##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended March 31, 2001

OR

|      |  |                                                                                         
|----- |  | ----------------------------------------------------------------------------------------
|[   ] |  | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________________ to ____________________.

Commission file number: 0-20736

Sport Chalet, Inc.

(Exact name of registrant as specified in its charter)


|                                                                                      |  |                                                  
|------------------------------------------------------------------------------------- |  | -------------------------------------------------
|Delaware(State or other jurisdiction of incorporation or organization)                |  | 95-4390071(I.R.S. Employer Identification Number)
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|920 Foothill Boulevard, La Canada, California(Address of principal executive offices) |  | 91011(Zip code)                                  

Registrants telephone number, including area code: (818) 790-2717

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]

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 11, 2001 was approximately $15.8 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
11, 2001 was 6,580,001.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants definitive proxy statement relating to its 2001
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.

1



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TABLE OF CONTENTS



|                                      |                                                                                               |                                    |  |  |  |  |  | 
|------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------- |  |  |  |  |  | 
|PART I                               
|                                      | ITEM 1. BUSINESS                                                                             
|                                      | ITEM 2. PROPERTIES                                                                           
|                                      | ITEM 3. LEGAL PROCEEDINGS                                                                    
|                                      | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS                                
|PART II                              
|                                      | ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                
|                                      | ITEM 6. SELECTED FINANCIAL DATA                                                              
|                                      | ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                      | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|                                      | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|                                      | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III                             
|                                      | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|                                      | ITEM 11. EXECUTIVE COMPENSATION                                                              
|                                      | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|                                      | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|PART IV                              
|                                      | ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                     
|Index to Audited Financial Statements
|                                      |                                                                                               | Report of Independent Auditors    
|                                      |                                                                                               | Statements of Income              
|                                      |                                                                                               | Balance Sheets                    
|                                      |                                                                                               | Statements of Stockholders' Equity
|                                      |                                                                                               | Statements of Cash Flows          
|SIGNATURES                           
|EXHIBIT INDEX                        
|EXHIBIT 10.51                        
|EXHIBIT 23                           



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PART I

This Annual Report on Form 10-K contains statements which 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. Those 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. (the Company), founded in 1959, is a leading operator
of full service, specialty sporting goods superstores in Southern California.
Including the just opened store in the City of Palmdale, the Company now has 24
locations, eleven located in Los Angeles County, five in Orange County, three
in each of San Diego and San Bernardino Counties, and one in each of Riverside
and Ventura Counties. These stores average 38,000 square feet in size. In
addition, the Company operates a retail e-commerce store through Global Sports
Interactive at www.sportchalet.com. The Companys executive offices are located
at 920 Foothill Boulevard, La Canada, California 91011, and its telephone
number is (818) 790-2717.

Operating History and Growth Plan

The Companys growth strategy contemplates opening new stores in Southern
California as suitable locations are found over the next several fiscal years.
Over the past two years the Company has opened five new stores and relocated
two. The Company currently plans to open at least two stores in Southern
California during the next 12 months. In addition, for the first time, the
Company will expand outside of Southern California, entering the Las Vegas,
Nevada market during the upcoming fiscal year. Future store openings are
subject to availability of satisfactory store locations based on local
competitive conditions, site availability and cost and the Companys ability to
provide and maintain high service levels and quality brand merchandising at
competitive prices.

Store openings are expected to have a favorable impact on sales volume,
but will negatively affect profit in the short term. New stores tend to have
higher costs in the early years of operation, due primarily to extra labor used
to open new stores, reduced sales on a per employee basis until the store
matures and increased promotional costs. As the store matures, sales tend to
level off and expenses decline as a percentage of sales. The Companys stores
generally require three years to attract a stable, mature customer base. The
Company estimates the cost of opening a new store to be approximately $1.8
million consisting primarily of the investment in inventory (net of average
vendor payables), the cost of furniture, fixtures and equipment and pre-opening
expenses, such as the costs associated with training employees and stocking the
store.

The Companys sales are dependent to some degree on the economic
environment and level of consumer spending in Southern California. Although
business reports regarding the Southern California area suggest a retail
environment conducive to the Companys expansion plans, this benefit may be
partially offset by higher rental expenses for new stores as the real estate
market for retail locations is very competitive.

The Company has developed an information technology strategic plan calling
for: (i) the replacement of all point of sale software and equipment, (ii)
store systems to handle rental equipment, customer repairs, special orders and
team sales, (iii) installation of inventory replenishment software, and (iv)
the general upgrading of back office systems. During fiscal 2000 and 2001,
$800,000 and $3.7 million, respectively, of capital expenditures were incurred
in implementing this plan. To date all point of sale

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software and equipment has been replaced, a replenishment system has been
selected and installation is underway, specifications for rentals, special
orders and team sales have been written and coding has begun. The Company
expects to spend $2.4 million in fiscal 2002 toward this plan with the
expectation of ultimately achieving better customer service through faster
checkout, more targeted marketing based on information collected and efficiency
gains through improved inventory control.

In 1992, with 12 stores, the Company leased its current distribution
center that provides for approximately 150,000 square feet of maximum capacity.
During fiscal 2001 the Company conducted a study of its current and future
distribution needs and determined that a new facility is required to support
growth plans. The Company is currently looking for such a facility and expects
to move to a new distribution center during the fourth quarter of fiscal 2002.
The Company expects to spend approximately $3.3 million in capital expenditures
for this new facility.

Operating Strategies

The Companys 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, the
Companys stores offer over 35 services for the serious sports enthusiast,
including custom golf club fitting and repair, ski rental and repair, full dive
training and certification programs, SCUBA charters, team sales, racquet
stringing, and bicycle tune up and repair. Each shop is staffed by sales
associates with expertise in the use of the merchandise they sell, permitting
the Company to offer its customers a high level of knowledgeable service.
Average sales per store were $9.3 million for fiscal 2001.

The Company purchases merchandise from over 1,200 vendors. The Companys
largest vendor, Nike, Inc., accounted for approximately 9% and 8% of the
Companys total inventory purchases for fiscal 2001 and 2000, respectively.
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,
|          |       |  |                     
|          |       |  | 2001                 |     | 2000 |  | 1999
|          |       |  |                      |     |      |  |     
|Hardlines |       |  | 55                   | %   |      |  | 55   | %   |   |  | 54 | %  
|         
|         
|         
|         
|Apparel   |       |  | 28                   | %   |      |  | 27   | %   |   |  | 28 | %  
|         
|         
|         
|         
|Footwear  |       |  | 17                   | %   |      |  | 18   | %   |   |  | 18 | %  
|          |       |  |                      |     |      |  |      |     |   |  |    |    
|          | Total |  |                      | 100 | %    |  |      | 100 | % |  |    | 100 | %
|          |       |  |                      |     |      |  |      |     |   |  |    |    

The market for retail sporting goods is seasonal in nature. The Companys
highest sales levels and operating profit occur predominantly during the winter
months of November, December and January, which overlap the third and fourth
fiscal quarters ended December 31 and March 31. As with other retailers, the
Companys business is heavily affected by sales of merchandise during the
Christmas season. In addition, the Companys product mix has historically
emphasized cold weather sporting goods merchandise, particularly ski-related
products, thus boosting sales levels during the winter months and often
increasing the seasonality of the Companys business. Sales of winter related
products ranged from 17% to 19% of the Companys net sales in recent years. In
each of fiscal 1999, 2000 and 2001, 31%, 31% and 32%, respectively, of the
Companys sales were attributable to the months of November, December and
January. Management anticipates that this seasonal trend in sales will
continue. No assurance can be provided that any substantial decrease in sales
for the winter months, which could be influenced by the amount and timing of
snowfall at the resorts frequented by those living in Southern California, will
not have a material adverse effect on the Companys profitability. However, in
order 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.

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The Company uses the Sport Chalet name as a service mark in connection
with its business operations. The Company has registered Sport Chalet as a
service mark with the State of California, and has obtained federal
registration for certain purposes. The Company also retains common law rights
to the name, which it has used since 1959. The lack of federal registration
for certain purposes might pose a problem if the Company 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. The Company competes with many different types of retail stores,
including full-line sporting goods chains (e.g., Gart Sports, The Sports
Authority, Chicks, Big 5), specialty stores (e.g., REI, Footaction, Turners,
Foot Locker, West Marine), supplier owned stores (e.g., Nike, Reebok), discount
and department stores (e.g., Wal-Mart, Nordstrom, Macys, Target, Sears) as
well as catalog and internet based retailers. The Companys industry is
dominated by sporting goods superstore retailers, i.e. full-line sporting goods
chains with stores typically larger than 30,000 square feet often located in
freestanding locations. Superstore chains generally provide a greater
selection of higher quality merchandise than other retailers, while remaining
price competitive. Historically, the Company has provided 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 Southern
California area.

The Company believes that its broad selection of high quality name brands
and numerous specialty items at competitive prices, showcased by its
well-trained sales associates, distinguish it from discount and department
stores, traditional and specialty sporting goods stores and other superstore
operations. Management believes the Companys format takes advantage of
several significant trends and conditions in the sporting goods industry. These
trends 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.

The Company operates its online store through Global Sports Interactive
(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. The Company receives a license
fee based on a percentage of sales generated by the website.

Employees

As of March 31, 2001, the Company had 1,767 full and part-time employees,
1,558 of whom were employed in the Companys stores and 209 of whom were
employed in warehouse and delivery operations or in executive office positions.
None of the employees are unionized. The Company believes that its employee
relations are good. A typical store has approximately 75 employees, of whom 15
to 30 are in the store at any given time on a normal operating basis.
Generally, each store employs a store manager, two assistant managers, three
area managers and several department heads, who supervise the sales associates
in customer service, merchandising, and operations. Additional part-time
employees are typically hired during the holiday and other peak seasons.

4



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ITEM 2. PROPERTIES

At June 22, 2001, the Company had 24 store locations. The following table
summarizes the key information on the Companys retail properties:

|                     |       |              |               |                      |  |  |        |         | 
|-------------------- | ----- | ------------ | ------------- | -------------------- |  |  | ------ | ------- | 
|Location             |       | Opening Date |               | Gross Square Footage
|                     |       |              |               |                     
|La Canada (1)        |       |              | June 1960     |                      |  |  | 40,300 |        
|                    
|                    
|                    
|                    
|Huntington Beach (2) |       |              | June 1981     |                      |  |  | 50,000 |        
|                    
|                    
|                    
|                    
|La Jolla             |       |              | June 1983     |                      |  |  | 20,000 |        
|                    
|                    
|                    
|                    
|Mission Viejo        |       |              | August 1986   |                      |  |  | 30,000 |        
|                    
|                    
|                    
|                    
|Point Loma (2)       |       |              | November 1987 |                      |  |  | 34,600 |        
|                    
|                    
|                    
|                    
|Valencia (2)         |       |              | November 1987 |                      |  |  | 40,000 |        
|                    
|                    
|                    
|                    
|Marina Del Rey       |       |              | November 1989 |                      |  |  | 42,300 |        
|                    
|                    
|                    
|                    
|Beverly Hills        |       |              | November 1989 |                      |  |  | 38,500 |        
|                    
|                    
|                    
|                    
|Brea (2)             |       |              | April 1990    |                      |  |  | 34,200 |        
|                    
|                    
|                    
|                    
|Oxnard (2)           |       |              | June 1990     |                      |  |  | 40,000 |        
|                    
|                    
|                    
|                    
|West Hills (2)       |       |              | June 1991     |                      |  |  | 44,000 |        
|                    
|                    
|                    
|                    
|Burbank              |       |              | August 1992   |                      |  |  | 45,000 |        
|                    
|                    
|                    
|                    
|Montclair (3)        |       |              | November 1992 |                      |  |  | 18,000 |        
|                    
|                    
|                    
|                    
|Torrance             |       |              | November 1993 |                      |  |  | 38,700 |        
|                    
|                    
|                    
|                    
|Glendora             |       |              | November 1993 |                      |  |  | 40,000 |        
|                    
|                    
|                    
|                    
|Rancho Cucamonga (2) |       |              | June 1994     |                      |  |  | 36,000 |        
|                    
|                    
|                    
|                    
|Irvine (2)           |       |              | November 1995 |                      |  |  | 35,000 |        
|                    
|                    
|                    
|                    
|Laguna Niguel        |       |              | November 1997 |                      |  |  | 40,000 |        
|                    
|                    
|                    
|                    
|Mission Valley       |       |              | June 1998     |                      |  |  | 47,000 |        
|                    
|                    
|                    
|                    
|Long Beach           |       |              | May 1999      |                      |  |  | 43,000 |        
|                    
|                    
|                    
|                    
|Porter Ranch         |       |              | July 1999     |                      |  |  | 43,000 |        
|                    
|                    
|                    
|                    
|Temecula             |       |              | October 1999  |                      |  |  | 40,000 |        
|                    
|                    
|                    
|                    
|Chino Hills          |       |              | July 2000     |                      |  |  | 40,000 |        
|                    
|                    
|                    
|                    
|Palmdale (2)         |       |              | June 2001     |                      |  |  | 38,000 |        
|                     |       |              |               |                      |  |  |        |        
|                     | Total |              |               |                      |  |  |        | 917,600 | 
|                     |       |              |               |                      |  |  |        |        



---

|(1) |  | The original store opened in 1959. The existing store includes four nearby
facilities.
|--- |  | --------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Includes swimming pool facility for SCUBA and kayaking instruction.                   
|   
|   
|   
|   
|(3) |  | Outlet store relocated to a nearby regional shopping center in October
2000.          

5



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All retail facilities are located on leased property. The initial terms
of the retail leases expire in 2003 through 2015 and are subject to options
that extend their terms through 2009 to 2027. All retail store leases provide
for base rent which may or may not be credited against percentage rent based
upon gross sales from the premises. In some of the leases, base rental amounts
increase as the lease term progresses, although in some cases, the Company
expects that percentage rent will more than offset the base rental amounts.

The Company leases from corporations controlled by Norbert Olberz, the
Chairman of the Board and the Companys principal stockholder (the Principal
Stockholder), its corporate office space in La Canada, its warehouse and
distribution facility in Montclair, and its stores in La Canada, Huntington
Beach and Porter Ranch. Although the term of the distribution facility lease
runs to 2007, the Principal Stockholder has agreed to cancel the lease when the
Company moves to a new distribution center. The Company has incurred rental
expense to the Principal Stockholder of $2.5 million, $2.1 million and $1.7
million in fiscal 2001, 2000 and 1999, respectively.

Management believes that the occupancy costs under the leases with
corporations controlled by the Principal Stockholder described above are no
higher than those which could be charged by an unrelated third party under
similar circumstances.




ITEM 3. LEGAL PROCEEDINGS

Kelly Silver v. Sport Chalet, Inc., Case No. 00CC08024, filed on July 7,
2000 in the Superior Court of the State of California, County of Orange.

This is a class action lawsuit brought by a former area manager, Kelly
Silver, against the Company. The complaint alleges a failure to pay overtime
wages to Area Managers, unfair business practices based upon the alleged
failure to pay overtime wages, fraud and deceit and negligent misrepresentation
based upon the failure to pay overtime wages, and conversion/theft of labor for
the alleged overtime hours.

The Company and plaintiffs have reached a tentative settlement of all
claims for all class members. The settlement is subject to court approval and
the Company has fully reserved for the anticipated cost of this litigation.




ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

No matters were submitted to the Companys stockholders during the fourth
quarter of fiscal 2001.

6



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PART II




|        |  |                                                                      
|------- |  | ---------------------------------------------------------------------
|ITEM 5. |  | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Price for Common Shares

The Companys Common Stock is traded on The Nasdaq Stock Markets National
Market under the symbol SPCH. The following table reflects the range of high
and low sale prices of the Companys Common Stock by quarter over the last two
fiscal years as reported by Nasdaq:

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|Fiscal 2000    |  | High |       | Low
|               |  |      |       |    
|First Quarter  |  | $    | 8.000 |     |  | $ | 4.375 | 
|              
|              
|              
|              
|Second Quarter |  | $    | 6.375 |     |  | $ | 3.750 | 
|              
|              
|              
|              
|Third Quarter  |  | $    | 6.750 |     |  | $ | 4.000 | 
|              
|              
|              
|              
|Fourth Quarter |  | $    | 5.437 |     |  | $ | 4.062 | 

|               |  |      |        |     |  |   |       | 
|-------------- |  | ---- | ------ | --- |  | - | ----- | 
|Fiscal 2001    |  | High |        | Low
|               |  |      |        |    
|First Quarter  |  | $    | 5.500  |     |  | $ | 4.000 | 
|              
|              
|              
|              
|Second Quarter |  | $    | 6.500  |     |  | $ | 4.375 | 
|              
|              
|              
|              
|Third Quarter  |  | $    | 7.656  |     |  | $ | 4.875 | 
|              
|              
|              
|              
|Fourth Quarter |  | $    | 11.375 |     |  | $ | 5.359 | 

|                                      |  |      |        |     |  |   |       | 
|------------------------------------- |  | ---- | ------ | --- |  | - | ----- | 
|Fiscal 2002                           |  | High |        | Low
|                                      |  |      |        |    
|First Quarter (through June 11, 2001) |  | $    | 10.000 |     |  | $ | 7.480 | 

On June 11, 2001, the closing price of the Companys Common Stock as
reported by Nasdaq was $8.75. 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 the Companys Common
Stock as of June 11, 2001 was 300 (excluding individual participants in nominee
security position listings) and as of that date, the Company estimates that
there were approximately 1,000 beneficial owners holding stock in nominee or
street name.

Dividend Policy

The Company has not paid any dividends to stockholders since its initial
public offering in November 1992. It is currently contemplated that the
Company will retain earnings for use in the operation and potential expansion
of its business and, therefore, does 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 the Companys earnings, financial
condition, capital needs and other factors deemed relevant by the Board of
Directors.

7



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##### Table of Contents






ITEM 6. SELECTED FINANCIAL DATA

The following sets forth selected financial data as of and for the periods
presented. This data should be read in conjunction with the financial
statements and related notes thereto and other financial information included
herein.

|                                               |         |   |                                          |       |      |   |         |       |      |   |         |       |  |   |         |       |  |   |         |       | 
|---------------------------------------------- | ------- | - | ---------------------------------------- | ----- | ---- | - | ------- | ----- | ---- | - | ------- | ----- |  | - | ------- | ----- |  | - | ------- | ----- | 
|                                               |         |   | Year Ended March 31,                    
|                                               |         |   |                                         
|                                               |         |   | 2001                                     |       | 2000 |   | 1999    |       | 1998 |   | 1997   
|                                               |         |   |                                          |       |      |   |         |       |      |   |        
|                                               |         |   | (In thousands, except per share amounts)
|Statements of Income Data:                    
|                                              
|                                              
|                                              
|                                              
|Net sales                                      |         | $ | 214,842                                  |       |      | $ | 175,846 |       |      | $ | 154,573 |       |  | $ | 143,014 |       |  | $ | 137,705 |      
|                                              
|                                              
|                                              
|                                              
|Cost of goods sold, buying and occupancy
costs |         |   | 148,619                                  |       |      |   | 123,496 |       |      |   | 106,921 |       |  |   | 100,239 |       |  |   | 98,237  |      
|                                               |         |   |                                          |       |      |   |         |       |      |   |         |       |  |   |         |       |  |   |         |      
|Gross profit                                   |         |   | 66,223                                   |       |      |   | 52,350  |       |      |   | 47,652  |       |  |   | 42,775  |       |  |   | 39,468  |      
|                                              
|                                              
|                                              
|                                              
|Selling, general and administrative expenses   |         |   | 54,406                                   |       |      |   | 43,524  |       |      |   | 38,873  |       |  |   | 35,669  |       |  |   | 34,805  |      
|                                              
|                                              
|                                              
|                                              
|Stock award (1)                                |         |   |                                         |       |      |   |        |       |      |   |        |       |  |   | 1,468   |       |  |   |        |      
|                                               |         |   |                                          |       |      |   |         |       |      |   |         |       |  |   |         |       |  |   |         |      
|                                              
|                                              
|                                              
|                                              
|Income from operations                         |         |   | 11,817                                   |       |      |   | 8,826   |       |      |   | 8,780   |       |  |   | 5,638   |       |  |   | 4,663   |      
|                                              
|                                              
|                                              
|                                              
|Interest expense (income)                      |         |   | (361                                     | )     |      |   | (284    | )     |      |   | (243    | )     |  |   | 175     |       |  |   | 805     |      
|                                               |         |   |                                          |       |      |   |         |       |      |   |         |       |  |   |         |       |  |   |         |      
|Income before taxes                            |         |   | 12,178                                   |       |      |   | 9,110   |       |      |   | 9,023   |       |  |   | 5,463   |       |  |   | 3,858   |      
|                                              
|                                              
|                                              
|                                              
|Income tax provision                           |         |   | 4,913                                    |       |      |   | 3,626   |       |      |   | 3,609   |       |  |   | 2,236   |       |  |   | 1,555   |      
|                                               |         |   |                                          |       |      |   |         |       |      |   |         |       |  |   |         |       |  |   |         |      
|                                              
|                                              
|                                              
|                                              
|Net income                                     |         | $ | 7,265                                    |       |      | $ | 5,484   |       |      | $ | 5,414   |       |  | $ | 3,227   |       |  | $ | 2,303   |      
|                                               |         |   |                                          |       |      |   |         |       |      |   |         |       |  |   |         |       |  |   |         |      
|Earnings per share  basic                     |         | $ | 1.10                                     |       |      | $ | .83     |       |      | $ | .83     |       |  | $ | .50     |       |  | $ | .35     |      
|                                               |         |   |                                          |       |      |   |         |       |      |   |         |       |  |   |         |       |  |   |         |      
|Earnings per share  diluted                   |         | $ | 1.07                                     |       |      | $ | .81     |       |      | $ | .80     |       |  | $ | .49     |       |  | $ | .35     |      
|                                               |         |   |                                          |       |      |   |         |       |      |   |         |       |  |   |         |       |  |   |         |      
|Weighted average shares outstanding:          
|                                              
|                                              
|                                              
|                                              
|                                               | Basic   |   |                                          | 6,580 |      |   |         | 6,577 |      |   |         | 6,530 |  |   |         | 6,504 |  |   |         | 6,500 | 
|                                               |         |   |                                          |       |      |   |         |       |      |   |         |       |  |   |         |       |  |   |         |      
|                                               | Diluted |   |                                          | 6,805 |      |   |         | 6,756 |      |   |         | 6,731 |  |   |         | 6,587 |  |   |         | 6,500 | 
|                                               |         |   |                                          |       |      |   |         |       |      |   |         |       |  |   |         |       |  |   |         |      
|Selected
Operating Data:                      
|                                              
|                                              
|                                              
|                                              
|Stores open at end of period                   |         |   | 23                                       |       |      |   | 22      |       |      |   | 19      |       |  |   | 18      |       |  |   | 18      |      
|                                              
|                                              
|                                              
|                                              
|Comparable store sales increase (2)            |         |   | 14.5                                     | %     |      |   | 2.0     | %     |      |   | 3.2     | %     |  |   | 3.8     | %     |  |   | 0.0     | %    
|                                              
|                                              
|                                              
|                                              
|EBITDA (3)                                     |         | $ | 16,036                                   |       |      | $ | 12,540  |       |      | $ | 11,995  |       |  | $ | 8,564   |       |  | $ | 7,566   |      

|                           |  |                 |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|-------------------------- |  | --------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                           |  | As of March 31,
|                           |  |                
|                           |  | 2001            |        | 2000 |  | 1999 |        | 1998 |  | 1997
|                           |  |                 |        |      |  |      |        |      |  |     
|                           |  | (In thousands) 
|Balance Sheet Data:       
|                          
|                          
|                          
|                          
|Working capital            |  | $               | 33,238 |      |  | $    | 29,239 |      |  | $    | 22,999 |  |  | $ | 18,201 |  |  | $ | 13,040 | 
|                          
|                          
|                          
|                          
|Total assets               |  |                 | 75,822 |      |  |      | 64,454 |      |  |      | 58,380 |  |  |   | 48,718 |  |  |   | 44,436 | 
|                          
|                          
|                          
|                          
|Debt                       |  |                 |       |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   | 1,352  | 
|                          
|                          
|                          
|                          
|Total stockholders equity |  |                 | 50,040 |      |  |      | 42,622 |      |  |      | 36,980 |  |  |   | 31,521 |  |  |   | 26,707 | 



---

|(1) |  | Represents the fair market value of 293,625 unregistered common shares
awarded to certain employees by the Principal Stockholder and his spouse,
through their family trust.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | A stores sales are included in the comparable store sales calculation
after its twelfth full month of operation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|   
|   
|   
|(3) |  | EBITDA is earnings before income taxes, interest expense and depreciation
and amortization. The Company believes 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 the ability of the Company 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 the Companys operating
performance or to cash flows from operating activities (as determined in
accordance with GAAP) as a measure of liquidity. The Companys 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.

8



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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
Financial Data and the Companys 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 31 |      | Quarter ended March 31
|                                             |         |   |                     |      |                       
|                                             |         |   | 2001                |      | 2000                   |  | 1999   |   | 2001    |   | 2000   
|                                             |         |   |                     |      |                        |  |        |   |         |   |        
|                                             |         |   | Amount              |      | Percent                |  | Amount |   | Percent |   | Amount  |     | Percent |  | Amount |   | Percent |   | Amount  |     | Percent
|                                             |         |   |                     |      |                        |  |        |   |         |   |         |     |         |  |        |   |         |   |         |     |        
|Net sales                                    |         | $ | 214,842             |      |                        |  | 100.0  | % |         | $ | 175,846 |     |         |  | 100.0  | % |         | $ | 154,573 |     |         |  | 100.0 | % |  | $ | 56,022 |     |  |  | 100.0 | % |  | $ | 49,010 |     |  |  | 100.0 | %
|                                            
|                                            
|                                            
|                                            
|Gross profit                                 |         |   | 66,223              |      |                        |  | 30.8   |   |         |   | 52,350  |     |         |  | 29.8   |   |         |   | 47,652  |     |         |  | 30.8  |   |  |   | 16,498 |     |  |  | 29.4  |   |  |   | 13,902 |     |  |  | 28.4  |  
|                                            
|                                            
|                                            
|                                            
|Selling, general and
administrative expenses |         |   | 54,406              |      |                        |  | 25.3   |   |         |   | 43,524  |     |         |  | 24.8   |   |         |   | 38,873  |     |         |  | 25.2  |   |  |   | 14,821 |     |  |  | 26.5  |   |  |   | 11,170 |     |  |  | 22.8  |  
|                                            
|                                            
|                                            
|                                            
|Income from operations                       |         |   | 11,817              |      |                        |  | 5.5    |   |         |   | 8,826   |     |         |  | 5.0    |   |         |   | 8,780   |     |         |  | 5.7   |   |  |   | 1,677  |     |  |  | 3.0   |   |  |   | 2,732  |     |  |  | 5.6   |  
|                                            
|                                            
|                                            
|                                            
|Interest income                              |         |   | 361                 |      |                        |  | 0.2    |   |         |   | 284     |     |         |  | 0.1    |   |         |   | 243     |     |         |  | 0.2   |   |  |   | 156    |     |  |  | 0.3   |   |  |   | 110    |     |  |  | 0.2   |  
|                                            
|                                            
|                                            
|                                            
|Income before taxes                          |         |   | 12,178              |      |                        |  | 5.7    |   |         |   | 9,110   |     |         |  | 5.2    |   |         |   | 9,023   |     |         |  | 5.8   |   |  |   | 1,833  |     |  |  | 3.3   |   |  |   | 2,842  |     |  |  | 5.8   |  
|                                            
|                                            
|                                            
|                                            
|Net income                                   |         |   | 7,265               |      |                        |  | 3.4    |   |         |   | 5,484   |     |         |  | 3.1    |   |         |   | 5,414   |     |         |  | 3.5   |   |  |   | 1,042  |     |  |  | 1.9   |   |  |   | 1,713  |     |  |  | 3.5   |  
|                                            
|                                            
|                                            
|                                            
|Earnings per share:                         
|                                            
|                                            
|                                            
|                                            
|                                             | Basic   |   | $                   | 1.10 |                        |  |        |   |         |   | $       | .83 |         |  |        |   |         |   | $       | .83 |         |  |       |   |  |   | $      | .15 |  |  |       |   |  |   | $      | .26 | 
|                                            
|                                            
|                                            
|                                            
|                                             | Diluted |   | $                   | 1.07 |                        |  |        |   |         |   | $       | .81 |         |  |        |   |         |   | $       | .80 |         |  |       |   |  |   | $      | .15 |  |  |       |   |  |   | $      | .26 | 

Fiscal 2001 Compared to Fiscal 2000.Sales increased from $175.8 million
to $214.8 million, a 22.2% increase, as a result of a comparable store sales
increase of 14.5% and the opening of four new stores since May 1999. The
comparable store sales increase reflects favorable winter weather conditions
experienced in the third and fourth quarter as compared to the same quarters of
the prior year, increased consumer demand for in-line scooters and continuing
improvements in merchandising and customer service. Excluding sales of
scooters and winter related merchandise, comparable store sales were up 7.4%
during fiscal 2001. Management believes that the scooter phenomenon has run
its course and will be insignificant in the future.

Gross profit for the year increased as a percent of sales from 29.8% to
30.8%, due to (i) reduced markdowns as a percent of sales due to early strong
sales of winter related merchandise in fiscal 2001 as compared with fiscal 2000
and (ii) increased comparable store sales which caused occupancy costs to
decrease as a percent of sales.

Selling, general and administrative expenses increased as a percent of
sales from 24.8% to 25.3%, primarily the result of increased litigation costs
over the prior year.

Interest income increased from $284,000 to $361,000 due to cash reserves
generated by increased sales.

The effective tax rate as a percent of pretax income is 40.3% for fiscal
2001 and 39.8% for fiscal 2000. 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 to $7.3 million compared to $5.5 million in the prior
year primarily due to increased sales slightly offset by increased selling,
general and administrative expense. Diluted earnings per share increased 32.1%
to $1.07 from $.81 due primarily to increased net income.

9



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##### Table of Contents



Fourth Quarter 2001 Compared to Fourth Quarter 2000.Sales increased from
$49.0 million to $56.0 million, a 14.3% increase. Comparable store sales
increased 11.3% as favorable winter weather conditions in Southern California
resulted in significant increases in sales of winter related merchandise during
the fourth quarter of fiscal 2001. Excluding sales of scooters and winter
related merchandise, comparable store sales were up 4.4%. Also contributing to
the total sales increase was the addition of one new store that was opened
during the fiscal year.

Gross profit for the period increased as a percent of sales from 28.4% to
29.4% primarily from decreased markdowns as a percent of sales partially offset
by an unusually low inventory shrink in 2000 which increased in 2001 but is
still below industry averages.

Selling, general and administrative expenses increased from 22.8% to 26.5%
as a percent of sales primarily for two reasons, (i) increased litigation costs
and (ii) bonus accruals related to the Companys strong results for the year.

Interest income increased slightly from $110,000 to $156,000 due to cash
reserves generated by increased sales.

The effective income tax rate as a percent of pretax income for the fourth
quarter 2001 is 43.2% compared to 39.7% for the same period of fiscal 2000, as
the result of timing differences between quarters of fiscal 2001.

Net income decreased to $1.0 million from $1.7 million and earnings per
share decreased to $.15 from $.26 as the effect of strong increases in sales
and gross profit margin were offset by higher selling, general and
administrative expenses.

Fiscal 2000 Compared to Fiscal 1999.Sales increased from $154.6 million
to $175.8 million, a 13.7% increase. The increase is primarily related to the
opening of three new stores during fiscal 2000. Comparable store sales
increased 2.0% reflecting continuing improvements in merchandising and customer
service, offset partially by the unusually warm and dry weather conditions
experienced in the third quarter as compared to the third quarter of the prior
year. Comparable store sales of non-winter related merchandise increased 4.0%.

Gross profit for the period decreased as a percent of sales from 30.8% to
29.8% as significant markdowns were required to stimulate the sales of winter
related merchandise.

Selling, general and administrative expenses decreased as a percent of
sales from 25.2% to 24.8%, primarily the result of reduced incentive-based
labor costs.

Interest income increased from $243,000 to $284,000 due to investments of
cash reserves at higher interest rates.

The effective tax rate as a percent of pretax income is 39.8% for fiscal
2000 and 40.0% for fiscal 1999. 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 remained relatively flat at $5.5 million compared to $5.4
million in the prior year primarily due to increased sales offset by reduced
gross profit margins. Diluted earnings per share increased to $.81 from $.80
due primarily to increased net income.

10



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##### Table of Contents



Liquidity and Capital Resources

The Companys primary capital requirements are for inventory and store
expansion, relocation and remodeling. Historically, cash from operations,
credit terms from vendors and bank borrowing have met the Companys liquidity
needs. The Company believes that these sources will be sufficient to fund
currently anticipated cash requirements for the foreseeable future.

Net cash provided by operating activities was $11.5 million, $1.0 million
and $9.6 million for fiscal 2001, 2000 and 1999, respectively. Net income
provided cash of $7.3 million, $5.5 million and $5.4 million in fiscal 2001,
2000 and 1999. Included in net income was non-cash depreciation of $4.2
million, $3.7 million and $3.2 million for fiscal 2001, 2000 and 1999,
respectively.

Accounts receivable decreased by $2.3 million in fiscal 2001 and increased
$1.5 million in fiscal 2000 as a result of the changes in amounts due to the
Company from John Wells Golf Shops. Prior to April 1, 2000, John Wells Golf
Shops operated the leased golf department within the Companys stores at which
time the Company purchased the inventory and fixtures of the golf department
from the lessee and now operates the golf department on its own.

During fiscal 2001, inventories increased $5.6 million due to increased
sales, the addition of one new store and the purchase of John Wells Golf Shops.
In fiscal 2000, inventories increased $7.0 million primarily as the result of
adding three new stores.

Accounts payable historically increase as inventory increases. For fiscal
2001 accounts payable increased only $371,000 as part of the inventory increase
occurred early in the year due to a new store and the purchase of John Wells
Golf Shops and vendors were paid before year end. The remainder of the
inventory increase did not result in significant payables at year-end because
of changes in the timing of vendor payments. During fiscal 2000, accounts
payable decreased $69,000 due to changes in the timing of vendor payments. For
fiscal 1999 the accounts payable increase of $2.0 million was directly related
to the increases in inventory.

Net cash used in investing activities was $8.0 million, $6.6 million and
$3.8 million for fiscal 2001, 2000 and 1999, respectively. In fiscal 2001 one
store was opened, one was remodeled and one was relocated while in fiscal 2000
three stores were added and one was relocated and during fiscal 1999 one store
was added. In fiscal 2001, 2000 and 1999, capital expenditures for information
technology totaled $3.7 million, $800,000 and $200,000, respectively, while
ongoing capital expenditures for the Companys existing stores totaled $3.0
million, $2.8 million and $2.3 million, respectively.

As a result of the Companys expansion plans, capital expenditures are
forecasted to be much higher than in the past. During fiscal 2002, the Company
has forecasted capital expenditures of $14.8 million. Approximately $3.2
million of this amount will be used to open at least three new stores, and $3.3
million is planned for a new distribution center. The Company expects to
increase expenditures for improvements to existing stores, above historical
levels, to enhance merchandising presentation. In addition, approximately $2.4
million will be used as part of the Companys three-year strategic plan
regarding information technology, which began in fiscal 2000.

The Company has a credit facility from Bank of America National Trust and
Savings Association, Inc. (the Lender) which provides for advances up to $10
million less the amount of any outstanding draws up to a $1.5 million maximum
in authorized letters of credit. Interest accrues at prime less 1/2% 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. This credit facility expires on
August 31, 2002 and the Company expects to renegotiate and extend the term of
this agreement 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 losses and capital
expenditures, calculated on a quarterly

11



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##### Table of Contents



basis. In addition, the Company must reduce borrowings to $2 million or less
for 30 consecutive days during each fiscal year. The Company currently is in
full compliance with these covenants and expects to remain in compliance during
the term of the credit facility. 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 cause the Company to request additional borrowing
capacity from the Lender or alter its expansion plans or operations.

No cash dividends have been declared on common stock in fiscal 2001. The
Company intends to retain earnings for use in the operation and expansion of
its business and, therefore, does not anticipate paying any cash dividends in
the foreseeable future.

Seasonality

As noted previously, the months of November, December and January
historically have accounted for the largest percentage of the Companys net
sales and a significant portion of its net income. As is typical with other
sporting goods retailers, the Companys sales volume increases significantly
during the Christmas holiday season and the peak ski and snowboard season
generally corresponds to this three-month period.

The Companys operating results historically have been influenced by the
amount and timing of snowfall at the resorts frequented by those living in
Southern California. An early snowfall often has influenced sales because it
generally extends the demand for winter apparel and equipment while a late
snowfall may have the opposite effect.

Although the third and fourth quarters of fiscal 2001 experienced strong
sales of winter-related products as a result of good winter weather conditions
that provided snowfall throughout the period, management has projected little
or no growth in winter-related product sales relative to other specialty
product areas of the Companys business. Accordingly, the effect of snow
conditions on the Companys operating results has been and is being partially
mitigated by managements actions to diversify the Companys product mix.
Sales of winter related products range from 17% to 19% of the total Companys
net sales in recent years. In each of fiscal 1999, 2000 and 2001, 31%, 31% and
32%, respectively, of the Companys sales were attributable to the months of
November, December and January.

Suppliers in the ski and snowboard industry require that commitments be
made for purchases of apparel and equipment by April for fall delivery, and
only limited quantities of merchandise can be reordered during the fall.
Consequently, the Company places its orders in the spring anticipating snowfall
in the winter. If the snowfall does not at least provide an adequate base or
occurs late in the season, or if sales do not meet projections, the Company may
be required to mark down its winter related merchandise.

Factors That May Affect Future Results

The statements which are not historical facts contained in this Annual
Report on Form 10-K are 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, that involve risks and
uncertainties. These risks and uncertainties include, but are not limited to,
those set forth below.

Economic Conditions.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 have had, and may in the future have, a materially adverse effect on the
Companys results of operations.

12



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##### Table of Contents



Competition.The sporting goods business and the retail environment are
highly competitive, and the Company competes with national, regional and local
full-line sporting goods chains, specialty stores, supplier owned stores,
discount and department stores, and e-tailers. A number of the Companys
competitors are larger and have greater resources than the Company.

Regional Market Concentration.Currently, all of the Companys stores are
located in Southern California. Accordingly, the Company is subject to
regional risks, such as the economy, weather conditions, natural disasters and
government regulations. If the region were to suffer an economic downturn or
if other adverse events were to occur, there could be an adverse effect on the
Companys net sales and profitability and its ability to implement its planned
growth. Several of the Companys competitors operate stores across the United
States and, thus, are not as vulnerable as the Company to such regional risks.

Limited Expansion Locations.The real estate market for retail locations
in Southern California is limited and very competitive. The Companys growth
strategy contemplates locating suitable new store locations over the next
several fiscal years. Failure by the Company to locate suitable new store
locations would have a material adverse effect on the Companys implementation
of its growth strategy and sales volume.

Expansion Plan.The Companys continued growth is dependent to a
significant degree upon its ability to open new stores on a profitable basis.
The Companys ability to expand will depend, in part, on business conditions
and the availability of satisfactory store locations based on local competitive
conditions, site availability and cost, and the Companys ability to provide
and maintain high service levels and quality brand merchandising at competitive
prices. In addition, a decline in the Companys overall financial performance,
increased rents or any other adverse effects arising from the commercial real
estate market in the Companys markets may adversely effect the Companys
current growth plan. There can be no assurance that the Company will possess
sufficient funds to finance the expenditures related to its planned growth,
that new stores can be opened on a timely basis, that such new stores can be
operated on a profitable basis, or that such growth will be manageable.

Future Capital Requirements.The Company may not be able to fund its
future growth or react to competitive pressures if it lacks sufficient funds.
The Companys large investment in its information technology has, and the
planned distribution center is expected to, put a strain on cash flow.
Currently, the Company feels it has sufficient cash available through its bank
credit facilities and cash from operations to fund existing operations for the
foreseeable future. The Company cannot be certain that additional financing
will be available in the future if necessary.

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

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

Seasonality.The Companys business is seasonal in nature. As a result,
the Companys results of operations are likely to vary during its fiscal year.
See Seasonality

13



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##### Table of Contents



Variability of Quarterly Results.The Company has experienced, and
expects to continue to experience, a substantial variation in its net sales and
operating results from quarter to quarter. The Company believes that the
factors which influence this variability of quarterly results include general
economic and industry conditions that affect consumer spending, changing
consumer demands, the timing of the Companys introduction of new products, the
level of consumer acceptance of each new product, the seasonality of the
markets in which the Company participates, the weather and actions of
competitors. Accordingly, a comparison of the Companys results of operations
from period to period is not necessarily meaningful, and the Companys results
of operations for any period are not necessarily indicative of future
performance.

Closely Controlled Stock.At June 11, 2001, Norbert Olberz, the Companys
founder and Chairman of the Board of Directors, owned approximately 66% of the
Companys outstanding common stock. Mr. Olberz effectively has the ability to
control the outcome on all matters requiring stockholder approval, including,
but not limited to, the election and removal of directors, and any merger,
consolidation or sale of all or substantially all of the Companys assets, and
to control the Companys management and affairs.

Stock Price.The market price of the Companys common stock is likely to
be volatile and could be subject to significant fluctuations in response to
factors such as quarterly variations in operating results, operating results
which vary from the expectations of securities analyst and investors, changes
in financial estimates, changes in market valuations of competitors,
announcements by the Company or its competitors of a material nature, additions
or departures of key personnel, future sales of common stock and stock volume
fluctuations. Also, general political and economic conditions such as a
recession or interest rate fluctuations may adversely affect the market price
of the Companys stock.




ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required by this section are submitted as part of
Item 14 of this report.




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

None.

14



---



##### 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 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

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.




PART IV




ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

|    |  |  |                                         |  |  |                                                                                                                                                   
|--- |  |  | --------------------------------------- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  |  | (1)                                     |  |  | Financial Statements  The financial statements listed on the accompanying Index
to Audited Financial Statements are filed as part of this report.
|   
|   
|   
|   
|    |  |  | (2)                                     |  |  | Schedules  Not applicable.                                                                                                                       
|   
|   
|   
|   
|(b) |  |  | Reports on Form 8-K                     | 
|   
|   
|   
|   
|    |  |  | None.                                   | 
|   
|   
|   
|   
|(c) |  |  | Exhibits  See Index on Page E-1 hereof | 

15



---



##### Table of Contents



Sport Chalet, Inc.




Index to Audited Financial Statements

|                                                                                                  |  |      |    | 
|------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                  |  | Page
|                                                                                                  |  |     
|Report of Independent Auditors                                                                    |  |      | 17 | 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Statements of Income for each of the three years in the period ended March 31, 2001               |  |      | 18 | 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Balance Sheets as of March 31, 2001 and 2000                                                      |  |      | 19 | 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Statements of Stockholders Equity for each of the three years in the period ended
March 31, 2001 |  |      | 20 | 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Statements of Cash Flows for each of the three years in the period ended March 31, 2001           |  |      | 21 | 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|                                                                                                 
|Notes to Financial Statements                                                                     |  |      | 22 | 

16



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##### Table of Contents






Report of Independent Auditors

The Stockholders and Board of Directors
Sport Chalet, Inc.

We have audited the accompanying balance sheets of Sport Chalet, Inc. as of
March 31, 2001 and 2000, and the related statements of income, stockholders
equity, and cash flows for each of the three years in the period ended March
31, 2001. These 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 auditing standards generally
accepted in the 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 financial position of Sport Chalet, Inc. at March
31, 2001 and 2000, and the results of its operations and its cash flows for
each of the three years in the period ended March 31, 2001, in conformity with
accounting principles generally accepted in the United States.

| |  |                      
| |  | ---------------------
| |  | /s/ Ernst & Young LLP

Los Angeles, California
May 18, 2001

17



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##### Table of Contents






Sport Chalet, Inc.

Statements of Income

|                                                      |         |         |             |                     |           |      |             |      |           |   |             |     |           | 
|----------------------------------------------------- | ------- | ------- | ----------- | ------------------- | --------- | ---- | ----------- | ---- | --------- | - | ----------- | --- | --------- | 
|                                                      |         |         |             | Year ended March 31
|                                                      |         |         |             |                    
|                                                      |         |         |             | 2001                |           | 2000 |             | 1999
|                                                      |         |         |             |                     |           |      |             |     
|Net sales                                             |         | $       | 214,841,536 |                     |           | $    | 175,846,383 |      |           | $ | 154,573,318 |    
|                                                     
|                                                     
|                                                     
|                                                     
|Cost of goods sold, buying and occupancy              |         |         | 148,619,057 |                     |           |      | 123,496,150 |      |           |   | 106,920,821 |    
|                                                      |         |         |             |                     |           |      |             |      |           |   |             |    
|                                                     
|                                                     
|                                                     
|                                                     
|Gross profit                                          |         |         | 66,222,479  |                     |           |      | 52,350,233  |      |           |   | 47,652,497  |    
|                                                     
|                                                     
|                                                     
|                                                     
|Selling, general and administrative expenses          |         |         | 54,405,689  |                     |           |      | 43,524,142  |      |           |   | 38,872,850  |    
|                                                      |         |         |             |                     |           |      |             |      |           |   |             |    
|Income from operations                                |         |         | 11,816,790  |                     |           |      | 8,826,091   |      |           |   | 8,779,647   |    
|                                                     
|                                                     
|                                                     
|                                                     
|Interest income                                       |         |         | (361,682    | )                   |           |      | (283,432    | )    |           |   | (243,366    | )  
|                                                      |         |         |             |                     |           |      |             |      |           |   |             |    
|Income before taxes                                   |         |         | 12,178,472  |                     |           |      | 9,109,523   |      |           |   | 9,023,013   |    
|                                                     
|                                                     
|                                                     
|                                                     
|Income tax provision                                  |         |         | 4,913,000   |                     |           |      | 3,626,000   |      |           |   | 3,609,000   |    
|                                                      |         |         |             |                     |           |      |             |      |           |   |             |    
|Net income                                            |         | $       | 7,265,472   |                     |           | $    | 5,483,523   |      |           | $ | 5,414,013   |    
|                                                      |         |         |             |                     |           |      |             |      |           |   |             |    
|Earnings per share:                                  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Basic   |         | $           | 1.10                |           |      | $           | .83  |           |   | $           | .83 |          
|                                                      |         |         |             |                     |           |      |             |      |           |   |             |    
|                                                      | Diluted |         | $           | 1.07                |           |      | $           | .81  |           |   | $           | .80 |          
|                                                      |         |         |             |                     |           |      |             |      |           |   |             |    
|Weighted average number of common shares
outstanding:
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |         | Basic   |             |                     | 6,580,001 |      |             |      | 6,577,000 |   |             |     | 6,529,667 | 
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |         | Diluted |             |                     | 6,804,735 |      |             |      | 6,756,042 |   |             |     | 6,731,244 | 

See accompanying notes.

18



---



##### Table of Contents






Sport Chalet, Inc.

Balance Sheets

|                                                 |                                                                            |                                                                         |            |            |        |      |            |            |        | 
|------------------------------------------------ | -------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ---------- | ---------- | ------ | ---- | ---------- | ---------- | ------ | 
|                                                 |                                                                            |                                                                         |            | March 31  
|                                                 |                                                                            |                                                                         |            |           
|                                                 |                                                                            |                                                                         |            | 2001       |        | 2000
|                                                 |                                                                            |                                                                         |            |            |        |     
|Assets                                          
|                                                
|                                                
|                                                
|                                                
|Current assets:                                 
|                                                
|                                                
|                                                
|                                                
|                                                 | Cash and cash equivalents                                                  |                                                                         | $          | 8,945,034  |        |      | $          | 5,468,390  |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Accounts receivable, less allowance of $25,000 in
2001 and $75,000 in 2000 |                                                                         |            | 519,677    |        |      |            | 2,808,769  |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Merchandise inventories                                                    |                                                                         |            | 42,491,532 |        |      |            | 36,921,166 |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Prepaid expenses and other current assets                                  |                                                                         |            | 1,324,047  |        |      |            | 1,295,082  |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Deferred income taxes                                                      |                                                                         |            | 1,928,710  |        |      |            | 1,186,162  |       
|                                                 |                                                                            |                                                                         |            |            |        |      |            |           
|                                                
|                                                
|                                                
|                                                
|Total current assets                             |                                                                            |                                                                         | 55,209,000 |            |        |      | 47,679,569 |           
|                                                
|                                                
|                                                
|                                                
|Furniture, equipment and leasehold improvements:
|                                                
|                                                
|                                                
|                                                
|                                                 | Furniture, fixtures and office equipment                                   |                                                                         |            | 19,651,049 |        |      |            | 17,167,888 |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Rental equipment                                                           |                                                                         |            | 3,472,072  |        |      |            | 3,166,932  |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Vehicles                                                                   |                                                                         |            | 639,693    |        |      |            | 686,061    |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Leasehold improvements                                                     |                                                                         |            | 13,438,382 |        |      |            | 12,589,688 |       
|                                                 |                                                                            |                                                                         |            |            |        |      |            |           
|                                                 |                                                                            |                                                                         | 37,201,196 |            |        |      | 33,610,569 |           
|                                                
|                                                
|                                                
|                                                
|                                                 | Less allowance for depreciation and amortization                           |                                                                         |            | 16,949,192 |        |      |            | 17,201,939 |       
|                                                 |                                                                            |                                                                         |            |            |        |      |            |           
|                                                 |                                                                            |                                                                         | 20,252,004 |            |        |      | 16,408,630 |           
|                                                
|                                                
|                                                
|                                                
|Deferred income tax                              |                                                                            |                                                                         | 95,433     |            |        |      |           |           
|                                                
|                                                
|                                                
|                                                
|Other assets                                     |                                                                            |                                                                         | 265,421    |            |        |      | 365,739    |           
|                                                 |                                                                            |                                                                         |            |            |        |      |            |           
|Total assets                                     |                                                                            | $                                                                       | 75,821,858 |            |        | $    | 64,453,938 |           
|                                                 |                                                                            |                                                                         |            |            |        |      |            |           
|Liabilities and stockholders equity            
|                                                
|                                                
|                                                
|                                                
|Current liabilities:                            
|                                                
|                                                
|                                                
|                                                
|                                                 | Accounts payable                                                           |                                                                         | $          | 11,950,684 |        |      | $          | 11,579,549 |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Salaries and wages payable                                                 |                                                                         |            | 2,960,167  |        |      |            | 1,815,476  |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Other accrued expenses                                                     |                                                                         |            | 5,773,010  |        |      |            | 3,378,312  |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Income tax payable                                                         |                                                                         |            | 1,286,861  |        |      |            | 1,667,554  |       
|                                                 |                                                                            |                                                                         |            |            |        |      |            |           
|                                                
|                                                
|                                                
|                                                
|Total current liabilities                        |                                                                            |                                                                         | 21,970,722 |            |        |      | 18,440,891 |           
|                                                
|                                                
|                                                
|                                                
|Deferred rent                                    |                                                                            |                                                                         | 3,811,246  |            |        |      | 3,331,180  |           
|                                                
|                                                
|                                                
|                                                
|Deferred income taxes                            |                                                                            |                                                                         |           |            |        |      | 60,212     |           
|                                                
|                                                
|                                                
|                                                
|Commitments and contingencies                   
|                                                
|                                                
|                                                
|                                                
|Stockholders equity                            
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            | Preferred stock, $.01 par value:                                       
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            | Authorized shares  2,000,000                                          
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            | Issued and outstanding shares  none
Common stock, $.01 par value:     
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            | Authorized shares  15,000,000                                         
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            | Issued and outstanding shares  6,580,001 in
2001 and 6,577,000 in 2000 |            |            | 65,800 |      |            |            | 65,770 | 
|                                                
|                                                
|                                                
|                                                
|                                                 | Additional paid-in capital                                                 |                                                                         |            | 21,842,340 |        |      |            | 21,689,607 |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Retained earnings                                                          |                                                                         |            | 28,131,750 |        |      |            | 20,866,278 |       
|                                                 |                                                                            |                                                                         |            |            |        |      |            |           
|Total stockholders equity                       |                                                                            |                                                                         | 50,039,890 |            |        |      | 42,621,655 |           
|                                                 |                                                                            |                                                                         |            |            |        |      |            |           
|Total liabilities and stockholders equity       |                                                                            | $                                                                       | 75,821,858 |            |        | $    | 64,453,938 |           
|                                                 |                                                                            |                                                                         |            |            |        |      |            |           

See accompanying notes.

19



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Sport Chalet, Inc.

Statements of Stockholders Equity

|                          |                                      |  |              |        |            |   |                 |     |          |   |            |         |  |   |            |           |  |   |            |           | 
|------------------------- | ------------------------------------ |  | ------------ | ------ | ---------- | - | --------------- | --- | -------- | - | ---------- | ------- |  | - | ---------- | --------- |  | - | ---------- | --------- | 
|                          |                                      |  | Common Stock |        | Additional |   | Retained       
|                          |                                      |  | Shares       |        | Amount     |   | Paid-in Capital |     | Earnings |   | Total     
|                          |                                      |  |              |        |            |   |                 |     |          |   |           
|Balance at March 31, 1998 |                                      |  | 6,525,000    |        |            | $ | 65,250          |     |          | $ | 21,486,677 |         |  | $ | 9,968,742  |           |  | $ | 31,520,669 |          
|                         
|                         
|                         
|                         
|                          | Shares granted to officer            |  |              | 7,000  |            |   |                 | 70  |          |   |            | 45,430  |  |   |            |          |  |   |            | 45,500    | 
|                         
|                         
|                         
|                         
|                          | Net income for 1999                  |  |              |       |            |   |                 |    |          |   |            |        |  |   |            | 5,414,013 |  |   |            | 5,414,013 | 
|                          |                                      |  |              |        |            |   |                 |     |          |   |            |         |  |   |            |           |  |   |            |          
|                         
|                         
|                         
|                         
|Balance at March 31, 1999 |                                      |  | 6,532,000    |        |            |   | 65,320          |     |          |   | 21,532,107 |         |  |   | 15,382,755 |           |  |   | 36,980,182 |          
|                         
|                         
|                         
|                         
|                          | Exercise of stock options            |  |              | 45,000 |            |   |                 | 450 |          |   |            | 127,800 |  |   |            |          |  |   |            | 128,250   | 
|                         
|                         
|                         
|                         
|                          | Tax benefit from exercise
of options |  |              |       |            |   |                 |    |          |   |            | 29,700  |  |   |            |          |  |   |            | 29,700    | 
|                         
|                         
|                         
|                         
|                          | Net income for 2000                  |  |              |       |            |   |                 |    |          |   |            |        |  |   |            | 5,483,523 |  |   |            | 5,483,523 | 
|                          |                                      |  |              |        |            |   |                 |     |          |   |            |         |  |   |            |           |  |   |            |          
|                         
|                         
|                         
|                         
|Balance at March 31, 2000 |                                      |  | 6,577,000    |        |            |   | 65,770          |     |          |   | 21,689,607 |         |  |   | 20,866,278 |           |  |   | 42,621,655 |          
|                         
|                         
|                         
|                         
|                          | Exercise of stock options            |  |              | 3,001  |            |   |                 | 30  |          |   |            | 13,287  |  |   |            |          |  |   |            | 13,317    | 
|                         
|                         
|                         
|                         
|                          | Shares granted to officers           |  |              |       |            |   |                 |    |          |   |            | 134,769 |  |   |            |          |  |   |            | 134,769   | 
|                         
|                         
|                         
|                         
|                          | Tax benefit from exercise
of options |  |              |       |            |   |                 |    |          |   |            | 4,677   |  |   |            |          |  |   |            | 4,677     | 
|                         
|                         
|                         
|                         
|                          | Net income for 2001                  |  |              |       |            |   |                 |    |          |   |            |        |  |   |            | 7,265,472 |  |   |            | 7,265,472 | 
|                          |                                      |  |              |        |            |   |                 |     |          |   |            |         |  |   |            |           |  |   |            |          
|Balance at March 31, 2001 |                                      |  | 6,580,001    |        |            | $ | 65,800          |     |          | $ | 21,842,340 |         |  | $ | 28,131,750 |           |  | $ | 50,039,890 |          
|                          |                                      |  |              |        |            |   |                 |     |          |   |            |         |  |   |            |           |  |   |            |          

See accompanying notes.

20



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##### Table of Contents






Sport Chalet, Inc.

Statements of Cash Flows

|                                                                                  |              |                                              |                                           |           |                     |            |            |           |           |            |            |           |           |            |  
|--------------------------------------------------------------------------------- | ------------ | -------------------------------------------- | ----------------------------------------- | --------- | ------------------- | ---------- | ---------- | --------- | --------- | ---------- | ---------- | --------- | --------- | ---------- | -
|                                                                                  |              |                                              |                                           |           | Year ended March 31
|                                                                                  |              |                                              |                                           |           |                    
|                                                                                  |              |                                              |                                           |           | 2001                |            | 2000       |           | 1999     
|                                                                                  |              |                                              |                                           |           |                     |            |            |           |          
|Operating activities                                                             
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net income                                                                        |              | $                                            | 7,265,472                                 |           |                     | $          | 5,483,523  |           |           | $          | 5,414,013  |          
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Adjustments to reconcile net income to net cash
provided by operating activities:
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |              | Depreciation and amortization                |                                           |           | 4,220,312           |            |            |           | 3,714,365 |            |            |           | 3,215,312 |           
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |              | Loss (gain) on disposal of equipment         |                                           |           | 85,598              |            |            |           | 149,437   |            |            |           | (33,706   | )         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |              | Stock compensation                           |                                           |           | 134,769             |            |            |           |          |            |            |           | 45,500    |           
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |              | Deferred income taxes                        |                                           |           | (898,193            | )          |            |           | 36,689    |            |            |           | (219,464  | )         
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |              | Changes in operating assets and liabilities:
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |              |                                              | Accounts receivable                       |           |                     | 2,289,092  |            |           |           | (1,518,503 | )          |           |           | (880,631   | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |              |                                              | Merchandise inventories                   |           |                     | (5,570,366 | )          |           |           | (6,982,167 | )          |           |           | (2,126,941 | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |              |                                              | Prepaid expenses and other current assets |           |                     | (28,965    | )          |           |           | (320,230   | )          |           |           | (79,346    | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |              |                                              | Refundable income taxes                   |           |                     |           |            |           |           |           |            |           |           | 675,521    |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |              |                                              | Accounts payable                          |           |                     | 371,135    |            |           |           | (69,415    | )          |           |           | 2,038,104  |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |              |                                              | Salaries and wages payable                |           |                     | 1,144,691  |            |           |           | (1,146,924 | )          |           |           | 119,593    |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |              |                                              | Other accrued expenses                    |           |                     | 2,874,764  |            |           |           | 825,445    |            |           |           | 641,486    |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |              |                                              | Income taxes payable                      |           |                     | (380,693   | )          |           |           | 864,611    |            |           |           | 802,943    |  
|                                                                                  |              |                                              |                                           |           |                     |            |            |           |           |            |            |          
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net cash provided by operating activities                                         |              |                                              | 11,507,616                                |           |                     |            | 1,036,831  |           |           |            | 9,612,384  |          
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Investing activities                                                             
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Purchases of furniture, equipment and leasehold
improvements                      |              |                                              | (8,196,063                                | )         |                     |            | (6,881,596 | )         |           |            | (3,300,013 | )        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Other assets                                                                      |              |                                              | 100,318                                   |           |                     |            | 215,523    |           |           |            | (514,532   | )        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from sale of assets                                                      |              |                                              | 46,779                                    |           |                     |            | 110,580    |           |           |            | 60,928     |          
|                                                                                  |              |                                              |                                           |           |                     |            |            |           |           |            |            |          
|Net cash used in investing activities                                             |              |                                              | (8,048,966                                | )         |                     |            | (6,555,493 | )         |           |            | (3,753,617 | )        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Financing activities                                                             
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from exercise of stock options and
related tax benefit                   |              |                                              | 17,994                                    |           |                     |            | 157,950    |           |           |            |           |          
|                                                                                  |              |                                              |                                           |           |                     |            |            |           |           |            |            |          
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net cash provided by financing activities                                         |              |                                              | 17,994                                    |           |                     |            | 157,950    |           |           |            |           |          
|                                                                                  |              |                                              |                                           |           |                     |            |            |           |           |            |            |          
|Increase (decrease) in cash and cash equivalents                                  |              |                                              | 3,476,644                                 |           |                     |            | (5,360,712 | )         |           |            | 5,858,767  |          
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Cash and cash equivalents at beginning of year                                    |              |                                              | 5,468,390                                 |           |                     |            | 10,829,102 |           |           |            | 4,970,335  |          
|                                                                                  |              |                                              |                                           |           |                     |            |            |           |           |            |            |          
|Cash and cash equivalents at end of year                                          |              | $                                            | 8,945,034                                 |           |                     | $          | 5,468,390  |           |           | $          | 10,829,102 |          
|                                                                                  |              |                                              |                                           |           |                     |            |            |           |           |            |            |          
|Cash paid during the year for:                                                   
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Income taxes |                                              | $                                         | 6,202,000 |                     |            | $          | 2,695,000 |           |            | $          | 2,350,000 |          
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Interest     |                                              |                                           |          |                     |            |            |          |           |            |            |          |          

See accompanying notes.

21



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##### Table of Contents



Sport Chalet, Inc.

Notes to financial statements

1. Description of Business

Sport Chalet, Inc. (the Company) is an operator of full service, specialty
sporting goods superstores in Southern California. As of March 31, 2001, the
Company had 23 stores, 11 of which are located in Los Angeles County, five in
Orange County, three in San Diego County, two in San Bernardino County, one in
Ventura County and one in Riverside County.

The Chairman of the Board (Principal Stockholder) owned approximately 66% of
the Companys outstanding common stock at March 31, 2001.

2. Summary of Significant Accounting Policies

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.

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 years | 
|                                        
|                                        
|                                        
|                                        
|Rental equipment                         |  |  | 3 years   | 
|                                        
|                                        
|                                        
|                                        
|Vehicles                                 |  |  | 5 years   | 
|                                        
|                                        
|                                        
|                                        
|Leasehold improvements                   |  |  | 15 years  | 

22



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##### Table of Contents



Sport Chalet, Inc.

Notes to financial statements (continued)

2. Summary of Significant Accounting Policies (continued)

Long Lived Assets

The Company periodically evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful life of long lived assets
may warrant revision or that the remaining balance may not be recoverable. When
factors indicate that the asset should be evaluated for possible impairment,
the Company uses an estimate of the undiscounted net cash flows over the
remaining life of the asset in measuring whether the asset is recoverable.
Based upon the anticipated future income and cash flow from operations, in the
opinion of Company management, there has been no impairment.

Pre-opening Costs

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

Revenue Recognition

Retail merchandise sales are recognized at the point of sale less estimated
sales returns. The Company adopted Staff Accounting Bulletin No.101 (SAB 101),
Revenue Recognition in Financial Statements, in the fourth quarter of 2000.
Such adoption did not have a material impact on the Companys financial
position or results of operations.

Advertising Costs

Advertising costs are expensed as incurred. Advertising expense amounted to
$5,111,472, $4,469,803 and $3,960,886 for the years ended March 31, 2001, 2000
and 1999, respectively.

Income Taxes

The Company utilizes Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, which prescribes the use of the liability method
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.

23



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##### Table of Contents



Sport Chalet, Inc.

Notes to financial statements (continued)

2. Summary of Significant Accounting Policies (continued)

Earnings Per Share

In fiscal 1998, the Company adopted Statement of Financial Accounting Standards
No. 128, Earnings Per Share (EPS). This statement supersedes Accounting
Principles Board Opinion No. 15 and replaces primary and fully diluted EPS with
a dual presentation of basic and diluted 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 31                             
|                                                         |                          |                                                       |       |                                      
|                                                         |                          |                                                       |       | 2001                                  |       | 2000 |       | 1999 
|                                                         |                          |                                                       |       |                                       |       |      |       |      
|                                                         |                          |                                                       |       | (in thousands, except per share data)
|Basic EPS computation:                                  
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Numerator                |                                                       | $     | 7,265                                 |       |      | $     | 5,484 |       |   | $     | 5,414 |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Denominator:            
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                          | Weighted average common shares
outstanding            |       |                                       | 6,580 |      |       |       | 6,577 |   |       |       | 6,530 | 
|                                                         |                          |                                                       |       |                                       |       |      |       |       |       |   |       |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Basic earnings per share |                                                       | $     | 1.10                                  |       |      | $     | .83   |       |   | $     | .83   |      
|                                                         |                          |                                                       |       |                                       |       |      |       |       |       |   |       |      
|Diluted EPS computation:                                
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Numerator                |                                                       | $     | 7,265                                 |       |      | $     | 5,484 |       |   | $     | 5,414 |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Denominator:            
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                          | Weighted average common shares
outstanding            |       |                                       | 6,580 |      |       |       | 6,577 |   |       |       | 6,530 | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                          | Incremental shares from
assumed conversion of options |       |                                       | 225   |      |       |       | 179   |   |       |       | 201   | 
|                                                         |                          |                                                       |       |                                       |       |      |       |       |       |   |       |      
|                                                        
|                                                        
|                                                        
|                                                        
|Total weighted average common
shares  assuming dilution |                          |                                                       | 6,805 |                                       |       |      | 6,756 |       |       |   | 6,731 |      
|                                                         |                          |                                                       |       |                                       |       |      |       |       |       |   |       |      
|                                                        
|                                                        
|                                                        
|                                                        
|Diluted earnings per share                               |                          | $                                                     | 1.07  |                                       |       | $    | .81   |       |       | $ | .80   |      
|                                                         |                          |                                                       |       |                                       |       |      |       |       |       |   |       |      

24



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##### Table of Contents



Sport Chalet, Inc.

Notes to financial statements (continued)

2. Summary of Significant Accounting Policies (continued)

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles 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 stock-based awards to employees using the intrinsic
value method as prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees.

Major Supplier

During 2001 and 2000, the Company purchased approximately 9% and 8%,
respectively, of its inventory from one supplier. At March 31, 2001 and 2000,
the amount due to this supplier constituted approximately 7.5% and 8% of
accounts payable, respectively.

3. Loans Payable to Bank

The Company has a credit facility with Bank of America National Trust and
Savings Association, Inc. (lender) which provides for advances up to $10
million less the amount of any outstanding draws up to a maximum of $1.5
million in authorized letters of credit. Maximum borrowings generally may not
exceed 50% of the value of eligible inventory, as defined, and may also be
reduced under certain circumstances to reflect reserves or other adjustments.
Interest shall accrue at prime less 1/2% depending on cash flow (7.5% at March
31, 2001) or may be fixed for a period of time at the then current rate
established under one of several indicies, all at the Companys option. This
credit facility expires August 31, 2002. The primary covenants in the credit
facility with the lender require the Company to maintain certain minimum cash
flow coverage and debt to equity ratios, and restricts the level of losses and
capital expenditures, calculated on a quarterly basis. This loan is secured by
substantially all of the Companys non-real estate assets.

At March 31, 2001, the Company had no letters of credit outstanding.

There were no borrowings during either fiscal 2001 or fiscal 2000.

25



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##### Table of Contents



Sport Chalet, Inc.

Notes to financial statements (continued)

4. Commitments and Contingencies

The Company leases all buildings (including its corporate office space,
warehouse and distribution facility 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.

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, 2001:

|           |  |   |             | 
|---------- |  | - | ----------- | 
|2002       |  | $ | 11,324,033  | 
|          
|          
|          
|          
|2003       |  |   | 11,309,564  | 
|          
|          
|          
|          
|2004       |  |   | 10,625,625  | 
|          
|          
|          
|          
|2005       |  |   | 10,704,089  | 
|          
|          
|          
|          
|2006       |  |   | 10,772,037  | 
|          
|          
|          
|          
|Thereafter |  |   | 51,382,303  | 
|           |  |   |             | 
|           |  | $ | 106,117,651 | 
|           |  |   |             | 

Total rent expense amounted to $15,504,720, $13,553,746 and $11,765,848 for the
years ended March 31, 2001, 2000 and 1999, respectively, of which $2,469,373,
$2,102,252 and $1,670,113, 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
$977,592, $755,933 and $748,789 for the years ended March 31, 2001, 2000 and
1999, respectively. Included in the accompanying balance sheets are amounts
representing prepaid rent to the Principal Stockholder of $125,791 at March 31,
2001 and $123,334 at March 31, 2000.

The Company is involved from time to time in routine legal matters incidental
to its business. In the opinion of the Companys management, based on the
advice of counsel, resolution of such matters will not have a material effect
on its financial position or results of operations.

A former employee of the Company has filed a class action lawsuit against the
Company. The complaint alleges a failure to pay overtime wages to area
managers, unfair business practices and negligent representation. The Company
and plaintiffs have reached a tentative settlement of all claims for all class
members. The settlement is subject to court approval and the Company has fully
reserved for the anticipated cost of this litigation.

26



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##### Table of Contents



Sport Chalet, Inc.

Notes to financial statements (continued)

5. Income Taxes

The provision (benefit) for income taxes for the years ended March 31, 2001,
2000 and 1999 consists of the following:

|         |          |   |           |           |      |   |           |           |  |   |           |           |  
|-------- | -------- | - | --------- | --------- | ---- | - | --------- | --------- |  | - | --------- | --------- | -
|         |          |   | 2001      |           | 2000 |   | 1999     
|         |          |   |           |           |      |   |          
|Federal:
|        
|        
|        
|        
|         | Current  |   | $         | 4,631,000 |      |   | $         | 2,791,000 |  |   | $         | 2,876,000 |  
|        
|        
|        
|        
|         | Deferred |   |           | (811,000  | )    |   |           | 27,000    |  |   |           | (67,000   | )
|         |          |   |           |           |      |   |           |           |  |   |           |          
|         |          |   | 3,820,000 |           |      |   | 2,818,000 |           |  |   | 2,809,000 |          
|        
|        
|        
|        
|State:  
|        
|        
|        
|        
|         | Current  |   |           | 1,202,000 |      |   |           | 798,000   |  |   |           | 803,000   |  
|        
|        
|        
|        
|         | Deferred |   |           | (109,000  | )    |   |           | 10,000    |  |   |           | (3,000    | )
|         |          |   |           |           |      |   |           |           |  |   |           |          
|         |          |   | 1,093,000 |           |      |   | 808,000   |           |  |   | 800,000   |          
|         |          |   |           |           |      |   |           |           |  |   |           |          
|         |          | $ | 4,913,000 |           |      | $ | 3,626,000 |           |  | $ | 3,609,000 |          
|         |          |   |           |           |      |   |           |           |  |   |           |          

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, 2001 and
2000 are as follows:

|                                     |                             |   |           |         |         |   |         |         |         |   |           |         |      |   |         |         |  
|------------------------------------ | --------------------------- | - | --------- | ------- | ------- | - | ------- | ------- | ------- | - | --------- | ------- | ---- | - | ------- | ------- | -
|                                     |                             |   | 2001      |         | 2000   
|                                     |                             |   |           |         |        
|                                     |                             |   |           |         |         |   | Non-    |         |         |   |           |         | Non-
|                                     |                             |   | Current   |         | current |   | Current |         | current
|                                     |                             |   |           |         |         |   |         |        
|Deferred tax liabilities:           
|                                    
|                                    
|                                    
|                                    
|                                     | Tax over book depreciation  |   | $         |        |         |   | $       | (74,450 | )       |   | $         |        |      |   | $       | (95,494 | )
|                                     |                             |   |           |         |         |   |         |         |         |   |           |         |      |   |         |        
|Total deferred tax liabilities       |                             |   |          |         |         |   | (74,450 | )       |         |   |          |         |      |   | (95,494 | )      
|                                    
|                                    
|                                    
|                                    
|Deferred tax assets:                
|                                    
|                                    
|                                    
|                                    
|                                     | Uniform cost capitalization |   |           | 161,437 |         |   |         |        |         |   |           | 51,510  |      |   |         |        |  
|                                    
|                                    
|                                    
|                                    
|                                     | Markdown reserve            |   |           | 471,240 |         |   |         |        |         |   |           | 599,760 |      |   |         |        |  
|                                    
|                                    
|                                    
|                                    
|                                     | Accrued vacation            |   |           | 232,756 |         |   |         |        |         |   |           | 197,888 |      |   |         |        |  
|                                    
|                                    
|                                    
|                                    
|                                     | Litigation reserve          |   |           | 792,540 |         |   |         |        |         |   |           |        |      |   |         |        |  
|                                    
|                                    
|                                    
|                                    
|                                     | Other                       |   |           | 270,737 |         |   |         | 169,883 |         |   |           | 337,004 |      |   |         | 35,282  |  
|                                     |                             |   |           |         |         |   |         |         |         |   |           |         |      |   |         |        
|Total deferred tax assets            |                             |   | 1,928,710 |         |         |   | 169,883 |         |         |   | 1,186,162 |         |      |   | 35,282  |        
|                                     |                             |   |           |         |         |   |         |         |         |   |           |         |      |   |         |        
|Total deferred tax asset
(liability) |                             | $ | 1,928,710 |         |         | $ | 95,433  |         |         | $ | 1,186,162 |         |      | $ | (60,212 | )      
|                                     |                             |   |           |         |         |   |         |         |         |   |           |         |      |   |         |        



27



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##### Table of Contents



Sport Chalet, Inc.

Notes to financial statements (continued)

5. Income Taxes (continued)

A reconciliation of the provision for income taxes for the years ended March
31, 2001, 2000 and 1999 with the amount computed using the federal statutory
rate follows:

|                                                   |  |      |           |      |  |      |           |  |  |   |           | 
|-------------------------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                                   |  | 2001 |           | 2000 |  | 1999
|                                                   |  |      |           |      |  |     
|Statutory rate, 34% applied to income
before taxes |  | $    | 4,141,000 |      |  | $    | 3,097,000 |  |  | $ | 3,068,000 | 
|                                                  
|                                                  
|                                                  
|                                                  
|State taxes, net of federal tax effect             |  |      | 711,000   |      |  |      | 499,000   |  |  |   | 528,000   | 
|                                                  
|                                                  
|                                                  
|                                                  
|Other, net                                         |  |      | 61,000    |      |  |      | 30,000    |  |  |   | 13,000    | 
|                                                   |  |      |           |      |  |      |           |  |  |   |           | 
|                                                   |  | $    | 4,913,000 |      |  | $    | 3,626,000 |  |  | $ | 3,609,000 | 
|                                                   |  |      |           |      |  |      |           |  |  |   |           | 

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 1,200,000 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, 2001, there were 268,666 remaining shares available for
grant under the Plan.

Pro forma information regarding net income and earnings per share is required
by Statement 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for fiscal 2001, 2000 and 1999: weighted-average risk-free interest
rates of 6%; dividend yields of 0%; weighted-average volatility factors of the
expected market price of the Companys common stock of .48 for 2001, .45 for
2000 and .46 for 1999; and a weighted average expected life of the option of
five years.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options vesting period. The pro forma
information follows:

|                                     |         |   |           |      |      |   |           |     |  |   |           |     | 
|------------------------------------ | ------- | - | --------- | ---- | ---- | - | --------- | --- |  | - | --------- | --- | 
|                                     |         |   | March 31 
|                                     |         |   |          
|                                     |         |   | 2001      |      | 2000 |   | 1999     
|                                     |         |   |           |      |      |   |          
|Pro forma net income                 |         | $ | 7,027,735 |      |      | $ | 5,308,847 |     |  | $ | 5,274,449 |    
|                                    
|                                    
|                                    
|                                    
|Pro forma earnings per common share:
|                                    
|                                    
|                                    
|                                    
|                                     | Basic   |   |           | 1.07 |      |   |           | .81 |  |   |           | .81 | 
|                                    
|                                    
|                                    
|                                    
|                                     | Diluted |   |           | 1.03 |      |   |           | .79 |  |   |           | .80 | 

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.

28



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##### Table of Contents



Sport Chalet, Inc.

Notes to financial statements (continued)

6. Award Plan and Stock Award (continued)

Award Plan (continued)

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.

A summary of the Companys stock option activity and related information
follows:

|                                                               |           |  |                |         |                |   |                |      |                |  |         |          |                |   |      |      |  |  |          |        |  |   |      |      | 
|-------------------------------------------------------------- | --------- |  | -------------- | ------- | -------------- | - | -------------- | ---- | -------------- |  | ------- | -------- | -------------- | - | ---- | ---- |  |  | -------- | ------ |  | - | ---- | ---- | 
|                                                               |           |  | March
31, 2001 |         | March
31, 2000 |   | March
31, 1999
|                                                               |           |  |                |         |                |   |               
|                                                               |           |  |                |         |                |   | Weighted       |      |                |  |         |          | Weighted       |   |      |      |  |  | Weighted
|                                                               |           |  |                |         |                |   | Average        |      |                |  |         |          | Average        |   |      |      |  |  | Average 
|                                                               |           |  | Options        |         | Exercise Price |   | Options        |      | Exercise Price |  | Options |          | Exercise Price
|                                                               |           |  |                |         |                |   |               
|                                                              
|                                                              
|                                                              
|                                                              
|Outstanding at
beginning of year                               |           |  | 760,000        |         |                | $ | 4.65           |      |                |  | 618,000 |          |                | $ | 3.95 |      |  |  | 568,000  |        |  | $ | 3.73 |     
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Granted   |  |                | 120,000 |                |   |                | 3.96 |                |  |         | 302,000  |                |   |      | 4.47 |  |  |          | 50,000 |  |   |      | 6.46 | 
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Exercised |  |                | (3,001  | )              |   |                | 4.44 |                |  |         | (45,000  | )              |   |      | 2.85 |  |  |          |       | 
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Forfeited |  |                | (25,666 | )              |   |                | 4.15 |                |  |         | (115,000 | )              |   |      | 2.28 |  |  |          |       | 
|                                                               |           |  |                |         |                |   |                |      |                |  |         |          |                |   |      |      |  |  |          |        |  |   |      |     
|Outstanding at end
of year                                     |           |  | 851,333        |         |                | $ | 4.57           |      |                |  | 760,000 |          |                | $ | 4.65 |      |  |  | 618,000  |        |  | $ | 3.95 |     
|                                                               |           |  |                |         |                |   |                |      |                |  |         |          |                |   |      |      |  |  |          |        |  |   |      |     
|                                                              
|                                                              
|                                                              
|                                                              
|Exercisable at end
of year                                     |           |  | 571,222        |         |                | $ | 3.97           |      |                |  | 255,600 |          |                | $ | 3.50 |      |  |  | 218,200  |        |  | $ | 2.88 |     
|                                                               |           |  |                |         |                |   |                |      |                |  |         |          |                |   |      |      |  |  |          |        |  |   |      |     
|Weighted average
fair value of
options granted
during the year |           |  |               |         |                | $ | 2.37           |      |                |  |        |          |                | $ | 2.22 |      |  |  |         |        |  | $ | 2.83 |     

Exercise prices for options outstanding as of March 31, 2001 ranged from $2.38
to $7.75. The weighted average remaining contractual life of those options is
nine years.

29



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##### Table of Contents



Sport Chalet, Inc.

Notes to financial statements (continued)

6. Award Plan and Stock Award (continued)

Stock Award

The Principal Stockholder and his spouse, through their Family Trust, awarded
27,645 registered shares to certain employees. Award recipients were not
required to pay consideration for the shares. The fair market value of the
shares was treated as a capital contribution by the Principal Stockholder and
expensed as compensation to recipients as of March 31, 2001.

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 are payable over four years and secured by the
awarded shares.

7. Employee Retirement Plan

Effective April 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 one year of service (provided that such service
represents a minimum of 1,000 hours worked during the year) and are at least 21
years of age are eligible to participate. Employees may contribute to the
401(k) Plan up to 24% of their current compensation, 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 $118,742, $101,519 and $114,973 for the years ended March 31,
2001 2000 and 1999, respectively.

30



---



##### Table of Contents



Sport Chalet, Inc.

Notes to 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   |        | Fourth 
|                           |  | Quarter |        | Quarter |  | Quarter |        | Quarter
|                           |  |         |        |         |  |         |        |        
|Fiscal 2001               
|                          
|                          
|                          
|                          
|Net sales                  |  | $       | 44,091 |         |  | $       | 53,744 |         |  | $ | 60,955 |  |  | $ | 56,022 | 
|                          
|                          
|                          
|                          
|Gross profit               |  |         | 13,719 |         |  |         | 16,201 |         |  |   | 19,804 |  |  |   | 16,498 | 
|                          
|                          
|                          
|                          
|Income from operations     |  |         | 2,282  |         |  |         | 2,930  |         |  |   | 4,928  |  |  |   | 1,677  | 
|                          
|                          
|                          
|                          
|Net income                 |  |         | 1,422  |         |  |         | 1,816  |         |  |   | 2,985  |  |  |   | 1,042  | 
|                          
|                          
|                          
|                          
|Basic earnings per share   |  |         | .22    |         |  |         | .28    |         |  |   | .45    |  |  |   | .15    | 
|                          
|                          
|                          
|                          
|Diluted earnings per share |  |         | .21    |         |  |         | .27    |         |  |   | .44    |  |  |   | .15    | 

|                           |  |         |        |         |  |         |        |         |  |   |        |  |  |   |        | 
|-------------------------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | - | ------ |  |  | - | ------ | 
|                           |  | First   |        | Second  |  | Third   |        | Fourth 
|                           |  | Quarter |        | Quarter |  | Quarter |        | Quarter
|                           |  |         |        |         |  |         |        |        
|Fiscal 2000               
|                          
|                          
|                          
|                          
|Net sales                  |  | $       | 34,669 |         |  | $       | 41,679 |         |  | $ | 50,489 |  |  | $ | 49,010 | 
|                          
|                          
|                          
|                          
|Gross profit               |  |         | 10,453 |         |  |         | 12,306 |         |  |   | 15,690 |  |  |   | 13,902 | 
|                          
|                          
|                          
|                          
|Income from operations     |  |         | 1,010  |         |  |         | 1,704  |         |  |   | 3,380  |  |  |   | 2,732  | 
|                          
|                          
|                          
|                          
|Net income                 |  |         | 658    |         |  |         | 1,065  |         |  |   | 2,048  |  |  |   | 1,713  | 
|                          
|                          
|                          
|                          
|Basic earnings per share   |  |         | .10    |         |  |         | .16    |         |  |   | .31    |  |  |   | .26    | 
|                          
|                          
|                          
|                          
|Diluted earnings per share |  |         | .10    |         |  |         | .16    |         |  |   | .30    |  |  |   | .26    | 

9. Other Accrued Expenses

Other accrued expenses consist of the following:

|                                                |  |          |           |      |  |   |           | 
|----------------------------------------------- |  | -------- | --------- | ---- |  | - | --------- | 
|                                                |  | March 31
|                                                |  |         
|                                                |  | 2001     |           | 2000
|                                                |  |          |           |     
|Outstanding gift certificates and store credits |  | $        | 1,624,858 |      |  | $ | 1,064,852 | 
|                                               
|                                               
|                                               
|                                               
|Litigation reserve                              |  |          | 1,650,000 |      |  |   | 50,000    | 
|                                               
|                                               
|                                               
|                                               
|Accrued sales tax                               |  |          | 1,392,857 |      |  |   | 1,372,967 | 
|                                               
|                                               
|                                               
|                                               
|Other                                           |  |          | 1,105,295 |      |  |   | 890,493   | 
|                                                |  |          |           |      |  |   |           | 
|Other accrued expenses                          |  | $        | 5,773,010 |      |  | $ | 3,378,312 | 
|                                                |  |          |           |      |  |   |           | 

31



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##### Table of Contents






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 22, 2001.

| |  |                                |  |                                                      
| |  | ------------------------------ |  | -----------------------------------------------------
| |  | SPORT CHALET, INC.(Registrant)
|
|
|
|
| |  | By:                            |  | /s/ CRAIG L. LEVRA                                   
| |  |                                |  |                                                      
| |  |                                |  | Craig L. Levra, President and
Chief Executive 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.

Signature

|                                                                                              |  |                                     
|--------------------------------------------------------------------------------------------- |  | ------------------------------------
|PRINCIPAL EXECUTIVE OFFICER                                                                   |  | DIRECTORS                           
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|/s/ CRAIG L. LEVRA                                                                            |  | /s/ NORBERT OLBERZ                  
|                                                                                              |  |                                     
|Craig L. Levra, Director, President and
Chief Executive Officer                               |  | Norbert Olberz
Chairman and Director
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER                                                    |  | /s/ JOHN R. ATTWOOD                 
|                                                                                              |  |                                     
|                                                                                              |  | John R. Attwood, Director           
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|/s/ HOWARD K. KAMINSKY                                                                        |  | /s/ AL D. MCCREADY                  
|                                                                                              |  |                                     
|Howard K. Kaminsky, Executive Vice President -
Finance, Chief Financial Officer and Secretary |  | Al D. McCready, Director            
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              |  | /s/ ERIC S. OLBERZ                  
|                                                                                              |  |                                     
|                                                                                              |  | Eric S. Olberz, Director            
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              |  | /s/ KENNETH OLSEN                   
|                                                                                              |  |                                     
|                                                                                              |  | Kenneth Olsen, Director             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              |  | /s/ FREDERICK H. SCHNEIDER          
|                                                                                              |  |                                     
|                                                                                              |  | Frederick H. Schneider, Director    

32



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EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                           |  |        |     |  
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------ | --- | -
|EXHIBIT |  |                                                                                                                                                                                                                           |  | PAGE  
|NUMBER  |  | DESCRIPTION                                                                                                                                                                                                               |  | NUMBER
|        |  |                                                                                                                                                                                                                           |  |       
|3.1     |  | Certificate of Incorporation of Sport Chalet, Inc.                                                                                                                                                                        |  |        | (1  | )
|       
|       
|       
|       
|3.2     |  | Bylaws of Sport Chalet, Inc.                                                                                                                                                                                              |  |        | (1  | )
|       
|       
|       
|       
|4.1     |  | Form of Certificate for the Common Stock.                                                                                                                                                                                 |  |        | (1  | )
|       
|       
|       
|       
|10.1    |  | Credit Agreement, dated August 1, 1992, between the Company and Wells Fargo Bank                                                                                                                                          |  |        | (2  | )
|       
|       
|       
|       
|10.2    |  | Letter dated October 8, 1992 by Wells Fargo Bank.                                                                                                                                                                         |  |        | (2  | )
|       
|       
|       
|       
|10.3    |  | 1992 Incentive Award Plan of the Company.                                                                                                                                                                                 |  |        | (2  | )
|       
|       
|       
|       
|10.4    |  | Form of Nonemployee Director Stock Option Incentive Award Agreement.                                                                                                                                                      |  |        | (2  | )
|       
|       
|       
|       
|10.5    |  | Form of Key Employee Stock Option Incentive Award Agreement.                                                                                                                                                              |  |        | (2  | )
|       
|       
|       
|       
|10.6    |  | Tax Indemnity Agreement, dated October 8, 1992, between the Company and Norbert J. Olberz.                                                                                                                                |  |        | (2  | )
|       
|       
|       
|       
|10.7    |  | Form of Director and Officer Indemnification Agreement.                                                                                                                                                                   |  |        | (2  | )
|       
|       
|       
|       
|10.8    |  | Form of Employee Stock Option Incentive Award Agreement.                                                                                                                                                                  |  |        | (3  | )
|       
|       
|       
|       
|10.9    |  | Credit Agreement Between the Company and Wells Fargo Bank dated December 1, 1992.                                                                                                                                         |  |        | (4  | )
|       
|       
|       
|       
|10.10   |  | Camp 7 Manufacturing Operations Lease dated March 1, 1993, between the Company and Eric Steven
Olberz.                                                                                                                    |  |        | (5  | )
|       
|       
|       
|       
|10.11   |  | First through Fourth Amendment to Credit Agreement between the Company and Wells Fargo Bank
dated December 1, 1992.                                                                                                       |  |        | (6  | )
|       
|       
|       
|       
|10.12   |  | Credit Agreement between the Company and Wells Fargo Bank dated June 1, 1994                                                                                                                                              |  |        | (7  | )
|       
|       
|       
|       
|10.13   |  | Huntington Beach store lease, dated August 25, 1994 between the Company and Huntington Beach
Properties, Inc., a California Corporation.                                                                                  |  |        | (8  | )
|       
|       
|       
|       
|10.14   |  | Letter Regarding Resignation of Samuel G. Allen                                                                                                                                                                           |  |        | (9  | )
|       
|       
|       
|       
|10.15   |  | Letter Regarding Resignation of Joseph H. Coulombe                                                                                                                                                                        |  |        | (10 | )
|       
|       
|       
|       
|10.16   |  | Severance and General Release Agreement with Samuel G. Allen                                                                                                                                                              |  |        | (10 | )
|       
|       
|       
|       
|10.17   |  | Employment Contract for Joseph H. Coulombe                                                                                                                                                                                |  |        | (10 | )
|       
|       
|       
|       
|10.18   |  | Employment Contract for Kim D. Robbins                                                                                                                                                                                    |  |        | (10 | )
|       
|       
|       
|       
|10.19   |  | Agreement for sale of Sport Chalet Manufacturing, dated June 23, 1995 by and among the Company,
Eric S. Olberz and Camp 7, a California corporation.                                                                      |  |        | (10 | )
|       
|       
|       
|       
|10.20   |  | Security Agreement [Debtor in Possession] dated June 23,1995 and executed by Camp 7, Inc., a
California corporation, as Borrower, on behalf of the Company, as Secured Party.                                             |  |        | (10 | )
|       
|       
|       
|       
|10.21   |  | Continuing Guaranty dated June 23, 1995 executed by Eric S. Olberz, as Guarantor, on behalf of
the Company, as lender.                                                                                                    |  |        | (10 | )
|       
|       
|       
|       
|10.22   |  | Promissory Note dated June 23, 1995 executed by Camp 7, Inc., a California corporation, as
Maker on behalf of the Company.                                                                                                |  |        | (10 | )
|       
|       
|       
|       
|10.23   |  | Agreement of Assignment and Assumption of Lease and Consent of Landlord, dated June 23, 1995,
by and among the Company, as Assignor, Camp 7, Inc., a California corporation, as Assignee and
Eric S. Olberz, as Landlord. |  |        | (10 | )
|       
|       
|       
|       
|10.24   |  | Pledge Agreement dated June 23, 1995, by and between Eric S. Olberz, as Pledgor, and the
Company, as Pledgee.                                                                                                             |  |        | (10 | )

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##### Table of Contents



|        |  |                                                                                                                                                                                        |  |        |      |  
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------ | ---- | -
|EXHIBIT |  |                                                                                                                                                                                        |  | PAGE  
|NUMBER  |  | DESCRIPTION                                                                                                                                                                            |  | NUMBER
|        |  |                                                                                                                                                                                        |  |       
|       
|       
|       
|       
|10.25   |  | Licensing Agreement dated June 23, 1995, by and between the Company as Licensee, and Camp 7,
Inc., a California corporation, as Licensor                                               |  |        | (10  | )
|       
|       
|       
|       
|10.26   |  | Indemnification Agreement dated June 23, 1995, by Eric S. Olberz, as Indemnitor, on behalf of
the Company, as Indemnity [if required].                                                 |  |        | (10  | )
|       
|       
|       
|       
|10.27   |  | Severance and General Release Agreement with Eric S. Olberz.                                                                                                                           |  |        | (10  | )
|       
|       
|       
|       
|10.28   |  | Pomona Warehouse lease, dated August 10, 1995, between the company and Montclair Warehouse,
Inc., a California Corporation.                                                            |  |        | (11  | )
|       
|       
|       
|       
|10.29   |  | Waiver of Loan Covenant by Bank dated February 13, 1996.                                                                                                                               |  |        | (12  | )
|       
|       
|       
|       
|10.30   |  | Loan and Security Agreement dated as of May 14, 1996, between the Company and BankAmerica
Business Credit, Inc., together with schedules thereto.                                      |  |        | (13  | )
|       
|       
|       
|       
|10.31   |  | Letter of Credit Financing Agreement Supplement to Loan and Security Agreement dated as of May
14,1996 between the Company and BankAmerica Business Credit, Inc.                       |  |        | (13  | )
|       
|       
|       
|       
|10.32   |  | Side Letter, dated as of May 14, 1996, between the Company and BankAmerica Business Credit,
Inc., respecting the Aggregate Rent Reserve.                                               |  |        | (13  | )
|       
|       
|       
|       
|10.33   |  | Termination Agreement and Mutual General Release dated March 25, 1997 among the Company,
BankAmerica Business Credit, Inc. and Bank of America National Trust and Savings Association. |  |        | (14  | )
|       
|       
|       
|       
|10.34   |  | Business Loan Agreement dated as of March 25, 1997 between the Company and Bank of America
National Trust and Savings Association, together with related exhibits.                     |  |        | (14  | )
|       
|       
|       
|       
|10.35   |  | Employment Agreement for President and Chief Operating Officer                                                                                                                         |  |        | (15  | )
|       
|       
|       
|       
|10.36   |  | Amendment No. 1 to Business Loan Agreement                                                                                                                                             |  |        | (16  | )
|       
|       
|       
|       
|10.37   |  | Business Loan Agreement dated as of June 19, 1998 between the Company and Bank of America
National Trust and Savings Association.                                                      |  |        | (17  | )
|       
|       
|       
|       
|10.38   |  | La Canada store lease dated June 19, 1998 between the Company and La Canada Properties, Inc., a
California Corporation.                                                                |  |        | (17  | )
|       
|       
|       
|       
|10.39   |  | La Canada office lease dated June 19, 1998 between the Company and La Canada Properties, Inc.,
a California Corporation.                                                               |  |        | (17  | )
|       
|       
|       
|       
|10.40   |  | Employment contract for Senior Vice President  General Merchandise Manager                                                                                                            |  |        | (18  | )
|       
|       
|       
|       
|10.41   |  | Porter Ranch store lease dated May 7, 1999 between the Company and North San Fernando Valley
Properties, Inc., a California Corporation.                                               |  |        | (19  | )
|       
|       
|       
|       
|10.42   |  | Employment contract for Executive Vice President  Operations                                                                                                                          |  |        | (20  | )
|       
|       
|       
|       
|10.43   |  | Employment contract for Senior Vice President  Finance                                                                                                                                |  |        | (20  | )
|       
|       
|       
|       
|10.44   |  | Employment contract for Senior Vice President  General Merchandise Manager                                                                                                            |  |        | (20  | )
|       
|       
|       
|       
|10.45   |  | Employment contract for Chairman of the Board                                                                                                                                          |  |        | (21  | )
|       
|       
|       
|       
|10.46   |  | Employment contract for President and Chief Executive Officer                                                                                                                          |  |        | (21  | )
|       
|       
|       
|       
|10.47   |  | Amendment to employment contract for Executive Vice President  Operations                                                                                                             |  |        | (21  | )
|       
|       
|       
|       
|10.48   |  | Amendment to employment contract for Senior Vice President  Finance                                                                                                                   |  |        | (21  | )
|       
|       
|       
|       
|10.49   |  | Amendment to employment contract for Senior Vice President  General Merchandise Manager                                                                                               |  |        | (21  | )
|       
|       
|       
|       
|10.50   |  | Amendment No. 2 Business Loan Agreement                                                                                                                                                |  |        | (22  | )
|       
|       
|       
|       
|10.51   |  | Employment contract for Senior Vice President  Marketing & Advertising                                                                                                                |  |        | E-4  |  
|       
|       
|       
|       
|23      |  | Consent of Independent Auditors                                                                                                                                                        |  |        | E-13 |  

E-2



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##### Table of Contents



(1) Incorporated by reference to the respective exhibit to the Companys Registration Statement on
Form S-1 (Registration Statement No. 33-53120).

(2) Incorporated by reference to Exhibits 10.17 through 10.23, inclusive, to the Companys
Registration Statement on Form S-1 (Registration statement and No. 33-53120).

(3) Incorporated by reference to Exhibit 4.5 to the Companys Registration Statement on Form S-8
(Registration Statement No. 33-61612.)

(4) Incorporated by reference to Exhibit 10.1 to the Companys quarterly report, on Form 10-Q, for
the quarter ending September 30, 1992.

(5) Incorporated by reference to Registrants Report on Form 10-K filed with the Securities and
Exchange Commission on June 28, 1993.

(6) Incorporated by reference to Exhibit 10.1, 10.2, 10.3 and 10.4 to the Companys quarterly
report, on Form 10-Q, for the quarter ending December 31, 1993.

(7) Incorporated by reference to the Companys Form 10-K filed with the Commission on June 28, 1994.

(8) Incorporated by reference to Exhibit 10.1 to the Companys quarterly report, on Form 10-Q, for
the quarter ending September 30, 1994.

(9) Incorporated by reference to Exhibit 10.1 to the Companys quarterly report, on Form 10-Q, for
the quarter ending December 31, 1994.

(10) Incorporated by reference to the Companys Form 10-K filed with the Commission on June 28, 1995.

(11) Incorporated by reference to Exhibit 10.1 to the Companys quarterly report, on Form 10-Q, for
the quarter ending September 30, 1995.

(12) Incorporated by reference to Exhibit 10.1 to the Companys quarterly report, on Form 10-Q, for
the quarter ending December 31, 1995.

(13) Incorporated by reference to Exhibit 10.30, 10.31 and 10.32 to the Companys Form 10-K filed
with the Securities and Exchange Commission on June 27, 1996.

(14) Incorporated by reference to Exhibit 10.33 and 10.34 to the Companys Form 10-K filed with the
Securities and Exchange Commission on June 30, 1997.

(15) Incorporated by reference to Exhibit 10.1 to the Companys quarterly report, on Form 10-Q, for
the quarter ending September 30, 1997.

(16) Incorporated by reference to Exhibit 10.1 to the Companys quarterly report, on Form 10-Q, for
the quarter ending December 31, 1997.

(17) Incorporated by reference to Exhibit 10.37, 10.38 and 10.39 to the Companys Form 10-K filed
with the Securities and Exchange Commission on June 30, 1998.

(18) Incorporated by reference to Exhibit 10.1 to the Companys quarterly report, on Form 10-Q, for
the quarter ending June 30, 1998.

(19) Incorporated by reference to Exhibit 10.41 to the Companys Form 10-K filed with the Securities
and Exchange Commission on June 30, 1999.

(20) Incorporated by reference to Exhibit 10.1, 10.2 and 10.3 to the Companys quarterly report, on
Form 10-Q, for the quarter ending December 31, 1999.

(21) Incorporated by reference to Exhibit 10.45 through Exhibit 10.49 to the Companys Form 10-K
filed with the Securities and Exchange Commission on June 30, 2000.

(22) Incorporated by reference to Exhibit 10.1 to the Companys quarterly report, on Form 10-Q, for
the quarter ending June 30, 2000.

E-3