<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act for 1934
For the quarterly period ended December 31, 1997
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act for 1934
For the Transition period from ______ to ______
Commission file number: 0-20736
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Sport Chalet, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-4390071
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
920 Foothill Boulevard, La Canada California 91011
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(Address of principal executive offices) (Zip)
(818) 790-2717
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(Registrant's telephone number,
including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date, February 1, 1998:
6,500,000
1
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SPORT CHALET, INC.
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Index to Form 10-Q
Part I
------
1. Item 1. Condensed Financial Statements
2. Item 2. Management's Discussion and Analysis of Financial Condition and
the Results of Operations
Part II
-------
1. Item 5. Other Information
2. Item 6. Exhibits and Reports on Form 8-K
2
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SPORT CHALET, INC.
------------------
PART I
------
ITEM 1. CONDENSED FINANCIAL STATEMENTS.
-------------------------------
The condensed financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the information
presented not misleading. In the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for a fair statement of
results for the interim period have been made.
It is suggested that these condensed financial statements be read in
conjunction with the financial statements and the notes thereto included in the
Company's 1997 Annual Report to Shareholders filed with the Commission on June
30, 1997.
3
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SPORT CHALET, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
------------------------- ----------------------------
1997 1996 1997 1996
---------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
Net sales................................. $43,797,953 $41,881,030 $105,922,809 $103,648,065
Cost of goods sold........................ 26,723,863 26,188,211 66,342,580 65,679,369
----------- ----------- ------------ ------------
Gross profit.............................. 17,074,090 15,692,819 39,580,229 37,968,696
Selling, general and
administrative
expenses............................. 13,185,557 12,605,932 34,376,285 33,918,414
----------- ----------- ------------ ------------
Income from operations.................... 3,888,533 3,086,887 5,203,944 4,050,282
Interest expense.......................... 90,124 262,346 215,394 738,303
----------- ----------- ------------ ------------
Income before taxes....................... 3,798,409 2,824,541 4,988,550 3,311,979
Income tax provision...................... 1,555,000 1,156,000 2,043,000 1,356,000
----------- ----------- ------------ ------------
Net income................................ $ 2,243,409 $ 1,668,541 $ 2,945,550 $ 1,955,979
=========== =========== ============ ============
Basic earnings per share (note 2).... $ .35 $ .26 $ .45 $ .30
=========== =========== ============ ============
Diluted earnings per share (note 2).. $ .34 $ .26 $ .45 $ .30
=========== =========== ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
4
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SPORT CHALET, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
-------------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash...................................................... $ 4,601,023 $ 451,114
Accounts receivable - net................................. 248,791 476,070
Merchandise inventories................................... 32,625,197 28,093,635
Prepaid expenses and other current assets................. 412,618 354,281
Deferred and refundable income taxes...................... 579,249 1,394,307
----------- -----------
Total current assets............................ 38,466,878 30,769,407
Furniture, equipment and leasehold
improvements - net........................................ 13,602,282 13,301,334
Deferred income taxes..................................... 39,508 298,879
Deposits.................................................. 66,730 66,730
----------- -----------
Total assets.................................... $52,175,398 $44,436,350
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Loans payable to bank.................................... $ - $ 1,351,765
Accounts payable......................................... 12,538,504 10,586,661
Salaries and wages payable............................... 2,342,830 2,200,895
Other accrued expenses................................... 6,424,945 3,266,082
Income taxes payable..................................... 1,216,622 324,000
----------- -----------
Total current liabilities....................... 22,522,901 17,729,403
Shareholders' 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 - 6,500,000............ 65,000 65,000
Additional paid-in capital........................... 19,900,052 19,900,052
Retained earnings........................................ 9,687,445 6,741,895
----------- -----------
Total shareholders' equity............................... 29,652,497 26,706,947
----------- -----------
Total liabilities and shareholders' equity...... $52,175,398 $44,436,350
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
5
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SPORT CHALET, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended December 31,
1997 1996
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income........................................................ $ 2,945,550 $ 1,955,979
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................................ 2,042,500 2,437,000
Deferred income taxes........................................ 1,074,429 1,445,429
Changes in operating assets and liabilities:
Accounts receivable..................................... 227,279 192,200
Merchandise inventories................................. (4,531,562) (2,778,652)
Prepaid expenses and other current assets............... (58,337) 244,608
Accounts payable........................................ 1,951,843 4,775,174
Salaries and wages expenses............................. 141,935 (112,943)
Other accrued expenses.................................. 3,158,863 2,456,815
Income taxes payable.................................... 892,622
------------ ------------
Net cash provided by operating activities......................... 7,845,122 10,615,610
INVESTING ACTIVITIES
Note receivable................................................... 212,710
Purchase of furniture, equipment and leasehold improvements....... (2,343,448) (2,548,688)
------------ ------------
Net cash used in investing activities............................. (2,343,448) (2,335,978)
FINANCING ACTIVITIES
Proceeds from bank borrowings..................................... 43,000,357 91,366,427
Principal payments on bank loans.................................. (44,352,122) (99,820,255)
------------ ------------
Net cash used in financing activities............................. (1,351,765) (8,453,828)
Increase (decrease) in cash....................................... 4,149,909 (174,196)
Cash at beginning of period....................................... 451,114 768,562
------------ ------------
Cash at end of period............................................. $ 4,601,023 $ 594,366
============ ============
Cash paid during the year for:
Income taxes................................................. $ 75,842 $ (89,429)
Interest..................................................... $ 215,394 $ 805,092
</TABLE>
SEE ACCOMPANYING NOTES.
6
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SPORT CHALET, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. For a summary of significant accounting policies and other information
which relates to these interim statements, reference should be made to the
notes to financial statements included in the Company's 1997 Annual Report
to Shareholders.
2. In February 1997, the Financial Accounting Standards Board (FASB) issued
"Earning Per Share" (Statement No. 128) establishing standards for
computing and presenting earnings per share for common stock or rights
which can be converted to common stock. Statement No. 128 supercedes the
standards for computing earnings per share previously found in APB Opinion
No. 15 and simplifies the standards for computing earnings per share. In
addition, Statement No. 128 replaces the presentation of primary earnings
per share with a presentation of basic earnings per share, requires the
dual presentation of basic and diluted earnings per share on the face of
the income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of basic
earnings per share computation to the numerator and denominator of the
diluted earnings per share computation. The statement is effective for
financial statements for both interim and annual periods ending after
December 15, 1997.
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic Earnings Per Share Computation
Numerator...................................... $2,243,409 $1,668,541 $2,945,550 $1,955,979
---------- ---------- ---------- ----------
Denominator
Weighted average common shares
outstanding.............................. 6,500,000 6,500,000 6,500,000 6,500,000
---------- ---------- ---------- ----------
Total Shares.............................. 6,500,000 6,500,000 6,500,000 6,500,000
---------- ---------- ---------- ----------
Basic earnings per share....................... $ .35 $ .26 $ .45 $ .30
========== ========== ========== ==========
Diluted Earnings Per Share Computation
Numerator...................................... $2,243,409 $1,668,541 $2,945,550 $1,955,979
---------- ---------- ---------- ----------
Denominator
Weighted average common shares
outstanding.............................. 6,500,000 6,500,000 6,500,000 6,500,000
---------- ---------- ---------- ----------
Incremental shares from assumed
conversion of options.................... 116,447 65,559
Total Shares.............................. 6,616,447 6,500,000 6,565,559 6,500,000
---------- ---------- ---------- ----------
Diluted earnings per share..................... $ 0.34 $ 0.26 $ .45 $ 0.30
========== ========== ========== ==========
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE
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RESULTS OF OPERATIONS.
----------------------
The following should be read in conjunction with the Company's financial
statements and related note thereto provided under Item 1 above.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1996. Sales are up 4.8%, $43.8 million compared to $41.8 million
for the same quarter last year. Comparable store sales are up 4.2%. The under-
performing El Cajon store was closed in September 1997 and a new store in Laguna
Nigel was opened during November 1997. Increased demand for winter-related
merchandise over the same period last year was due, in part, to a series of
storms during late November and December 1997 and improving economic conditions
in Southern California.
Gross profit as a percent of sales increased to 39.0% from 37.5% for the
same period last year primarily as a result of a decrease in the reserve for
estimated inventory shrink.
Selling, general and administrative expenses as a percent of sales remained
at 30.1% for the quarter compared to the same quarter last year, even though the
Company incurred additional costs associated with opening a new store.
Interest expense decreased from $262,000 to $90,000, primarily due to lower
bank borrowings due, in turn, to a reduction in total inventory and increased
profitability.
The effective income tax rate is 40.9% in both comparable periods. These
rates differ from the statutory rate of 40.1% as a result of permanent
differences between financial reporting and tax-basis income.
Net income increased from $1.7 million or $.26 per share to $2.2 million or
$.35 per share, primarily as a result of improved gross profit.
NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO NINE MONTHS ENDED DECEMBER
30, 1996. Sales are up 2.1%, $105.9 million compared to $103.7 million for the
same period last year. Comparable store sales are up 2.3%. The increase in
comparable store sales exceeded the increase in overall sales primarily due to
Management's decision to close the under-performing El Cajon store in September
1997 and open a new store in Laguna Nigel during November 1997.
Gross profit increased as a percent of sales, 37.4% compared to 36.6%, due
to reduced inventory shrinkage levels partially offset by increased markdowns.
The markdowns reflect the ongoing identification and clearance of slow moving
inventory in connection with Management's productivity enhancing programs.
Selling, general and administrative expenses as a percent of sales
decreased from 32.7% to 32.5%, even though the Company incurred additional costs
associated with closing one store and opening another
Interest expense decreased from $738,000 to $215,000, primarily due to
lower bank borrowings due, in turn, to a reduction in total inventory and
increased profitability.
8
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The effective income tax rate remained the same, 40.9%. This rate differs
from the statutory rate of 40.1% as a result of permanent differences between
financial reporting and tax-basis income.
Net income increased from $2.0 million or $.30 per share to $2.9 million or
$.45 per share, primarily as a result of improved gross profit.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements are for inventory, store
remodeling and expansion. Historically, the Company's liquidity needs have been
met by cash from operations, credit terms from vendors and bank borrowings.
Net cash provided by operating activities is $7.8 million for the nine
months ended December 31, 1997 compared to $10.6 million for the same period
ended December 31, 1996. Net income provided $2.9 million and $2.0 million,
respectively. Depreciation also provided $2.0 million and $2.4 million in cash
for same period ended December 31, 1997 and 1996, respectively.
Inventories increased by $4.5 million and $2.8 million for the nine months
ended December 31, 1997 and 1996, respectively, due to the seasonal build-up of
inventory. The 1997 increase is more than for 1996 because of relatively lower
inventory levels at the beginning of this fiscal year as compared to the
previous year. The inventory at December 31, 1997 is $3.2 million less than at
December 31, 1996 due to improved sales and inventory controls. Accounts
payable provided less cash in the nine month period ended December 31, 1997 than
the same period of 1996 due to a change in the timing of payments for inventory.
Net cash used in investing activities is $2.3 million in both nine-month
periods ending December 31, 1997 and 1996, respectively. The primary purpose of
these funds is for the routine replacement of furniture, equipment and leasehold
improvements at existing stores, as well as the up grading of computer systems.
In addition, approximately $400,000 was used to open the new store in November
1997.
Net cash used in or provided by financing activities has primarily
reflected advances or pay downs of the Company's revolving credit line. Cash
used is $1.4 million for the nine months ended December 31, 1997 compared to
$8.5 million used by financing activities for the nine months ended December 31,
1996. The decrease during 1997 compared to the same 1996 period is due to
reduced bank borrowing. Bank borrowing as of December 31, 1997 are $1.9 million
less than at December 31, 1996.
Management anticipates that the current cash balance will be used for
funding improvements in existing operations and future expansion. One new store
currently is planned to open in the summer of 1998.
9
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
The statements which are not historical facts contained in this Quarterly
Report on Form 10-Q 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. The words "anticipate", "believes", "expect", "intend", "may",
or similar expressions used in this Quarterly Report as they relate to the
Company or its Management are generally intended to identify such forward
looking statements. These risks and uncertainties contained in this Quarterly
Report include but are not limited to, product demand and market acceptance
risks, the effect of economic conditions generally and in Southern California,
and retail and sporting goods business conditions specifically, the impact of
competition, technological difficulties, capacity and supply constraints or
difficulties, the results of financing efforts, changes in consumer preferences
and trends, the effect of the Company's accounting policies, weather conditions,
acts of God, and other risks detailed in the Company's Commission filings.
10
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PART II
ITEM 5. OTHER INFORMATION.
------------------
On December 12, 1997 the Company obtained an amendment to its credit
facility dated March 1997 reducing the applicable interest rates by 25 basis
points. All other terms of the facility remain in place. See Exhibit 10.1 for
details.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
(a) Exhibits
10.1 Amendment No. 1 to Business Loan Agreement
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
During the quarter for which this report on Form 10-Q is filed,
no reports on Form 8-K were filed.
11
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officer and principal financial officer.
SPORT CHALET, INC.
DATE: February 4, 1998 /s/ Norbert J. Olberz
-----------------------------------------
Norbert J. Olberz
Chairman of the Board and Interim Chief
Executive Officer
(Duly Authorized Officer)
DATE: February 4, 1998 /s/ Howard K. Kaminsky
-----------------------------------------
Howard K. Kaminsky
Senior Vice President-Finance, Chief
Financial Officer, and Secretary
12
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================================================================================
EXHIBIT 10.1
[LOGO OF BA] BANK OF AMERICA AMENDMENT TO DOCUMENTS
- --------------------------------------------------------------------------------
AMENDMENT NO. 1 TO BUSINESS LOAN AGREEMENT
(INVENTORY)
This Amendment No. 1 (the "Amendment") dated as of 12/12, 1997 is between
Bank of America National Trust and Savings Association (the "Bank") and Sport
Chalet, Inc. (the "Borrower").
RECITALS
--------
A. The Bank and the Borrower entered into a certain Business Loan
Agreement (Inventory) dated as of March 25, 1997 (the "Agreement").
B. The Bank and the Borrower desire to amend the Agreement.
AGREEMENT
---------
1. Definitions. Capitalized terms used but not defined in this Amendment
-----------
shall have the meaning given to them in the Agreement.
2. Amendments. The Agreement is hereby amended as follows:
----------
2.1 Paragraph 1.4 of the Agreement is amended in its entirety as
follows:
"1.4 `Applicable Margin' means with respect to the Reference
Rate, the LIBOR Rate, the Offshore Rate, and the Short
Term Base Fixed Rate, the percentage points indicated as
being added thereto, as set forth in the chart below, based
on the Borrower's fixed charge coverage ratio:
Fixed Charge Coverage Ratio
---------------------------
<TABLE>
<CAPTION>
Greater than or equal to 1.15 to 1.00 Less than 1.15 to 1.00
------------------------------------- ----------------------
<S> <C>
RR - .25 RR + 0.00
Fixed + 1.75 Fixed + 2.00
Offshore + 1.75 Offshore + 2.00
LIBOR + 1.75 LIBOR + 2.00"
</TABLE>
3. Effect of Amendment. Except as provided in this Amendment, all of the
-------------------
terms and conditions of the Agreement shall remain in full force and effect.
- --------------------------------------------------------------------------------
-1-
<PAGE>
This Amendment is executed as of the date stated at the beginning of this
Amendment.
BANK OF AMERICA
National Trust and Savings Association Sport Chalet, Inc.
/s/ Matthew P. Dalany /s/ Howard K. Kaminsky
- --------------------------------------- ------------------------------------
By: Matthew P. Dalany, Vice President By: Howard K. Kaminsky, Senior Vice
President-Finance, Chief Financial
Officer and Secretary
-2-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S DECEMBER 31, 1997 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,601,023
<SECURITIES> 0
<RECEIVABLES> 248,791
<ALLOWANCES> 28,000
<INVENTORY> 32,625,197
<CURRENT-ASSETS> 38,466,878
<PP&E> 25,862,883
<DEPRECIATION> 12,260,601
<TOTAL-ASSETS> 52,175,398
<CURRENT-LIABILITIES> 22,522,901
<BONDS> 0
0
0
<COMMON> 65,000
<OTHER-SE> 29,587,497
<TOTAL-LIABILITY-AND-EQUITY> 49,292,083
<SALES> 105,922,809
<TOTAL-REVENUES> 105,922,809
<CGS> 66,342,580
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 34,376,285
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 215,394
<INCOME-PRETAX> 4,988,550
<INCOME-TAX> 2,043,000
<INCOME-CONTINUING> 2,945,550
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,945,550
<EPS-PRIMARY> .45
<EPS-DILUTED> .45
</TABLE>
