In thousands, except per share, square foot amounts)Statements of Income Data:Net sales
    
    $
    264,237
    
    
    $
    238,033
    
    
    $
    227,349
    
    
    $
    214,842
    
    
    $
    175,846Cost of goods sold, buying and occupancy
costs
    
    
    184,579
    
    
    
    168,739
    
    
    
    162,091
    
    
    
    148,619
    
    
    
    123,496Gross profit
    
    
    79,658
    
    
    
    69,294
    
    
    
    65,258
    
    
    
    66,223
    
    
    
    52,350Selling, general and administrative expenses
    
    
    71,988
    
    
    
    62,168
    
    
    
    57,126
    
    
    
    54,406
    
    
    
    43,524Income from operations
    
    
    7,670
    
    
    
    7,126
    
    
    
    8,132
    
    
    
    11,817
    
    
    
    8,826Interest expense (income)
    
    
    190
    
    
    
    307
    
    
    
    71
    
    
    
    (361
    )
    
    
    (284
    )Income before taxes
    
    
    7,480
    
    
    
    6,819
    
    
    
    8,061
    
    
    
    12,178
    
    
    
    9,110Income tax provision
    
    
    2,933
    
    
    
    2,659
    
    
    
    3,267
    
    
    
    4,913
    
    
    
    3,626Net income
    
    $
    4,547
    
    
    $
    4,160
    
    
    $
    4,794
    
    
    $
    7,265
    
    
    $
    5,484Earnings per share  basic
    
    $
    0.68
    
    
    $
    0.63
    
    
    $
    0.73
    
    
    $
    1.10
    
    
    $
    0.83Earnings per share  diluted
    
    $
    0.65
    
    
    $
    0.60
    
    
    $
    0.69
    
    
    $
    1.07
    
    
    $
    0.81Weighted average shares outstanding:Basic
    
    
    6,646
    
    
    
    6,615
    
    
    
    6,587
    
    
    
    6,580
    
    
    
    6,577Diluted
    
    
    7,008
    
    
    
    6,947
    
    
    
    6,995
    
    
    
    6,805
    
    
    
    6,756Selected Operating Data:Comparable store sales increase (decrease) (1)
    
    
    3.7
    %
    
    
    (0.9
    )%
    
    
    (1.1
    )%
    
    
    14.5
    %
    
    
    2.0
    %Net cash provided by operating activities
    
    $
    7,408
    
    
    $
    5,745
    
    
    $
    7,350
    
    
    $
    11,512
    
    
    $
    1,067EBITDA (2)
    
    $
    13,744
    
    
    $
    12,606
    
    
    $
    13,274
    
    
    $
    16,036
    
    
    $
    12,540Stores open at end of period
    
    
    31
    
    
    
    28
    
    
    
    26
    
    
    
    23
    
    
    
    22Total square feet at end of period (3)
    
    
    1,210
    
    
    
    1,087
    
    
    
    1,002
    
    
    
    881
    
    
    
    841Net Sales per square foot (4)
    
    $
    239
    
    
    $
    241
    
    
    $
    247
    
    
    $
    256
    
    
    $
    229Average net sales per store (4)
    
    $
    9,221
    
    
    $
    9,220
    
    
    $
    9,453
    
    
    $
    9,642
    
    
    $
    8,480
 As of March 312004
    
    2003
    
    2002
    
    2001
    
    2000(In thousands)Balance Sheet Data:Working capital
    
    $
    40,696
    
    
    $
    37,279
    
    
    $
    32,133
    
    
    $
    33,238
    
    
    $
    29,239Total assets
    
    
    92,701
    
    
    
    86,901
    
    
    
    83,310
    
    
    
    75,822
    
    
    
    64,454Long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total stockholders equity
    
    
    64,531
    
    
    
    59,274
    
    
    
    54,924
    
    
    
    50,040
    
    
    
    42,622
  (1)
    
    A stores sales are included in the comparable store sales calculation
after its twelfth full month of operation.(2)
    
    EBITDA is earnings before income taxes, interest expense and depreciation
and amortization. We believe that, in addition to cash flows from
operations and net income, EBITDA is a useful financial performance
measure for assessing operating performance as it provides an additional
basis to evaluate our ability to incur and service debt and to fund
capital expenditures. In evaluating EBITDA, consideration should be given,
among other things, to the amount by which EBITDA exceeds interest costs
for the period and how EBITDA compares to capital expenditures for the
period. To evaluate EBITDA, the components of EBITDA such as revenue and
operating expenses and the variability of such components over time should
also be considered. EBITDA should not be construed, however, as an
alternative to operating income (as determined in accordance with
accounting principles generally accepted in the United States of America
(GAAP) as an indicator of our operating performance or to cash flows
from operating activities (as determined in accordance with GAAP) as a
measure of liquidity. Our method of calculating EBITDA may differ from
methods used by other companies and, as a result, EBITDA measures
disclosed herein may not be comparable to other similarly titled measures
used by other companies.(3)
    
    Total square footage of all stores open at the end of the period
represented in thousands of square feet.(4)
    
    Calculated by using stores that were open for the full current fiscal
period and were also open for the full prior fiscal year. 9




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##### Table of Contents



ITEM 7.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following should be read in conjunction with Item 6. Selected
Consolidated Financial Data and our consolidated financial statements and
related notes thereto. Results of Operations The following tables set forth statements of income data and relative
percentages of net sales for the periods indicated (dollar amounts in
thousands, except per share amounts). Year ended March 312004
    
    2003
    
    2002Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    PercentNet sales
    
    $
    264,237
    
    
    
    100.0
    %
    
    $
    238,033
    
    
    
    100.0
    %
    
    $
    227,349
    
    
    
    100.0
    %Gross profit
    
    
    79,658
    
    
    
    30.1
    
    
    
    69,294
    
    
    
    29.1
    
    
    
    65,258
    
    
    
    28.7Selling, general and
administrative expenses
    
    
    71,988
    
    
    
    27.2
    
    
    
    62,168
    
    
    
    26.1
    
    
    
    57,126
    
    
    
    25.1Income from operations
    
    
    7,670
    
    
    
    2.9
    
    
    
    7,126
    
    
    
    3.0
    
    
    
    8,132
    
    
    
    3.6Interest expense (income)
    
    
    190
    
    
    
    0.1
    
    
    
    307
    
    
    
    0.1
    
    
    
    71
    
    
    
    0.0Income before taxes
    
    
    7,480
    
    
    
    2.8
    
    
    
    6,819
    
    
    
    2.9
    
    
    
    8,061
    
    
    
    3.5Net income
    
    
    4,547
    
    
    
    1.7
    
    
    
    4,160
    
    
    
    1.7
    
    
    
    4,794
    
    
    
    2.1Earnings per share:Basic
    
    $
    0.68
    
    
    
    
    
    
    $
    0.63
    
    
    
    
    
    
    $
    0.73Diluted
    
    $
    0.65
    
    
    
    
    
    
    $
    0.60
    
    
    
    
    
    
    $
    0.69
 Quarter ended March 312004
    
    2003Amount
    
    Percent
    
    Amount
    
    PercentNet sales
    
    $
    69,404
    
    
    
    100.0
    %
    
    $
    58,230
    
    
    
    100.0
    %Gross profit
    
    
    20,410
    
    
    
    29.4
    
    
    
    16,083
    
    
    
    27.6Selling, general and
administrative expenses
    
    
    19,878
    
    
    
    28.6
    
    
    
    15,936
    
    
    
    27.4Income from operations
    
    
    532
    
    
    
    0.8
    
    
    
    147
    
    
    
    0.3Interest expense
    
    
    28
    
    
    
    0.0
    
    
    
    34
    
    
    
    0.1Income before taxes
    
    
    504
    
    
    
    0.8
    
    
    
    113
    
    
    
    0.2Net income
    
    
    328
    
    
    
    0.5
    
    
    
    53
    
    
    
    0.1Earnings per share:Basic
    
    $
    0.05
    
    
    
    
    
    
    $
    0.01Diluted
    
    $
    0.05
    
    
    
    
    
    
    $
    0.01
 10




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##### Table of Contents



Fiscal 2004 Compared to Fiscal 2003.Sales increased $26.2 million or
11.0%, from $238.0 million for the fiscal year ended March 31, 2003 to $264.2
million for fiscal 2004. The increase is the result of opening three stores in
fiscal 2004 and two in fiscal 2003, in addition to a comparable store sales
increase of 3.7%. The comparable store sales increase reflects improved
economic climate and more seasonable winter weather conditions at the resorts
frequented by our customers. Gross profit increased $10.4 million or 15.0%, primarily from increased
sales. As a percent of sales, gross profit increased from 29.1% in fiscal 2003
to 30.1% in fiscal 2004. The 1.0% increase for fiscal 2004 compared to fiscal
2003 resulted primarily from ongoing improvements in purchasing practices which
reduced the need for markdowns. Selling, general and administrative expenses increased $9.8 million or
15.8%, primarily from additional stores. As a percent of sales, these expenses
increased from 26.1% in fiscal 2003 to 27.2% in fiscal 2004. The 1.1% increase
for fiscal 2004 compared to fiscal 2003 resulted from several primary factors:
(i) the write-off of assets totaling $245,000 which came from two large-scale
remodels completed in the first quarter of fiscal 2004, (ii) increased workers
compensation expense of $1.2 million, (iii) additional non-cash compensation
expense from a stock award of $449,000 from the Principal Stockholder to
certain executives of the Company, combined with a cash bonus of $369,000, paid
by the Company to cover the executives related income tax. The effective tax rate as a percent of pretax income was 39.2% for fiscal
2004 and 39.0% for fiscal 2003. These rates differ from the statutory rate of
39.8% primarily as a result of permanent differences between financial
reporting and tax-basis income. Net income increased from $4.2 million or $0.60 per diluted share for
fiscal 2003, to $4.5 million or $0.65 per diluted share for fiscal 2004,
primarily due to increased sales and improved gross profit as a percent of
sales partially offset by increased workers compensation expense and the
effect of the stock award. Fourth Quarter 2004 Compared to Fourth Quarter 2003.Sales increased
$11.2 million or 19.2%, from $58.2 million for the quarter ended March 31, 2003
to $69.4 million for the same period in fiscal 2004. The increase results from
the opening of three stores in fiscal 2004, in addition to a comparable store
sales increase of 10.5%. The comparable store sales increase reflects an
improved economic climate and more seasonable winter weather conditions at the
resorts frequented by our customers. Gross profit increased $4.3 million or 27.0%, primarily from increased
sales. As a percent of sales, gross profit increased from 27.6% for the
quarter ended March 31, 2003 to 29.4% for the quarter ended March 31, 2004.
The 1.8% increase resulted from reduced markdowns as more seasonable winter
weather conditions increased customer demand for winter-related products. Selling, general and administrative expenses increased $3.9 million or
24.7%, primarily from additional stores. As a percent of sales, these expenses
increased from 27.4% for the quarter ended March 31, 2003 to 28.6% for the
quarter ended March 31, 2004. The 1.2% increase is primarily the result of two
factors: (i) increased workers compensation expense of $600,000, (ii)
additional non-cash compensation expense from a stock award of $449,000 from
the Principal Stockholder to certain executives of the Company, combined with a
cash bonus of $369,000, paid by the Company to cover the executives related
income tax. The effective tax rate, as a percent of pretax income, was 34.9% for the
quarter ended March 31, 2004 and 53.0% for the same period in fiscal 2003.
Both differ from the statutory rate of 39.8% as a result of fourth quarter
provision adjustments reconciling the estimated effective rate utilized in
prior quarters to the annual effective tax rate. 11




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##### Table of Contents



Net income increased from $53,000 or $0.01 per diluted share for the
quarter ended March 31, 2003, to $328,000 or $0.05 per diluted share for the
quarter ended March 31, 2004, primarily due to increased sales and improved
gross profit as a percent of sales partially offset by increased workers
compensation expense and the effect of the stock award. Fiscal 2003 Compared to Fiscal 2002.Sales increased $10.7 million or
4.7% from $227.3 million for the fiscal year ending March 31, 2002 to $238.0
million for fiscal 2003. The increase was the result of opening two stores in
fiscal 2003 and three in fiscal 2002, offset by a comparable store sales
decrease of 0.9%. The comparable store sales decrease reflects a prolonged
sluggish retail environment, lackluster economic recovery, and the war in Iraq.
In addition, the decrease reflects a second year of unseasonable warm and dry
winter weather conditions at the resorts frequented by our customers throughout
the third and fourth quarters which resulted in decreased sales of
winter-related merchandise. Sales exclusive of winter-related merchandise
increased 7.0% in total and 0.9% on a comparable store basis. Gross profit increased $6.6 million or 4.1%, primarily from increased
sales. As a percent of sales, gross profit increased from 28.7% in fiscal 2002
to 29.1% in fiscal 2003. The improvement in merchandise margins was partially
offset by the effects of decreased comparable store sales which caused
occupancy costs to increase as a percent of sales in fiscal 2003 compared to
fiscal 2002. Selling, general and administrative expenses increased $5.0 million or
8.8%, primarily from additional stores. As a percent of sales, these expenses
increased from 25.1% in fiscal 2002 to 26.1% in fiscal 2003. The increase was
caused by increases in utility expenses, advertising expense, professional
fees, incentive-based labor and employment-based insurance costs. Interest expense increased from $71,000 in fiscal 2002 to $307,000 in
fiscal 2003, as our expansion was partially funded by the increased use of our
credit facility. The effective tax rate as a percent of pretax income was 39.0% for fiscal
2003 and 40.5% for fiscal 2002. These rates differ from the statutory rate of
39.8% primarily as a result of permanent differences between financial
reporting and tax-basis income. The decrease was the result of reduced blended
state income tax rate, from our expansion into Nevada which has no income tax
and qualifying tax credits from California not earned in the same period in the
prior year. Net income decreased from $4.8 million or $0.69 per diluted share for
fiscal 2002, to $4.2 million or $0.60 per diluted share for fiscal 2003,
primarily due to higher selling, general and administrative expenses partially
offset by higher sales and improved merchandise margins. Liquidity and Capital Resources Our primary capital requirements are for inventory and store expansion,
relocation and remodeling. Historically, cash from operations, credit terms
from vendors and bank borrowing have met our liquidity needs. We believe that
these sources will be sufficient to fund currently anticipated cash
requirements for the foreseeable future. Net cash provided by operating activities of $7.4 million, $5.7 million
and $7.3 million for fiscal 2004, 2003 and 2002, respectively, was primarily
the result of net income, adjusted for depreciation and amortization, and
increases in bank overdraft combined with accounts payable offset by inventory
purchases. Typically, inventory levels increase from year to year due to the addition
of new stores. Inventories increased $3.3 million in fiscal 2004, $3.0 million
in 2003 and $5.4 million in 2002, primarily from the addition of three stores,
two stores and three stores respectively. In fiscal 2004, the increase in
inventory was partially offset by a 3.0% decrease in average inventory per
store compared to fiscal 2003 due to ongoing improvements in inventory
management. 12




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##### Table of Contents



Bank overdraft represents the total of checks in transit in excess of cash
on hand. Although there is no bank overdraft at March 31, 2004, the overdraft
is expected to continue to fluctuate due to the timing of vendor payments in
the future. Historically, accounts payable increases as inventory increases.
However, the timing of vendor payments near the end of the fiscal year does
influence this relationship. As a result of these timing differences, accounts
payable combined with the bank overdraft decreased $4.0 million and $2.9
million for fiscal 2004 and 2003, respectively, compared to an increase of $6.0
million for fiscal 2002. Other accrued expenses increased by $2.8 and $1.0 million for fiscal 2004
and 2003, respectively, primarily from increased sales. Fiscal 2002 decreased
$1.8 million, as expenses related to the settlement of litigation were accrued
during fiscal 2001, and subsequently paid in fiscal 2002. Net cash used in investing activities was $8.8 million, $5.9 million, and
$12.1 million for fiscal 2004, 2003 and 2002, respectively, primarily for
capital expenditures as shown below, in thousands: Year ended March 312004
    
    2003
    
    2002New stores
    
    $
    3,595
    
    
    $
    1,891
    
    
    $
    4,628Remodels
    
    
    1,778
    
    
    
    
    
    
    
    Existing stores
    
    
    850
    
    
    
    457
    
    
    
    1,710Information systems
    
    
    1,496
    
    
    
    2,233
    
    
    
    993Distribution center
    
    
    
    
    
    
    
    
    
    
    3,278Other
    
    
    1,082
    
    
    
    1,462
    
    
    
    1,518Total
    
    $
    8,801
    
    
    $
    6,043
    
    
    $
    12,127
 We have continued to open new stores, three in fiscal 2004, two in fiscal
2003 and three in fiscal 2002. In addition, we are beginning to remodel mature
stores, two in fiscal 2004. In fiscal 2002, the distribution center was
relocated. As a result of our ongoing growth and strategic initiatives, forecasted
capital expenditures for fiscal 2005 are expected to be approximately $14.2
million, which will be funded by cash flow from operations and our bank credit
line, as needed. Approximately $7.3 million of this amount will be used to
open five new stores. The remainder is primarily for expenditures on
information systems and existing store improvements, which include four
remodels. Depreciation is expected to be accelerated for the stores to be
remodeled, increasing depreciation expense for those stores by approximately
$700,000 through the remodel date. 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. Net cash provided by financing activities reflects advances and repayments
of borrowings under our revolving credit facility. As of March 31, 2004, 2003,
and 2002, we had no outstanding borrowings on this facility. Our amended credit facility with Bank of America, N.A. (the Lender)
provides for advances up to $20.0 million, increasing to $35.0 million for the
period October 1, through December 31, each year, less the amount of any
outstanding draws, up to a $4.0 million maximum in authorized letters of
credit. Interest accrues at the Lenders prime rate plus 0.25% (4.25% at March
31, 2004) or can be fixed for a period of time at the then current rate
established under one of several indices, all at our option. In addition,
there is an unused commitment fee of .20% per year, based on a weighted average
formula. This credit facility expires on September 30, 2005, and we expect to
renegotiate and extend the term of this agreement or obtain another form of
financing before that date. 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 several restrictive covenants. The principal operating
covenants require us to maintain certain minimum cash flow coverage and
debt-to-equity ratios and restrict the level of capital expenditures,
calculated on a quarterly basis. We are currently in compliance with the
covenants. We believe our credit line with the Lender is sufficient to 13




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##### Table of Contents



fund capital expenditures for the foreseeable future and to meet seasonal
fluctuations in cash flow requirements. However, unexpected conditions could
require us to request additional borrowing capacity from the Lender or alter
our expansion plans or operations. Our primary contractual obligations and commitments as of March 31, 2004,
are store leases with initial terms expiring from 2005 through 2020, which
typically provide for multiple five-year renewal options and employment
contracts: Operating
    
    EmploymentPayments due by period:
    
    Leases
    
    ContractsWithin 1 year
    
    $
    17,023,811
    
    
    $
    319,5002 - 3 years
    
    
    33,948,239
    
    
    
    639,0004 - 5 years
    
    
    31,537,754
    
    
    
    639,000After 5 years
    
    
    62,662,962
    
    
    
    1,597,500Total
    
    $
    145,172,766
    
    
    $
    3,195,000
 All retail store leases provide for base rent which may or may not be
credited against percentage rent based upon gross sales from the premises. In
some of the leases, base rental amounts increase as the lease term progresses
although, in some cases, we expect that percentage rent will more than offset
the base rental amounts. Generally, our purchase obligations are cancelable 45
days prior to shipment from our vendors. Letters of credit amounting to
$1,555,093 relating to purchase commitments were outstanding as of March 31,
2004 and expire within one year. No cash dividends have been declared on Common Stock in fiscal 2004. We
intend to retain earnings for use in the operation and expansion of our
business and, therefore, do not anticipate paying any cash dividends in the
foreseeable future. Critical Accounting Policies and Use of Estimates Our significant accounting policies are described in Note 2 to the
Financial Statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. In preparing the financial
statements, we are required to make estimates and judgments which affect the
results of its operations and the reported value of assets and liabilities.
Actual results may differ from these estimates. We believe that the following
summarizes critical accounting policies which require significant judgments and

estimates in the preparation of its consolidated financial statements. Inventory Valuation.Merchandise inventories are stated at the lower of
cost (first-in, first-out determined by the retail method of accounting) or
market. We consider cost to include direct cost of merchandise, plus internal
costs associated with merchandise procurement, storage and handling. 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. Revenue Recognition.Sales are recognized upon the purchase by customers
at our retail store locations, less merchandise returned by customers. We
provide a reserve for projected merchandise returns based on historical
experience. As the reserve for merchandise returns is based on estimates, the
actual returns could differ from the reserve, which could impact sales. Revenue
from gift cards, gift certificates and store merchandise credits is recognized
at the time of redemption. 14




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##### Table of Contents



Self-insurance.Property, general liability and workers compensation
insurance coverage is self-insured for various levels. Self-insurance accruals
include claims filed, as well as estimates of claims incurred but not yet
reported based on historical trends. Projections of future loss are inherently
uncertain because of the random nature of insurance claim occurrences and could
be significantly affected if future occurrences and claims differ from
historical trends. 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 product offerings. The gift cards and
certificates have no expiration dates. We record unredeemed gift cards or
certificates as a liability until the point of redemption. Our historical
experience indicates that not all issued gift cards or certificates get
redeemed. Accordingly, we periodically adjust the carrying value of the
related liability. We monitor redemption rates as a percent of issuances and
use this information to estimate probable redemption of all outstanding gift
cards or certificates. This calculation is based on historical experience, and
future redemption rates may vary if consumer purchasing practices change or if
the pattern of redeeming gift cards is significantly different than we have
experienced with gift certificates. 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. Accounting for Income Taxes.As part of the process of preparing the
financial statements, income taxes are estimated for each of the jurisdictions
in which 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 that future recovery is
not likely, a valuation allowance would be established. To the extent a
valuation allowance is established or increased, an expense will be included
within the tax provision in the income statement. Significant management judgment is required in determining the provision
for income taxes, deferred tax assets and liabilities and any valuation
allowance recorded against net deferred tax assets. Based on our history of
operating earnings, no valuation allowance has been recorded as of March 31,
2004. In the event that actual results differ from these estimates, or these
estimates are adjusted in future periods, a valuation allowance may need to be
established, which could impact our financial position and results of
operations. Provisions for income taxes for 2004, 2003 and 2002 are based on numerous
factors that are subject to audit by the Internal Revenue Service and the tax
authorities in the various jurisdictions in which we do business. Factors That May Affect Future Results Our short- 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 other
information contained in this report. This Annual Report on Form l0-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. 15




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##### Table of Contents



Economic Conditions.The retail industry historically has been subject to
substantial cyclical variations. The merchandise sold by us is generally a
discretionary expense for its customers. A recession in the general economy or
uncertainties regarding future economic prospects that affect consumer spending
habits has had, and may do so in the future have, a materially adverse effect
on our results of operations. Terrorism/War.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 and Nevada may make us more
vulnerable to such uncertainties than other comparable retailers who may not
have similar geographical concentration. Competition.The sporting goods business and the retail environment are
highly competitive, and 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. Regional Market Concentration.Currently, most of our stores are located
in Southern California and the balance are located in Northern California and
the Las Vegas area of Nevada. 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 past. When the region suffers an economic
downturn or when other adverse events occur, historically there has been an
adverse effect on our net sales and profitability and this could also affect
our ability to implement our planned growth. Several of our competitors
operate stores across the United States and, thus, are not as vulnerable to
such regional risks. Reliance on a Single Distribution Center.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 net
sales and profitability. Expansion Plan.Our continued growth depends on a strategy of opening
new, profitable stores in existing markets and in new regional markets. The
ability to successfully implement this growth strategy could be negatively
affected by any of the following:  
    
    suitable sites may not be available for leasing;
    
    we may not be able to negotiate acceptable lease terms;
    
    we might not be able to hire and retain qualified store personnel; and
    
    we might not have the financial resources necessary to fund our expansion plans. In addition, our expansion in new and existing markets may present
competitive, distribution and merchandising challenges that differ from the
current challenges. These potential new challenges include competition among
our stores, added strain on our distribution center, additional information to
be processed by our management information systems and diversion of management
attention from ongoing operations. We face additional challenges in entering
new markets, including consumers lack of awareness of 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, net 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 our planned growth, that new stores can be opened on a
timely basis, that such new stores can be operated on a profitable basis, or
that such growth will be manageable. 16




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##### Table of Contents



Future Capital Requirements.We may not be able to fund our future growth
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. Currently, we feel 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. Management of Growth.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, management information systems, inventory management,
distribution facilities and receivables management. 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. Dependence on Key Personnel.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. Seasonality.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, the months of November,
December and January represented between 30% and 34%, of our total net sales,
while winter-related products ranged from 15% to 19% of total net sales. The
operating results historically have been influenced by the amount and timing of
snowfall at the resorts frequented by 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 April 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. Variability of Quarterly Results.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. Closely Controlled Stock.At June 7, 2004, Norbert Olberz, the Companys
founder, Chairman Emeritus, director and Principal Stockholder, owned
approximately 65% of Sport Chalets outstanding Common Stock. Mr. Olberz
effectively has the ability to control the outcome on all matters requiring
stockholder approval, including, but not limited to, the election and removal
of directors, and any merger, consolidation or sale of all or substantially all
of our assets, and to control our management and affairs. 17




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Information Systems are Vulnerable.Our success, in particular 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. Our Business Depends on Anticipating Consumer Tastes.If we fail to
anticipate changes in consumer preferences, we may experience lower net sales,
higher inventory markdowns and lower margins. Products must appeal to a broad
range of consumers whose preferences cannot be predicted with certainty. These
preferences are also subject to change. Sporting goods are often subject to
short-lived trends, such as the short-lived popularity of in-line scooters.
Outdoor wear is significantly influenced by fashion. Our success depends upon
the ability to anticipate and respond in a timely manner to trends in sporting
goods merchandise and consumers participation in sports. Failure to identify
and respond to these changes may cause net sales to decline. In addition,
because we generally make commitments to purchase products from vendors up to
six months in advance of the proposed delivery, misjudging the market may
over-stock unpopular products and force inventory markdowns that could have a
negative impact on profitability, or have insufficient inventory of a popular
item that can be sold at full markup. Stock Price.Our Common Stock is thinly traded making it difficult to
sell large amounts. The market price of our Common Stock is likely to be
volatile and could be subject to significant fluctuations in response to
factors such as quarterly variations in operating results, operating results
which vary from the expectations of securities analysts and investors, changes
in financial estimates, changes in market valuations of competitors,
announcements by us or our competitors of a material nature, additions or
departures of key personnel, future sales of Common Stock and stock volume
fluctuations. Also, general political and economic conditions such as a
recession or interest rate fluctuations may adversely affect the market price
of our Common Stock. 18




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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 flows during the next fiscal year from a
change of 100 basis points in the interest rate would not be significant. 
 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. 
 ITEM 9A. CONTROLS AND PROCEDURES The Companys Chief Executive Officer, Craig Levra, and Chief Financial
Officer, Howard Kaminsky, with the participation of the Companys management,
carried out an evaluation of the effectiveness of the Companys disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon
that evaluation, the Chief Executive Officer and the Chief Financial Officer
believe that, as of the end of the period covered by this report, the Companys
disclosure controls and procedures are effective in making known to them
material information relating to the Company (including its consolidated
subsidiaries) required to be included in this report. Disclosure controls and procedures, no matter how well designed and
implemented, can provide only reasonable assurance of achieving an entitys
disclosure objectives. The likelihood of achieving such objectives is affected
by limitations inherent in disclosure controls and procedures. These include
the fact that human judgment in decision-making can be faulty and that
breakdowns in internal control can occur because of human failures such as
simple errors or mistakes or intentional circumvention of the established
process. There were no changes in the Companys internal controls over financial
reporting, known to the Chief Executive Officer or the Chief Financial Officer
that occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting. 19




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##### Table of Contents



PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 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 section entitled Proposal 1  Election of Directors
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 Proposal 1-Election of Directors contained in the Proxy
Statement. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information concerning certain relationships and related transactions
is incorporated herein by reference from the section entitled Proposal
1-Election of Directors-Certain Relationships and Related Transactions
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
Auditors contained in the Proxy Statement. 20




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##### Table of Contents



PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (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 - Not applicable.
 (b)
    
    Reports on Form 8-K - (1)
    
    Current report on Form 8-K filed with the
Securities and Exchange
Commission on May 26, 2004, regarding a change in the
auditors
of Sport Chalet, Inc. Employee Retirement Savings
Plan.(c)
    
    Exhibits - See Index on Page 43.
 21




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##### Table of Contents



Sport Chalet, Inc. Index to Audited Consolidated Financial Statements PageReport of Independent Registered Public Accounting Firm
    
    
    23Consolidated Statements of Income for each of the three years in the period ended March 31, 2004
    
    
    24Consolidated Balance Sheets as of March 31, 2004 and 2003
    
    
    25Consolidated Statements of Stockholders Equity for each of the three years in the period ended March 31, 2004
    
    
    26Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 2004
    
    
    27Notes to Consolidated Financial Statements
    
    
    28
 22




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##### Table of Contents



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 31, 2004 and 2003, and the related consolidated
statements of income, stockholders equity, and cash flows for each of the
three years in the period ended March 31, 2004. These consolidated financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these 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 audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sport Chalet,
Inc. at March 31, 2004 and 2003, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended March 31,
2004, in conformity with United States generally accepted accounting
principles. /s/ Ernst & Young LLP
 Los Angeles, California
May 21, 2004 23




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Sport Chalet, Inc. Consolidated Statements of Income Year ended March 312004
    
    2003
    
    2002Net sales
    
    $
    264,236,923
    
    
    $
    238,033,375
    
    
    $
    227,348,772Cost of goods sold, buying and occupancy costs
    
    
    184,579,034
    
    
    
    168,739,502
    
    
    
    162,090,636Gross profit
    
    
    79,657,889
    
    
    
    69,293,873
    
    
    
    65,258,136Selling, general and administrative expenses
    
    
    71,987,975
    
    
    
    62,167,771
    
    
    
    57,126,198Income from operations
    
    
    7,669,914
    
    
    
    7,126,102
    
    
    
    8,131,938Interest expense (income)
    
    
    189,924
    
    
    
    306,755
    
    
    
    70,791Income before taxes
    
    
    7,479,990
    
    
    
    6,819,347
    
    
    
    8,061,147Income tax provision
    
    
    2,933,000
    
    
    
    2,659,000
    
    
    
    3,267,000Net income
    
    $
    4,546,990
    
    
    $
    4,160,347
    
    
    $
    4,794,147Earnings per share:Basic
    
    $
    0.68
    
    
    $
    0.63
    
    
    $
    0.73Diluted
    
    $
    0.65
    
    
    $
    0.60
    
    
    $
    0.69Weighted average number of common shares
outstanding:Basic
    
    
    6,645,667
    
    
    
    6,614,544
    
    
    
    6,586,904Diluted
    
    
    7,008,380
    
    
    
    6,947,343
    
    
    
    6,994,514
 See accompanying notes. 24




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Sport Chalet, Inc. Consolidated Balance Sheets March 312004
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    3,071,648
    
    
    $
    4,230,003Accounts receivable, less allowance of $30,000 in 2004
and $25,000 in 2003
    
    
    1,158,934
    
    
    
    1,090,519Merchandise inventories
    
    
    54,172,055
    
    
    
    50,886,630Prepaid expenses and other current assets
    
    
    2,202,036
    
    
    
    2,038,588Refundable income taxes
    
    
    
    
    
    
    58,990Deferred income taxes
    
    
    2,443,945
    
    
    
    1,325,249Total current assets
    
    
    63,048,618
    
    
    
    59,629,979Furniture, equipment and leasehold improvements:Furniture, fixtures and office equipment
    
    
    27,503,694
    
    
    
    26,922,764Rental equipment
    
    
    3,955,873
    
    
    
    3,892,903Vehicles
    
    
    610,413
    
    
    
    553,670Leasehold improvements
    
    
    23,241,431
    
    
    
    20,610,68255,311,411
    
    
    
    51,980,019Less allowance for depreciation and amortization
    
    
    25,843,435
    
    
    
    24,884,70529,467,976
    
    
    
    27,095,314Deferred income tax
    
    
    83,704
    
    
    
    66,281Other assets
    
    
    101,036
    
    
    
    109,905Total assets
    
    $
    92,701,334
    
    
    $
    86,901,479Liabilities and stockholders equityCurrent liabilities:Bank overdraft
    
    $
    
    
    
    $
    5,764,355Accounts payable
    
    
    11,131,473
    
    
    
    9,353,444Salaries and wages payable
    
    
    3,354,368
    
    
    
    2,191,335Income taxes payable
    
    
    35,631
    
    
    
    Other accrued expenses
    
    
    7,830,961
    
    
    
    5,041,753Total current liabilities
    
    
    22,352,433
    
    
    
    22,350,887Deferred rent
    
    
    5,818,026
    
    
    
    5,276,696Commitments and contingenciesStockholders equity:Preferred stock, $.01 par value:Authorized shares  2,000,000Issued and outstanding shares  none
    
    
    
    
    
    
    Common stock, $.01 par value:Authorized shares  15,000,000Issued and outstanding shares  6,673,534 in 2004 and
6,628,334 in 2003
    
    
    66,735
    
    
    
    66,283Additional paid-in capital
    
    
    22,830,906
    
    
    
    22,121,369Retained earnings
    
    
    41,633,234
    
    
    
    37,086,244Total stockholders equity
    
    
    64,530,875
    
    
    
    59,273,896Total liabilities and stockholders equity
    
    $
    92,701,334
    
    
    $
    86,901,479
 See accompanying notes. 25




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Sport Chalet, Inc. Consolidated Statements of Stockholders Equity Common Stock
    
    Additional
    
    RetainedShares
    
    Amount
    
    Paid-in Capital
    
    Earnings
    
    TotalBalance at March 31, 2001
    
    
    6,580,001
    
    
    $
    65,800
    
    
    $
    21,842,340
    
    
    $
    28,131,750
    
    
    $
    50,039,890Exercise of stock options
    
    
    15,499
    
    
    
    155
    
    
    
    56,028
    
    
    
    
    
    
    
    56,183Tax benefit from exercise
of options
    
    
    
    
    
    
    
    
    
    
    34,249
    
    
    
    
    
    
    
    34,249Net income for 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,794,147
    
    
    
    4,794,147Balance at March 31, 2002
    
    
    6,595,500
    
    
    
    65,955
    
    
    
    21,932,617
    
    
    
    32,925,897
    
    
    
    54,924,469Exercise of stock options
    
    
    32,834
    
    
    
    328
    
    
    
    135,279
    
    
    
    
    
    
    
    135,607Tax benefit from exercise
of options
    
    
    
    
    
    
    
    
    
    
    53,473
    
    
    
    
    
    
    
    53,473Net income for 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,160,347
    
    
    
    4,160,347Balance at March 31, 2003
    
    
    6,628,334
    
    
    
    66,283
    
    
    
    22,121,369
    
    
    
    37,086,244
    
    
    
    59,273,896Exercise of stock options
    
    
    45,200
    
    
    
    452
    
    
    
    226,121
    
    
    
    
    
    
    
    226,573Tax benefit from exercise
of options
    
    
    
    
    
    
    
    
    
    
    34,498
    
    
    
    
    
    
    
    34,498Stock Compensation from
grant of shares from
Principal Stockholder
    
    
    
    
    
    
    
    
    
    
    448,918
    
    
    
    
    
    
    
    448,918Net income for 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,546,990
    
    
    
    4,546,990Balance at March 31, 2004
    
    
    6,673,534
    
    
    $
    66,735
    
    
    $
    22,830,906
    
    
    $
    41,633,234
    
    
    $
    64,530,875
 See accompanying notes. 26




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Sport Chalet, Inc. Consolidated Statements of Cash Flows Year ended March 312004
    
    2003
    
    2002Operating activitiesNet income
    
    $
    4,546,990
    
    
    $
    4,160,347
    
    
    $
    4,794,147Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    6,074,104
    
    
    
    5,479,628
    
    
    
    5,142,507Loss on disposal of equipment
    
    
    354,608
    
    
    
    31,730
    
    
    
    659,931Stock compensation
    
    
    448,918
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    (1,145,000
    )
    
    
    51,756
    
    
    
    580,856Tax benefit on employee stock options
    
    
    34,498
    
    
    
    53,473
    
    
    
    34,249Changes in operating assets and liabilities:Accounts receivable
    
    
    (68,415
    )
    
    
    (411,810
    )
    
    
    (159,032
    )Merchandise inventories
    
    
    (3,285,425
    )
    
    
    (2,970,077
    )
    
    
    (5,425,021
    )Prepaid expenses and other current assets
    
    
    (163,448
    )
    
    
    (281,581
    )
    
    
    (432,960
    )Refundable income taxes
    
    
    58,990
    
    
    
    389,770
    
    
    
    (448,760
    )Bank overdraft
    
    
    (5,764,355
    )
    
    
    (1,427,903
    )
    
    
    7,192,258Accounts payable
    
    
    1,778,029
    
    
    
    (1,461,797
    )
    
    
    (1,135,443
    )Salaries and wages payable
    
    
    1,163,033
    
    
    
    6,826
    
    
    
    (775,658
    )Other accrued expenses
    
    
    2,789,208
    
    
    
    1,033,545
    
    
    
    (1,764,802
    )Income taxes payable
    
    
    44,512
    
    
    
    
    
    
    
    (1,286,861
    )Deferred rent
    
    
    541,330
    
    
    
    1,091,071
    
    
    
    374,379Net cash provided by operating activities
    
    
    7,407,577
    
    
    
    5,744,978
    
    
    
    7,349,790Investing activitiesPurchases of furniture, equipment and leasehold
improvements
    
    
    (8,801,374
    )
    
    
    (6,029,631
    )
    
    
    (12,127,475
    )Other assets
    
    
    8,869
    
    
    
    105,564
    
    
    
    49,953Net cash used in investing activities
    
    
    (8,792,505
    )
    
    
    (5,924,067
    )
    
    
    (12,077,522
    )Financing activitiesProceeds from bank borrowings
    
    
    10,225,000
    
    
    
    57,563,424
    
    
    
    15,100,000Repayment of bank borrowings
    
    
    (10,225,000
    )
    
    
    (57,563,424
    )

    
    
    (15,100,000
    )Proceeds from exercise of stock options
    
    
    226,573
    
    
    
    135,607
    
    
    
    56,183Net cash provided by financing activities
    
    
    226,573
    
    
    
    135,607
    
    
    
    56,183Decrease in cash and cash equivalents
    
    
    (1,158,355
    )
    
    
    (43,482
    )
    
    
    (4,671,549
    )Cash and cash equivalents at beginning of year
    
    
    4,230,003
    
    
    
    4,273,485
    
    
    
    8,945,034Cash and cash equivalents at end of year
    
    $
    3,071,648
    
    
    $
    4,230,003
    
    
    $
    4,273,485Cash paid during the year for:Income taxes
    
    $
    3,940,000
    
    
    $
    2,164,000
    
    
    $
    4,587,516Interest
    
    
    189,925
    
    
    
    323,304
    
    
    
    91,727
 See accompanying notes. 27




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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 31 full service, specialty sporting goods superstores in California and
Nevada. The Company has 27 locations in Southern California, two in Northern
California and two in Nevada. The Chairman of the Board (the Principal Stockholder) owned
approximately 65% of the Companys outstanding Common Stock at March 31, 2004. Segments of an Enterprise The Company reports segment information in accordance with SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information (SFAS
131). Under SFAS 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 subsidiary. 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. 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 Merchandise inventories are stated at the lower of cost (first-in,
first-out determined by the retail method of accounting) or market and consist
principally of merchandise held for resale. The Company considers cost to
include the direct cost of merchandise, plus internal costs associated with
merchandise procurement, storage and handling. 28




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Sport Chalet, Inc. Notes to Consolidated Financial Statements (continued) 2. Summary of Significant Accounting Policies (continued) Furniture, Equipment and Leasehold Improvements Furniture, equipment, and leasehold improvements are stated on the basis
of cost. Depreciation of furniture 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: Furniture, fixtures and office equipment
    
    5-7 yearsRental equipment
    
    3 yearsVehicles
    
    5 yearsLeasehold improvements
    
    10-15 years
 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. Long Lived Assets The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Standards (SFAS) No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. The Company reviews
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is determined by a comparison of
the carrying amount of an asset to future undiscounted net cash flows expected
to be generated by the asset. If such assets are considered impaired the
impairment recognized is measured by comparing projected individual store
discounted cash flow to the asset carrying values. 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. 29




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##### Table of Contents



Sport Chalet, Inc. Notes to Consolidated Financial Statements (continued) 2. Summary of Significant Accounting Policies (continued) 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 an allowance for estimated returns. Issuance of gift
cards and store credits are recorded as a liability until redeemed for
merchandise. Vendor Allowances Vendor allowances include consideration received from vendors, such as
volume rebates and cooperative advertising funds. 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 good sold as the merchandise is sold. Advertising Costs Advertising costs are expensed as incurred. Advertising expense, net of
vendor reimbursement, amounted to $6,639,668, $6,125,976 and $5,145,848 for the
years ended March 31, 2004, 2003 and 2002, 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 The Company is a party to various lease agreements which require scheduled
rent increases over the noncancelable lease term. Rent expense for such leases
is recognized on a straight-line basis over the related lease term. The
difference between rent based upon scheduled monthly payments and rent expense
recognized on a straight-line basis is recorded as deferred rent. 30




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Sport Chalet, Inc. Notes to Consolidated Financial Statements (continued) 2. Summary of Significant Accounting Policies (continued) Earnings Per Share Earnings per share has been computed in accordance with Statement of
Financial Accounting Standards 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. A reconciliation of the numerators and denominators of the basic and
diluted EPS computations is illustrated below: March 312004
    
    2003
    
    2002(in thousands, except per share data)Basic EPS computation:Numerator
    
    $
    4,547
    
    
    $
    4,160
    
    
    $
    4,794Denominator:Weighted average
common shares
outstanding
    
    
    6,646
    
    
    
    6,615
    
    
    
    6,587Basic earnings per share
    
    $
    0.68
    
    
    $
    0.63
    
    
    $
    0.73Diluted EPS computation:Numerator
    
    $
    4,547
    
    
    $
    4,160
    
    
    $
    4,794Denominator:Weighted average
common shares
outstanding
    
    
    6,646
    
    
    
    6,615
    
    
    
    6,587Incremental shares
from assumed
conversion of
options
    
    
    363
    
    
    
    332
    
    
    
    408Total weighted average
common shares  assuming
dilution
    
    
    7,009
    
    
    
    6,947
    
    
    
    6,995Diluted earnings per share.
    
    $
    0.65
    
    
    $
    0.60
    
    
    $
    0.69
 31




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Sport Chalet, Inc. Notes to Consolidated Financial Statements (continued) 2. Summary of Significant Accounting Policies (continued) 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. Stock-Based Compensation The Company accounts for its employee stock option plan under the
recognition and measurement principles of Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. Under APB No. 25, no stock-based compensation is reflected in
net income, as all options granted under the plans had an exercise price equal
to the market value of the underlying Common Stock on the date of grant and the
related number of shares granted is fixed at that point in time. The Company used the Black-Scholes option-pricing model with the following
weighted-average assumptions in determining the fair value of options granted
in fiscal 2004, 2003 and 2002: weighted-average risk-free interest rates of
4.0%, 4.0% and 4.5%, respectively; dividend yields of 0%; weighted-average
volatility factors of the expected market price of the Companys Common Stock
of 0.33 for 2004, 0.41 for 2003 and 0.45 for 2002; and a weighted average
expected life of the option of five years. The following table presents the
effect on net income and basic and diluted net income per common share had the
Company adopted the fair value method of accounting for stock-based
compensation under Statement 123. Because additional options are expected to
be granted each year, the pro forma disclosures may not be representative of
pro forma effects on reported results for future periods. 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. Because the
Companys employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in managements
opinion, the existing models do not provide a reliable single measure of the
fair value of employee stock options. The weighted average fair value of options granted during fiscal 2004,
2003 and 2002 were $2.86, $3.45 and $4.16, respectively. 32




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Sport Chalet, Inc. Notes to Consolidated Financial Statements (continued) The following table illustrates the effect on net income and earnings per
share if the company had applied the fair value recognition provisions of SFAS
No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation (see Note 6): March 312004
    
    2003
    
    2002Net income as reported
    
    $
    4,546,990
    
    
    $
    4,160,347
    
    
    $
    4,794,147Add:Stock based compensation expense
included in reported net income, net
of related tax effects
    
    
    271,146
    
    
    
    
    
    
    
    Deduct:Total stock-based employee
compensation expense determined
under fair market value based method
for all awards, net of related tax
effects
    
    
    805,782
    
    
    
    391,938
    
    
    
    286,556Pro forma net income
    
    $
    4,012,354
    
    
    $
    3,768,409
    
    
    $
    4,507,591Net income per share  basic and dilutedAs reported  basic
    
    $
    0.68
    
    
    $
    0.63
    
    
    $
    0.73As reported  diluted
    
    $
    0.65
    
    
    $
    0.60
    
    
    $
    0.69Pro forma  basic
    
    $
    0.60
    
    
    $
    0.57
    
    
    $
    0.68Pro forma  diluted
    
    $
    0.50
    
    
    $
    0.55
    
    
    $
    0.66
 Reclassification Certain reclassifications were made to the prior year financial statements
to conform to current year presentation with regard to the consolidated
statement of cash flows. 33




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Sport Chalet, Inc. Notes to Consolidated Financial Statements (continued) 3. Loans Payable to Bank The Companys credit facility with Bank of America, N.A. (the Lender)
provides for advances up to $20.0 million, increasing to $35.0 million for the
period October 1, through December 31, each year, less the amount of any
outstanding draws, up to a $4.0 million maximum in authorized letters of
credit. Interest accrues at the Lenders prime rate plus 0.25% (4.25% at March
31, 2004) or can be fixed for a period of time at the then current rate
established under one of several indices, all at the Companys option. In
addition, there is an unused commitment fee of .20% per year, based on a
weighted average formula. This credit facility expires on September 30, 2005,
and the Company expects to renegotiate and extend the term of this agreement or
obtain another form of financing before that date. The Companys obligation to
the Lender is presently secured by a first priority lien on substantially all
of the Companys non-real estate assets, and the Company is subject to several
restrictive covenants. The principal operating covenants require the Company
to maintain certain minimum cash flow coverage and debt to equity ratios and
restrict the level of capital expenditures, calculated on a quarterly basis.
The Company currently is in compliance with the covenants. The Company
believes its credit line with the Lender is sufficient to fund capital
expenditures for the foreseeable future and to meet seasonal fluctuations in
cash flow requirements. However, unexpected conditions could require the
Company to request additional borrowing capacity from the Lender or alter its
expansion plans or operations. At March 31, 2004, there were no outstanding borrowings under the
facility. Letters of credit amounting to $1,555,093 relating to purchase
commitments were outstanding as of March 31, 2004. The weighted average interest rate on borrowings during the year ended
March 31, 2004 was 4.25%. 4. Commitments and Contingencies The Company leases all buildings (including its corporate office space and
three stores from the Companys Principal Stockholder) under certain
noncancelable operating lease agreements. Rentals of the retail locations in
most instances require the payment of contingent rentals based on a percentage
of sales in excess of minimum rental payment requirements. Most of the leases
obligate the Company to pay costs of maintenance, utilities, and property
taxes. Most leases contain renewal options of five years and certain leases
provide for various rate increases over the lease term. 34




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Sport Chalet, Inc. Notes to Consolidated Financial Statements (continued) 4. Commitments and Contingencies (continued) Future minimum payments, by year and in the aggregate, under those leases
with terms of one year or more, consist of the following at March 31, 2004: 2005
    
    $
    17,023,8112006
    
    
    17,159,2402007
    
    
    16,788,9992008
    
    
    16,711,7862009
    
    
    14,825,968Thereafter
    
    
    62,662,962$
    145,172,766
 Total rent expense amounted to $22,489,609, $19,994,428 and $16,912,075
for the years ended March 31, 2004, 2003 and 2002, respectively, of which
$2,488,790, $2,168,753 and $2,351,571, respectively, was paid on the leases
with the Principal Stockholder. Also, total rent expense includes contingent
rentals calculated as a percentage of gross sales over certain base amounts of
$1,918,429, $1,227,879 and $1,105,928 for the years ended March 31, 2004, 2003
and 2002, respectively. Included in the accompanying balance sheets are amounts
representing prepaid rent to the Principal Stockholder of $133,614 at March 31,
2004 and $128,959 at March 31, 2003. Pursuant to his employment contract dated
April 1, 2000, the Principal Stockholder is paid a base salary of $300,000 per
year until March 31, 2014. The Company is involved from time to time in routine legal matters
incidental to its business. In the opinion of the Companys management,
resolution of such matters will not have a material effect on its financial
position or results of operations. 35




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Sport Chalet, Inc. Notes to Consolidated Financial Statements (continued) 5. Income Taxes The provision for income taxes for the years ended March 31, 2004, 2003
and 2002 consists of the following: 2004
    
    2003
    
    2002Federal:Current.
    
    $
    3,279,000
    
    
    $
    1,843,000
    
    
    $
    2,018,000Deferred
    
    
    (968,000
    )
    
    
    210,000
    
    
    
    491,0002,311,000
    
    
    
    2,053,000
    
    
    
    2,509,000State:Current.
    
    
    799,000
    
    
    
    764,000
    
    
    
    668,000Deferred
    
    
    (177,000
    )
    
    
    (158,000
    )
    
    
    90,000622,000
    
    
    
    606,000
    
    
    
    758,000$
    2,933,000
    
    
    $
    2,659,000
    
    
    $
    3,267,000
 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 March 31, 2004 and
2003 are as follows: 2004
    
    2003Non-
    
    
    
    
    
    Non-Current
    
    current
    
    Current
    
    currentDeferred tax liabilities:Tax over book depreciation
    
    $
    
    
    
    $
    (649,290
    )
    
    $
    
    
    
    $
    (680,757
    )Total deferred tax liabilities
    
    
    
    
    
    
    (649,290
    )
    
    
    
    
    
    
    (680,757
    )Deferred tax assets:Uniform cost capitalization
    
    
    135,086
    
    
    
    
    
    
    
    96,435
    
    
    
    Inventory reserves
    
    
    720,206
    
    
    
    
    
    
    
    828,556
    
    
    
    Accrued vacation
    
    
    290,715
    
    
    
    
    
    
    
    271,143
    
    
    
    Self-insurance accruals
    
    
    662,522
    
    
    
    
    
    
    
    
    
    
    
    Allowance for bad debt and
sales returns
    
    
    121,495
    
    
    
    
    
    
    
    9,959
    
    
    
    State income taxes
    
    
    288,868
    
    
    
    
    
    
    
    
    
    
    
    Deferred rent
    
    
    
    
    
    
    732,994
    
    
    
    
    
    
    
    747,038Other
    
    
    225,053
    
    
    
    
    
    
    
    119,156
    
    
    
    Total deferred tax assets
    
    
    2,443,945
    
    
    
    732,994
    
    
    
    1,325,249
    
    
    
    747,038Total deferred tax asset
    
    $
    2,443,945
    
    
    $
    83,704
    
    
    $
    1,325,249
    
    
    $
    66,281
 36




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Sport Chalet, Inc. Notes to Consolidated Financial Statements (continued) 5. Income Taxes (continued) A reconciliation of the provision for income taxes for the years ended
March 31, 2004, 2003 and 2002 with the amount computed using the federal
statutory rate follows: 2004
    
    2003
    
    2002Statutory rate, 34% applied to income
before taxes
    
    $
    2,543,000
    
    
    $
    2,319,000
    
    
    $
    2,741,000State taxes, net of federal tax effect
    
    
    436,000
    
    
    
    398,000
    
    
    
    500,000Other, net
    
    
    (46,000
    )
    
    
    (58,000
    )
    
    
    26,000$
    2,933,000
    
    
    $
    2,659,000
    
    
    $
    3,267,000
 6. Award Plan and Stock Award Award Plan The Company has an Incentive Award Plan (1992 Plan) under which stock
options or other awards to purchase or receive up to 1,500,000 shares of the
Companys Common Stock may be granted to employees and non-employee directors.
The option price per share shall not be less than fair market value at the date
of grant. Options vest over three- to five-year periods and if not exercised,
expire five to ten years from the date of grant. The 1992 Plan also provides
for issuance by the Company of stock appreciation rights, restricted stock and
performance awards. At March 31, 2004 and 2003, there were 420,799 and 431,999
remaining shares, respectively, reserved for future issuance and available for
grant under the Plan. The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation (Statement 123), as amended by SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure-an amendment of FASB
Statement No. 123 (Statement 148). Statement 148 requires prominent
disclosures in annual and interim financial statements regarding the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company measures compensation expense for its
stock option awards under the intrinsic value method in accordance with the
provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25) and related interpretations. APB 25 requires
compensation expense to be recognized based on the excess, if any, of the
quoted market price of the stock at the date of the grant and the amount an
employee must pay to acquire the stock. Options awarded under the Companys
stock option plans are granted with an exercise price equal to the fair market
value on the date of the grant. 37




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Sport Chalet, Inc. Notes to Consolidated Financial Statements (continued) 6. Award Plan and Stock Award (continued) Award Plan (continued) On December 20, 2002, the Companys founder and Principal Stockholder,
Norbert Olberz, and his wife, through a family trust, granted an option to
purchase all of the shares (then 4,400,510) of the Companys Common Stock held
by the family trust to a newly formed limited liability company (the LLC).
The managers of the LLC currently are the Companys Chairman and Chief
Executive Officer and the Companys Chief Financial Officer, who own 59.1% and
39.4% respectively, of the interests in the LLC. Other senior executives of the
Company own the remaining interest in the LLC. Under the terms of the grant,
the option becomes exercisable for 181 days from the date of death (vesting
or measurement date) of Mr. Olberz, at an exercise price equal to the market
price on the date of Mr. Olberz death. The option terminates by mutual
consent between the family trust and the members of the LLC or in the event
that the Companys Chairman and Chief Executive Officer ceases to be the Chief
Executive Officer of the Company. The family trust may borrow against the
shares until the vesting date and may also sell shares provided that the family
trust maintains ownership of at least 51% of the Companys shares on a fully
diluted basis. On June 11, 2004, the option was amended to extend the
exercisable period from 181 days to 365 days from the date of death. For financial accounting purposes, the grant of the option by the
Principal Stockholder of the Company is being treated in a manner consistent
with a grant of an option by the Company. The Company has also treated the
grant of the option to the LLC as if the grant was made directly to employees
of the Company, as the members of the LLC are employees of the Company and no
non-employee services will be provided to the Company by the LLC or members of
the LLC and, for economic and tax purposes, the LLC is a pass-through entity in
that all income or losses of the LLC are passed through to its individual
members. In addition, vesting of the option, except for the Companys Chief
Financial Officer, is contingent upon continued employment. Because the
option has been granted with an exercise price equal to the market price on the
measurement date, under APB No. 25, the Company has not been required to
recognize compensation expense in connection with the grant of the option. The
fair value of the option is being recognized as compensation expense for
purposes of calculating pro forma net income and pro forma earnings per share
as required by FASB Statement No.123, Accounting for Stock-Based
Compensation. The fair value for the option was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: weighted-average risk-free interest rate of 4.0%,
dividend yields of 0%; weighted-average volatility factors of the expected
market price of the Companys Common Stock of 0.332 and an expected life of the
option of 365 days. For purposes of pro forma disclosures displayed in Note 2 
Summary of Significant Accounting Policies: Stock Based Compensation, the
estimated fair value at the date of grant was $3,872,000 for the option and is
being amortized to expense over the options vesting period, which has been
estimated at nine years. 38




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##### Table of Contents



Sport Chalet, Inc. Notes to Consolidated Financial Statements (continued) 6. Award Plan and Stock Award (continued) Award Plan (continued) A summary of the Companys stock option activity and related information
follows: March 31, 2004
    
    March 31, 2003
    
    March 31, 2002Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseOptions
    
    Price
    
    Options
    
    Price
    
    Options
    
    PriceOutstanding at
beginning of year
    
    
    939,667
    
    
    $
    5.09
    
    
    
    912,501
    
    
    $
    5.18
    
    
    
    851,333
    
    
    $
    4.57Granted
    
    
    43,000
    
    
    
    7.22
    
    
    
    60,000
    
    
    
    7.77
    
    
    
    154,000
    
    
    
    8.54Exercised
    
    
    (45,200
    )
    
    
    5.01
    
    
    
    (32,834
    )
    
    
    4.13
    
    
    
    (15,499
    )
    
    
    3.62Forfeited
    
    
    (31,800
    )
    
    
    7.10
    
    
    
    
    
    
    
    
    
    
    
    (77,333
    )
    
    
    5.67Outstanding at end
of year
    
    
    905,667
    
    
    $
    5.13
    
    
    
    939,667
    
    
    $
    5.09
    
    
    
    912,501
    
    
    $
    5.18Exercisable at end
of year
    
    
    727,534
    
    
    $
    4.58
    
    
    
    706,467
    
    
    $
    4.35
    
    
    
    704,301
    
    
    $
    4.71
 39




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##### Table of Contents



Sport Chalet, Inc. Notes to Consolidated Financial Statements (continued) 6. Award Plan and Stock Award (continued) The following table provides certain information with respect to stock
options outstanding and stock options exercisable at year end 2004: Stock Options Outstanding
    
    Stock Options ExercisableWeightedWeighted
    
    Average
    
    
    
    
    
    WeightedRange of Exercise
    
    
    
    
    
    Average
    
    Remaining
    
    
    
    
    
    AveragePrices
    
    Shares
    
    Exercise Price
    
    Life
    
    Shares
    
    Exercise PriceUnder $3.00
    
    
    147,000
    
    
    $
    2.38
    
    
    
    1.9
    
    
    
    147,000
    
    
    $
    2.38$3.00-$4.99
    
    
    517,667
    
    
    
    4.59
    
    
    
    4.5
    
    
    
    479,667
    
    
    
    4.58$5.00-$6.99
    
    
    20,000
    
    
    
    5.81
    
    
    
    1.8
    
    
    
    15,000
    
    
    
    5.44$7.00-$8.99
    
    
    211,000
    
    
    
    8.22
    
    
    
    6.6
    
    
    
    83,533
    
    
    
    8.28Above $8.99
    
    
    10,000
    
    
    
    9.15
    
    
    
    4.2
    
    
    
    8,333
    
    
    
    9.16905,667
    
    
    $
    5.16
    
    
    
    4.5
    
    
    
    733,533
    
    
    $
    4.63
 Stock Award During the year ended March 31, 2004, the Principal Stockholder and his
spouse, through their family trust, awarded 38,600 shares to certain
executives. Award recipients were not required to pay consideration for the
shares. The fair market value of the shares, $448,918, was treated as a capital
contribution by the Principal Stockholder and expensed as compensation to
recipients as of March 31, 2004. The Company granted loans to employees to pay the income taxes associated
with certain stock awards granted and expensed in fiscal 1999 and fiscal 2001.
These loans bear interest at 6% and were originally payable over four years and
secured by the awarded shares. In 2003 a two-year extension was granted. At
March 31, 2004 and 2003 the loan balance was $101,036 and $109,905,
respectively. 7. Employee Retirement Plan Effective January 1, 1997, the Company adopted the Sport Chalet, Inc.
Employee Retirement Savings Plan (the 401(k) Plan). All employees who have
been employed by the Company for at least three months of service and are at
least 21 years of age are eligible to participate. Employees may contribute
from 2% to 100% of their eligible earnings to the 401(k) Plan, subject to a
statutorily prescribed annual limit. The Company matches 25% of employee
contributions up to 1% of the employees current compensation. The Company
expense related to this plan was $152,817, $147,291 and $123,158 for the years
ended March 31, 2004, 2003 and 2002, respectively. 40




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Sport Chalet, Inc. Notes to Consolidated Financial Statements (continued) 8. Quarterly Results of Operations (Unaudited) A summary of the unaudited quarterly results of operations follows (dollar
amounts in thousands, except per share amounts): First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    QuarterFiscal 2004Net sales
    
    $
    53,309
    
    
    $
    61,819
    
    
    $
    79,705
    
    
    $
    69,404Gross profit
    
    
    14,773
    
    
    
    18,513
    
    
    
    25,961
    
    
    
    20,410Income from operations
    
    
    (948
    )
    
    
    2,933
    
    
    
    5,154
    
    
    
    532Net income
    
    
    (593
    )
    
    
    1,728
    
    
    
    3,084
    
    
    
    328Basic earnings per share
    
    $
    (0.09
    )
    
    $
    0.26
    
    
    $
    0.46
    
    
    $
    0.05Diluted earnings per share
    
    $
    (0.09
    )
    

    $
    0.25
    
    
    $
    0.44
    
    
    $
    0.05
 First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    QuarterFiscal 2003Net sales
    
    $
    51,205
    
    
    $
    56,327
    
    
    $
    72,271
    
    
    $
    58,230Gross profit
    
    
    13,781
    
    
    
    16,786
    
    
    
    22,644
    
    
    
    16,083Income from operations
    
    
    182
    
    
    
    2,445
    
    
    
    4,352
    
    
    
    147Net income
    
    
    84
    
    
    
    1,417
    
    
    
    2,606
    
    
    
    53Basic earnings per share
    
    $
    0.01
    
    
    $
    0.21
    
    
    $
    0.39
    
    
    $
    0.01Diluted earnings per share
    
    $
    0.01
    
    
    $
    0.20
    
    
    $
    0.38
    
    
    $
    0.01
 9. Other Accrued Expenses Other accrued expenses consist of the following: March 312004
    
    2003Amount due to customers
    
    $
    2,361,886
    
    
    $
    1,973,474Accrued sales tax
    
    
    1,784,623
    
    
    
    1,400,646Self-insurance accruals
    
    
    1,663,192
    
    
    
    Other
    
    
    2,021,260
    
    
    
    1,667,633Other accrued expenses
    
    $
    7,830,961
    
    
    $
    5,041,753
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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized, on June 21, 2004. SPORT CHALET, INC.
(Registrant) By:
    /s/ Craig L. LevraCraig L. Levra, Chairman,Chief Executive Officer and President
(Principal Executive Officer) By:
    /s/  Howard K. KaminskyHoward K. Kaminsky, Executive Vice President Finance, Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated above. /s/ Norbert OlberzNorbert Olberz,Chairman Emeritus and Director/s/ John R. AttwoodJohn R. Attwood, Director/s/ Donald J. HowardDonald J. Howard, Director/s/ Al D. McCreadyAl D. McCready, Director/s/ Eric S. OlberzEric S. Olberz, Director/s/ Kenneth OlsenKenneth Olsen, Director/s/ Frederick H. Schneider.Frederick H. Schneider, Director
 42




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EXHIBIT INDEX EXHIBITNUMBER
    
    DESCRIPTION3.1
    
    Amended and Restated Certificate of Incorporation.
    
    
    (1
    )3.2
    
    Bylaws, of Sport Chalet, Inc., as amended.
    
    
    (2
    )4.1
    
    Form of Certificate for the Common Stock.
    
    
    (3
    )10.1
    
    1992 Incentive Award Plan of the Company.
    
    
    (4
    )10.1.1
    
    2004 Equity Incentive Plan.
    
    
    (17
    )10.2
    
    Form of Nonemployee Director Stock Option Incentive Award Agreement.
    
    
    (4
    )10.3
    
    Form of Key Employee Stock Option Incentive Award Agreement.
    
    
    (4
    )10.4
    
    Form of Director and Officer Indemnification Agreement.
    
    
    (4
    )10.5
    
    Form of Employee Stock Option Incentive Award Agreement.
    
    
    (5
    )10.6
    
    Lease for La Canada stores dated as of September 1, 1992, between the Company and La
Canada Properties, Inc.
    
    
    (6
    )10.7
    
    Lease for Huntington Beach store dated as of August 25, 1994, between the Company and
Huntington Beach Properties, Inc.
    
    
    (7
    )10.8
    
    Lease for Porter Ranch store dated as of May 7, 1999, between the Company and North San
Fernando Valley Properties, Inc.
    
    
    (9
    )10.9
    
    Lease for La Canada offices dated a of October 1, 2002, between the Company and La Canada
Properties, Inc.
    
    
    (15
    )10.10
    
    Business Loan Agreement dated as of June 19, 1998, between the Company and Bank of
America, N.A.
    
    
    (8
    )10.11
    
    Amendment No. 2 to Business Loan Agreement dated as of June 19,1998, between the Company
and Bank of America, N.A.
    
    
    (11
    )10.12
    
    Amendment No. 3 to Business Loan Agreement dated as of November 20, 2001, between the
Company and Bank of America, N.A.
    
    
    (12
    )10.13
    
    Amendment No. 4 to Business Loan Agreement dated as of June 10, 2002, between the Company
and Bank of America, N.A.
    
    
    (13
    )10.14
    
    Amendment No. 5 to Loan Agreement, dated as of September 25, 2003, between the Company
Bank of America, N.A.
    
    
    (14
    )10.15*
    
    Employment Agreement dated as of April 1, 2000, between the Company and Norbert J. Olberz.
    
    
    (10
    )10.16*
    
    Employment agreement dated as of November 15, 2002, between the Company and Craig L. Levra.
    
    
    (16
    )10.17*
    
    Employment agreement dated as of November 15, 2002, between the Company and Howard K.
Kaminsky.
    
    
    (16
    )10.18*
    
    Employment agreement dated as of November 15, 2002, between the Company and Dennis D.
Trausch.
    
    
    (16
    )14.1
    
    Code of Conduct
    
    
    23.1
    
    Report of Independent Registered Public Accounting Firm.
    
    
    
 43




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##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION31.1
    
    Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, Adopted
Pursuant to Sector 202 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 Sector 202 of the Sarbanes-Oxley Act of 2002.
    
    
    32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
    
    
    
  
    
    Filed as part of this Annual Report on Form 10-K.*
    
    Constitute management contracts, or compensatory plans or arrangements, which are required
to be filed Pursuant to Item 601 of Regulation S-K.(1)
    
    Incorporated by reference to Exhibit 3.1 to the Companys Registration Statement on Form
S-1 (Registration Statement No. 33-53120).(2)
    
    Incorporated by reference to Exhibit 3.2 to the Companys Registration Statement on Form
S-8 (Registration Statement No. 333-107683).(3)
    
    Incorporated by reference to Exhibit 4.1 to the Companys Registration Statement on Form
S-1 (Registration Statement No. 33-53120).(4)
    
    Incorporated by reference to Exhibits 10.19 through 10.23, to the Companys Registration
Statement on Form S-1 (Registration Statement No. 33-53120).(5)
    
    Incorporated by reference to Exhibits 4.5 to the Companys Registration Statement on Form
S-8 (Registration Statement No. 33-61612).(6)
    
    Incorporated by reference to Exhibit 10.1 to the Companys Registration Statement on Form
S-1 (Registration Statement No. 33-53120).(7)
    
    Incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q
for the quarter ending September 30, 1994.(8)
    
    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.(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 10.45 to the Companys Annual Report on Form 10-K for
the fiscal year ended March 31, 2000.(11)
    
    Incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q
for the quarter ending June 30, 2000.(12)
    
    Incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q
for the quarter ending December 31, 2001.(13)
    
    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.(14)
    
    Incorporated by reference to Exhibits 10.1 to the Companys Quarterly Report on Form 10-Q
for the quarter ending September 30, 2003.(15)
    
    Incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q
for the quarter ending September 30, 2002.(16)
    
    Incorporated by reference to Exhibits 10.1, 10.2 and 10.3 to the Companys Quarterly
Report on Form 10-Q for the quarter ending December 31, 2002.(17)
    
    Incorporated by reference to Appendix D to the Companys definitive proxy statement for
the 2004 annual meeting of stockholders. 44