<PAGE>
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, 1999
- ----------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF
1934 SECURITIES
For the transition period from__________________to_________________.
Commission file number: 0-20736
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Sport Chalet, Inc.
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(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 number)
incorporation or organization)
920 Foothill Boulevard, La Canada, California 91011
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 790-2717
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Securities registered pursuant to section 12(b) of the Act: N/A
Title of each class Name of each exchange on which registered
None N/A
- ----------------------------- ------------------------------------------
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
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 11, 1999 was $9.6 million. The number of shares of the
registrant's common stock outstanding as of June 11, 1999 was 6,577,000.
Documents Incorporated by Reference
(1) Portions of the Registrant's definitive proxy statement relating to its
1999 Annual Meeting of Shareholders, which will be filed pursuant to
Regulation 14A within 120 days of the close of the Registrant's last fiscal
year, as to Part III.
1
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PART I
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ITEM 1. BUSINESS
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A. GENERAL
----------
Sport Chalet, Inc. is a leading operator of full service, specialty
sporting goods superstores in Southern California. The Company currently has 20
stores, nine located in Los Angeles County, five in Orange County, three in San
Diego County, two in San Bernardino County and one in Ventura County. These
stores average 36,000 square feet in size. The Company's executive offices are
located at 920 Foothill Boulevard, La Canada, California 91011, and its
telephone number is (818) 790-2717.
B. OPERATING HISTORY AND GROWTH PLAN
------------------------------------
The Company began operations in 1959. During the mid-1980's, the Company
embarked on an expansion program that resulted in the opening of up to two
stores per year. In addition several stores were either relocated and/or
expanded. During fiscal 1995 the expansion program was scaled down in response
to slumping sales and the Board of Director's desire to focus on improving
existing operations. The Board of Directors subsequently completed an
evaluation of the Company's strategic policies, operations and management and
implemented specific programs aimed at improving the Company's competitive
position and overall profitability.
During fiscal 1998 the Company adopted a new growth strategy designed to
capitalize on improved operating capabilities and a more robust local economy.
The Company now has 21 stores having added three since the beginning of fiscal
1999. In addition, the Company currently plans to relocate one store and will
open at least one more store during the next 12 months. The Company's business
plan further contemplates opening new stores in Southern California as suitable
locations are found over the next several fiscal years. 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 impact profit in the short run. 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 $1.7 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. While
optimistic 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 becomes more competitive as the economy continues to
expand.
Beginning in fiscal 1995, the Company implemented a series of cost-cutting
actions, productivity improvements and merchandise and sales enhancements, which
include downsizing the Company's labor force, developing more advanced inventory
procurement systems, creating a loss prevention department and improved in-store
training. As a result, gross profit as a percentage of sales improved from a
low in fiscal 1996 of 24.8% to 30.8% for fiscal 1999.
2
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C. OPERATING STRATEGIES
-----------------------
The Company's stores feature a number of distinct, specialty sporting goods
shops under one roof, each offering a large assortment of quality brand name
merchandise at competitive prices. The specialty shops include traditional
sporting goods merchandise (e.g., footwear, apparel, other general athletic
products) and nontraditional merchandise such as downhill skiing, mountaineering
and SCUBA. The merchandise within each shop appeals to both experts and
beginners. 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 $8.1 million
for fiscal 1999.
The Company purchases merchandise from over 1200 vendors and in fiscal
1999, the Company's largest vendor, Nike, Inc., accounted for approximately 9%
of the Company's total inventory purchases. The following table sets forth the
percentage of total net sales for each major category for each of the last three
fiscal years:
<TABLE>
<CAPTION>
Year Ended March 31
--------------------------------------------
1999 1998 1997
---------- ----------- ----------
<S> <C> <C> <C>
Hardlines.................................................... 54% 54% 56%
Apparel...................................................... 28% 28% 25%
Footwear..................................................... 18% 18% 19%
--------------------------------------------
Total.................................................... 100% 100% 100%
============================================
</TABLE>
The market for retail sporting goods is seasonal in nature. The
Company's highest sales levels and operating profitability 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
historically has 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. In
fiscal 1997, 1998 and 1999, sales of winter apparel and equipment accounted for
18%, 19% and 18%, respectively, of the Company's total sales for those fiscal
years. In each of fiscal 1997, 1998 and 1999, 34%, 33% and 31%, respectively,
of the Company's sales and most of its net income were attributable to the
months of November, December and January. Management anticipates that this
seasonal trend in sales and net income 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 has emphasized, and plans to continue
to emphasize, a broadened product mix that offers merchandise generally
purchased by consumers in the spring, summer and fall seasons. Moreover, in
spite of recent product innovations such as snowboarding and "shaped" skis, as
well as the favorable "El Nino" weather conditions in fiscal 1998, Management
believes that the winter-related product category may have matured with little
or no expected growth relative to other specialty areas carried in the Company's
stores, thereby further underscoring the need for greater product and seasonal
diversification.
Compliance with Federal, State and local environmental laws and regulations
has not had, and is not expected to have, a material effect on the capital
expenditures, earnings and competitive position of the Company.
3
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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 for 40 years, and the lack of federal registration
for certain purposes, might only 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. It has also licensed trademarks for certain labels
under which it merchandises soft goods.
D. 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 (Gart Sports, The Sports Authority,
Chicks, Big 5), specialty stores (REI, Turners, Foot Locker, Just for Feet, West
Marine), and discount and department stores (Wal-Mart, Nordstrom, Macys, Target,
Sears). Industry literature mentions the dominance of sporting good superstore
retailers, full-line sporting goods chains with stores typically larger than
30,000 square feet often located in freestanding locations and the consolidation
and reorganization of several of the Company's competitors. 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.
In the last few years, several superstore retailers have attempted to
enter or expand their presence in Southern California, however, during the last
year, two major competitors announced store closings and are eliminating
expansion plans, while another key competitor intends to exploit the departure
of competitor stores in Southern California by upgrading its existing stores.
The Company's position is that 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 Internet has been mentioned as a growth area for sporting goods and
other retail products and many retailers have announced plans to sell or are
currently selling online. The Company will operate its online store through
Global Sports Interactive at www.sportchalet.com and expects to open for
-------------------
business this fall.
E. EMPLOYEES
-------------
As of March 31, 1999, the Company had 1,543 full and part-time
employees, 1,289 of whom were employed in the Company's stores and 254 of whom
were employed in warehouse and delivery operations or in executive office
positions. None of the employees are unionized. A typical store has
approximately 60 employees, of whom 15 to 30 are in the store at any time on a
normal operating basis. Each store employs a store manager, two assistant
managers, and five to seven area managers who supervise the sales associates.
Additional part-time employees typically are hired during the holiday season.
4
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F. YEAR 2000
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The Year 2000 issue exists because many computer applications currently use
two-digit date fields to designate a year. As the century date occurs, time-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in the computer shutting down or performing
incorrect computations, thereby possibly leading to disruptions in normal
business processing.
The Company has conducted a review to identify which systems, both internal
and external, will be affected by the "Year 2000" problem, and has developed a
project plan and schedule designed to correct those issues and systems under its
control.
The majority of the Company's business processing applications operate on a
mainframe computer system. Management believes the mainframe hardware and
operating system are now Year 2000 compliant, all programs and data have been
appropriately modified and testing is complete. The Company's point of sale,
payroll and phone systems also are believed by Management to be Year 2000
compliant.
The Company has completed substantially all of its Year 2000-conversion
project using internal staff spending approximately $200,000 in this effort. The
Company believes that the cost associated with becoming Year 2000 compliant has
not and is not expected to materially affect its future operating results or
financial condition.
While the Company currently believes that it has completed its Year 2000
conversion project, failure to achieve Year 2000 compliance could have a
material adverse impact on the Company's operations. Management believes the
most reasonably likely worst case scenario is where the Company would be unable
to collect payments from customers through its point-of-sale systems, receive
merchandise from vendors or ship merchandise to its own stores.
In addition, there can be no assurance that the systems of other companies
with which the Company does business will also be converted in a timely manner
or that failure to convert by other companies would not have a material impact
on the Company's operations. While the Company did not formally survey its
vendors, Management believes that because the Company purchases merchandise from
over 1200 vendors, none of which historically supplies more than 9% of the
Company's annual purchases and based on a limited review of vendor disclosure
materials, no material disruptions to the Company's operations due to the Year
2000 issues related to third parties are anticipated. However, Management
believes the most reasonably likely worst case scenario regarding third parties
would be lost sales due to a significant number of the Company's vendors having
difficulties shipping merchandise or the Company's inability to accept customer
payments because of problems with the bank or credit card processor. The Company
continues to evaluate the scope of its contingency plans to establish alternate
sources for merchandise and services.
5
<PAGE>
ITEM 2. PROPERTIES
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At March 31, 1999, the Company had eighteen store locations. The following
table summarizes the key information on the Company's retail properties:
<TABLE>
<CAPTION>
GROSS
SQUARE
LOCATION OPENING DATE FOOTAGE
- -------- ------------ --------
<S> <C> <C>
La Canada (1)................................ June 1960 35,000
Huntington Beach (2)(5)...................... June 1981 50,000
La Jolla (3)................................. June 1983 15,000
Mission Viejo................................ August 1986 30,000
Point Loma (2)............................... November 1987 31,000
Marina Del Rey............................... November 1989 42,000
Beverly Hills................................ November 1989 35,000
Brea (2)..................................... April 1990 34,000
Oxnard (2)................................... June 1990 36,000
West Hills (2)............................... June 1991 44,000
Burbank...................................... August 1992 45,000
Montclair (4)................................ November 1992 20,000
Torrance..................................... November 1993 40,000
Glendora..................................... November 1993 40,000
Rancho Cucamonga (2)......................... June 1994 36,000
Irvine (2)................................... November 1995 35,000
Valencia (2)................................. November 1996 40,000
Laguna Niguel................................ November 1997 40,000
Mission Valley............................... June 1998 47,000
</TABLE>
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(1) The original store opened in 1959. The existing store consists of two
nearby facilities - see the discussion below regarding future
expansion and relocation.
(2) Includes swimming pool facility for SCUBA and kayaking instruction.
(3) Consists of two nearby facilities - the store was originally opened
in a different location in the shopping mall and has been relocated.
(4) Store opened within the distribution center building in order to
utilize excess space.
(5) Relocated to a newly constructed facility on the same property in
August 1995.
In addition, the Company opened a 42,000 gross square foot store in
Long Beach during May 1999 and is in the process of opening a store in Porter
Ranch. All retail facilities are located on leased property. The initial terms
of the retail leases expire in 1999 through 2015. The La Jolla store lease
expires in August 1999 and the Company is currently negotiating with the
landlord of that store to move to another building in the same shopping center.
The remaining leases 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 cases, base rental amounts increase as the lease term progresses, but in
some cases, the Company expects that percentage rent will more than offset the
base rental amounts.
6
<PAGE>
The Company leases from entities under the control of Norbert J. Olberz,
the Chairman of the Board and the Company's Principal Shareholder (the
"Principal Shareholder"), its corporate office space in La Canada, its warehouse
and distribution facilities in Montclair, and its stores in La Canada and
Huntington Beach. The Company has incurred rental expense to the Principal
Shareholder of $1.5 million, $1.5 million, and $1.7 million in fiscal 1997,
1998, and 1999, respectively. The Company believes that the occupancy costs to
the Company under each lease are no higher than those which would be charged by
an unrelated third party under similar circumstances.
In 1999 the Company's non-employee Directors have approved a lease for the
new store Porter Ranch, California which was built and is owned by North San
Fernando Valley Properties, Inc., a California Corporation under the control of
the Principal Shareholder. The rental rate for the store will be the amount by
which four percent times monthly gross sales exceeds the $49,000 monthly minimum
rent. The store is 43,000 square feet. The lease is attached as an exhibit to
this Form 10-K.
During fiscal 1998, the Company's non-employee Directors also had approved
a proposal to relocate and expand the La Canada store and corporate offices
leased from La Canada Properties, Inc., a California Corporation under the
control of the Principal Shareholder. Pursuant to the proposal, the existing
lease will be terminated and the store and office relocated to the "Sport Chalet
Village," a shopping center in La Canada currently under development by La
Canada Properties, Inc. Plans to build the shopping center have been delayed
indefinitely due to problems obtaining permits and entitlements from the City of
La Canada. Assuming the project proceeds forward, at some unspecified future
date, the new rental rate for the store will be the amount by which four percent
times monthly gross sales exceeds the $54,250 monthly minimum rent and is
expected to be less, on a per foot basis, than under the old lease. The new
store will be 50,000 square feet compared to the old store's 35,000 square feet.
The new office rental rate will be $10,850 per month compared to $4,500 under
the old lease. The new office will be 20,000 square feet compared to the
current 10,000 square feet. Management believes that the new facilities, if
built, will result in improved operational efficiencies because the site will be
larger and all functions can be housed under one roof.
Management believes that the occupancy costs for the leases described above
would be no higher than those which would be charged by an unrelated third party
under similar circumstances.
The Company maintains insurance coverage for its various facilities for
fire and theft, but does not maintain earthquake insurance.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company is involved in various routine legal proceedings incidental to
the conduct of its business. Management does not believe that any of these legal
proceedings will have a material adverse impact on the business or financial
condition or results of operations of the Company, either due to the nature of
the claims, or because Management believes that such claims should not exceed
the limits of the Company's insurance coverage.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
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None.
7
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PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
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(a) Market Price for Common Shares -
------------------------------
The Company's Common Stock is traded on The Nasdaq Stock Market under
the symbol "SPCH". The following table reflects the range of high and low
selling prices of the Company's Common Stock by quarter over the last two fiscal
years:
<TABLE>
<CAPTION>
Fiscal 1998 High Low
- ----------------- ------ ------
<S> <C> <C>
First Quarter $3.125 $2.375
Second Quarter $3.375 $2.750
Third Quarter $5.000 $3.375
Fourth Quarter $5.375 $4.000
Fiscal 1999
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First Quarter $6.375 $4.250
Second Quarter $6.500 $4.750
Third Quarter $7.625 $4.500
Fourth Quarter $7.250 $5.438
</TABLE>
(b) Approximate Number of Holders of Common Shares -
----------------------------------------------
The approximate number of shareholders of the Company's Common Stock
as of June 11, 1999 was 281 (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.
(c) Frequency and Amount of Any Dividends Declared -
----------------------------------------------
The Company has not paid any dividends to shareholders 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.
8
<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended March 31
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1999 1998 1997 1996 1995
---------- ----------- ----------- ----------- -----------
(In thousands, except per share amounts and selected operating data)
<S> <C> <C> <C> <C> <C>
Statements of Income Data:
Net sales............................................ $154,573 $143,014 $137,705 $133,741 $134,735
Cost of goods sold, buying and occupancy
costs(1).......................................... 106,921 100,239 98,237 100,522 98,443
-------------------------------------------------------------------
Gross profit......................................... 47,652 42,775 39,468 33,219 36,292
Selling, general and administrative expenses......... 38,873 35,669 34,805 34,235 34,852
Stock award (2)...................................... - 1,468 - - -
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Net income (loss) from operations.................... 8,780 5,638 4,663 (1,016) 1,440
Interest expense (income)............................ (243) 175 805 1,224 894
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Net income (loss) before taxes....................... 9,023 5,463 3,858 (2,240) 546
Income tax provision (benefit)....................... 3,609 2,236 1,555 (880) 254
-------------------------------------------------------------------
Net income (loss).................................... 5,414 3,227 2,303 (1,360) 292
===================================================================
Earnings (loss) per share basic..................... $ .83 $ .50 $ .35 $ (.21) $ .04
===================================================================
Earnings (loss) per share diluted................... $ .80 $ .49 $ .35 $ (.21) $ .04
Weighted average shares outstanding:
Basic........................................... 6,530 6,504 6,500 6,500 6,500
===================================================================
Diluted......................................... 6,731 6,587 6,500 6,500 6,500
===================================================================
Selected Operating Data:
Stores open at end of period......................... 19 18 18 18 17
Comparable store sales increase (decrease)(3)........ 3.2% 3.8% 0.0% (4.1)% 1.4%
Balance Sheet Data:
Working capital...................................... $ 22,999 $ 18,201 $ 13,040 $ 11,240 $ 14,916
Total assets......................................... 56,567 48,718 44,436 49,508 51,565
Total loans payable.................................. - - 1,352 10,308 9,333
Total shareholders' equity........................... 36,980 31,521 26,707 24,404 25,764
</TABLE>
(1) Includes the direct cost of merchandise, rent and internal costs associated
with merchandise procurement, storage and handling. Rent is reclassified
from selling, general and administrative expenses to conform with industry
reporting practices in all periods presented.
(2) Represents the fair market value of 293,625 unregistered common shares
awarded to certain employees by the Principal Shareholder and his spouse,
through their Family Trust.
(3) A store's sales are included in the comparable store sales calculation
after its twelfth full month of operation.
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATION
- --------------------
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).
<TABLE>
<CAPTION>
Year ended March 31 Quarter ended March 31
------------------------------------------------------ ------------------------------------
1999 1998 1997 1999 1998
---------------- ---------------- ---------------- ----------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales......................... $154,573 100.0% $143,014 100.0% $137,705 100.0% $39,050 100.0% $37,091 100.0%
Gross profit...................... 47,652 30.8 42,775 29.9 39,468 28.7 12,139 31.1 11,470 30.9
Selling, general and
Administrative expenses........ 38,873 25.2 35,669 24.9 34,805 25.3 10,224 26.2 9,568 25.8
Stock award....................... - - 1,468 1.0 - - - - 1,468 4.0
Income (loss) from operations..... 8,780 5.7 5,638 3.9 4,663 3.4 1,915 4.9 434 1.2
Interest expense (income)......... (243) (0.2) 175 0.1 805 .6 (125) (0.3) (40) (0.1)
Income (loss) before taxes........ 9,023 5.8 5,463 3.8 3,858 2.8 2,040 5.2 474 1.3
Net income (loss)................. 5,414 3.5 3,227 2.3 2,303 1.7 1,302 3.3 281 0.8
Earnings (loss) per share:
Basic....................... .83 .50 .35 .20 .04
Diluted..................... .80 .49 .35 .19 .04
</TABLE>
Fiscal 1999 Compared to Fiscal 1998. Sales increased from $143.0
million to $154.6 million, an 8.1% increase. Comparable store sales increased
3.2% reflecting, in Management's opinion, stronger consumer demand in Southern
California favoring the Company's product mix and continuing improvements in
merchandising and customer service, offset partially by the lack of "El Nino"
driven weather conditions which favorably impacted sales levels of winter-
related merchandise in the third and fourth quarters of the prior fiscal year.
In addition, one new store was opened during June 1998 and another during
November 1997, while the under-performing El Cajon store was closed in September
1997.
Gross profit for the period increased as a percent of sales from 29.9%
to 30.8% reflecting strong consumer demand and continued improvements in
inventory procurement systems and practices, which led to more efficient
inventory levels as well as further reductions in inventory shrinkage.
Selling, general and administrative ("SG&A") expenses increased
slightly as a percent of sales, 25.2% in fiscal 1999 compared to 24.9% in the
prior year as increased sales and net income in fiscal 1999 resulted in
increases in incentive-based labor costs.
For fiscal 1998 the Stock Award by the Principal Shareholder and his
spouse, through their Family Trust, of 293,625 unregistered shares to more than
one hundred employees and certain Directors resulted in compensation expense and
a decrease to net income of $1.5 million. As a consequence, earnings per share
was reduced by $.13 on an after-tax basis. No such award was made in fiscal
1999.
Interest income increased to $243,000 from an expense of $175,000 last
year due to investments of cash reserves generated by increased net income.
The effective tax rate as a percent of pretax income is 40.0% for
fiscal 1999 and 40.9% for fiscal 1998. These rates differ from the statutory
rate of 39.8% as a result of permanent differences between financial reporting
and tax-basis income.
10
<PAGE>
Net income increased to $5.4 million from $3.2 million in the prior
year primarily due to increased sales, improved gross profit margins and the
impact of the Stock Award in the prior fiscal year. Diluted earnings per share
increased to $.80 from $.49 due primarily to increased net income.
Fourth Quarter 1999 Compared to Fourth Quarter 1998. Sales increased
from $37.1 million to $39.1 million, a 5.4% increase. Comparable store sales
increased 0.9% reflecting, in Management's opinion, stronger consumer demand in
Southern California favoring the Company's product mix and continuing
improvements in merchandising and customer service, offset partially by the lack
of "El Nino" driven weather conditions which favorably impacted sales levels of
winter-related merchandise in the prior fiscal year quarter. In addition, one
new store was opened during June 1998.
Gross profit for the period increased as a percent of sales from 30.9%
to 31.1% strong consumer demand and continued improvements in inventory
procurement systems and practices, which led to more efficient inventory levels
as well as further reductions in inventory shrinkage.
Selling, general and administrative expenses increased from 25.8% to
26.2 as a percent of sales as increased sales and net income in fiscal 1999
resulted in increases in incentive-based labor costs.
For the fourth quarter 1998 the Stock Award by the Principal
Shareholder and his spouse, through their Family Trust, of 293,625 unregistered
shares to more than one hundred employees and certain Directors resulted in
compensation expense and a decrease to net income of $1.5 million. As a
consequence, earnings per share was reduced by $.13 on an after-tax basis. No
such award was made in the fourth quarter of fiscal 1999.
Interest income increased to $125,000 from $40,000 last year as a
result of increased cash reserves generated by increased earnings during fiscal
1999.
The effective income tax rate as a percent of pretax income for the
fourth quarter 1999 is 36.2% compared to 40.7% for the same period of fiscal
1998. The result of timing differences between quarters of fiscal 1999.
Net income increased to $1.3 million from $281,000 and earnings per
share increased to $.20 from $.04 as a result of increased sales, improved gross
profit margins and the impact of the Stock Award in the prior fiscal year.
Fiscal 1998 Compared to Fiscal 1997. Sales increased from $137.7
million to $143.0 million, a 3.9% increase primarily attributable to a 3.8%
increase in comparable store sales. Improving economic conditions in Southern
California during all four fiscal quarters, and "El Nino" driven weather
conditions favorably impacted sales levels of winter-related merchandise in the
third and fourth quarters.
Gross profit for the period increased as a percent of sales from 28.7%
to 29.9% reflecting continued improvements in inventory procurement systems and
practices which led to more efficient inventory levels as well as further
reductions in inventory shrinkage.
Selling, general and administrative expenses decreased slightly as a
percent of sales, 24.9% in fiscal 1998 compared to 25.3% in the prior year.
Increases in incentive-based labor costs were offset by cost reductions in other
areas as well as increased sales.
The Stock Award by the Principal Shareholder and his spouse, through
their Family Trust, of 293,625 unregistered shares to more than one hundred
employees and certain Directors resulted in compensation expense and a decrease
to net income of $1.5 million. As a consequence, earnings per share was reduced
by $.13 on an after-tax basis.
11
<PAGE>
Interest expense decreased to $175,000 from $805,000 due to a
significant decrease in average debt outstanding.
The effective tax rate as a percent of pretax income is 40.9% for
fiscal 1998 and 40.3% for fiscal 1997. 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 to $3.2 million from $2.3 million in the prior
year due to increased sales, improved gross profit margins, and relatively lower
SG&A expenses and reduced interest costs partially offset by the Stock Award.
Diluted earnings per share increased to $.49 from $.35 due primarily to
increased net income.
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 next 2 to 3 fiscal years.
Net cash provided by operating activities was $9.6 million, $9.2
million and $12.7 million for fiscal 1999, 1998 and 1997, respectively. Net
income provided cash of $5.4 million, $3.2 million and $2.3 million in fiscal
1999, 1998 and 1997. Included in net income, depreciation provided $3.2
million, $2.9 million and $2.9 million of cash for fiscal 1999, 1998, and 1997,
respectively. In fiscal 1998, stock awards provided an additional $1.6 million.
During fiscal 1999, inventories increased $1.7 million primarily the
result of adding one new store, while during fiscal 1998 and 1997 inventories
decreased $282,000 and $5.0 million as a result of the implementation of a
perpetual inventory system and improved procurement practices.
Accounts payable increased $1.6 million during fiscal 1999 directly
related to the increase in inventory. During fiscal 1998 accounts payable
decreased $976,000 in contrast to an increase of $691,000 during fiscal 1997 due
to changes in the timing of vendor payments.
Other accrued expenses decreased $61,000 during fiscal 1999 compare to
an increase of $1.3 million during fiscal 1998 and $216,000 during fiscal 1997
primarily due to expenses related to the sales volume increases during the
fourth quarter of fiscal 1998 as compared to the fourth quarter of fiscal 1997.
Net cash used in investing activities was $3.3 million, $3.4 million
and $4.0 million for fiscal 1999, 1998 and 1997, respectively. In fiscal 1999
one store was added and during 1998 one store was relocated. In fiscal 1997,
one store was relocated and another was remodeled and a new computer system was
installed. In fiscal 1999, 1998 and 1997, ongoing capital expenditures for the
Company's existing stores totaled $2.3 million, $2.6 million and $2.2 million,
respectively.
Related to the Company's expansion plans capital expenditures are
forecasted to be much higher than in the past, during fiscal 2000 the Company
has forecasted capital expenditures of $8.4 million. Approximately $3.5 million
of this amount will be used to relocate one store and opening at least two new
stores. In addition, approximately $2 million will be used on implementing the
Company's three-year strategic plan regarding information technology.
Historically, net cash used in or provided by financing activities has
resulted primarily from the advance or pay down of a revolving credit line. For
fiscal 1999 there were no borrowings. For fiscal 1998 and 1997, peak borrowings
on that credit line were $4.9 million, $14.2 million, respectively.
12
<PAGE>
In June 1998 the Company modified 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, 2000 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 restricts the level of losses and capital
expenditures, calculated on a quarterly 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 over the next 2 to 3 fiscal years 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 1999.
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 and Quarterly Fluctuations
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, particularly the Mammoth Mountain resort in the eastern
Sierra Nevada mountains. An early snowfall at Mammoth 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 1998 experienced
strong sales of winter-related products as a result of the "El Nino" weather
conditions which provided unusually consistent snowfall throughout the period,
Management currently projects 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
have been and are being partially mitigated by Management's actions to diversify
the Company's product mix. Notwithstanding the overall increase in sales of
winter related products, such sales have decreased over the last five fiscal
years from 26% in fiscal 1994 to 18% in fiscal 1999 as a percentage of the total
Company sales revenue.
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.
13
<PAGE>
Disclosure Regarding Forward-Looking Statements
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. The words "anticipate", "believes", "expect", "intend", "may" or
similar expressions used in this Annual 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 Annual 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,
trade restrictions and other risks detailed in the Company's Security and
Exchange Commission filings.
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. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- ------------------------------------------------------------
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The following table sets forth the names and ages of all directors and
executive officers as of June 29, 1999, indicating all positions and offices
presently held by each.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Norbert J. Olberz 74 Chairman of the Board and Interim Chief Executive Officer
Eric S. Olberz 36 Director
John R. Attwood 68 Director
Kenneth Olsen 81 Director
Craig L. Levra 40 Director, President and Chief Operating Officer
Dennis D. Trausch 49 Executive Vice President
Howard K. Kaminsky 41 Senior Vice President - Finance, Chief Financial Officer and Secretary
Ronald G. Mann 48 Senior Vice President - General Merchandise Manager
</TABLE>
Norbert J. Olberz is the Company's founder and has been its
Controlling Shareholder and Chairman of the Board since it was founded in 1959,
Interim President from April 1995 through November 1997 and Interim Chief
Executive Officer since April 1995.
Eric S. Olberz has been a Director since 1992. Mr. Olberz recently
received a Bachelors degree with an emphasis in accounting from National
University and sat for the Certified Public Accountants Examination. He intends
to seek a staff accountant position with a public accounting firm. Mr. Olberz
was President and owner of Camp 7, Inc., a soft goods manufacturing operation
located in Santa Ana, California from July 1995 through October 1996 and Vice
Chairman of the Company from October 1994 to July 1995, Vice President from 1984
through October 1994 and Secretary from October 1992 to July 1995. Mr. Olberz
resigned as an officer and employee
14
<PAGE>
concurrently with Camp 7, Inc.'s acquisition of the Company's soft goods
manufacturing operations in July 1995. Mr. Olberz is the son of Norbert J.
Olberz, the Principal Shareholder.
John R. Attwood has been a Director of the Company and Chairman of the
Board's Compensation Committee since February 1993. Mr. Attwood is the
President of Attwood Enterprises, a consulting business. He was the former
Chairman of Coca-Cola Bottling of Los Angeles and Senior Vice President and a
Group President at Beatrice Companies, Inc., the parent company of Coca-Cola
Bottling of Los Angeles, until his retirement in 1986. Mr. Attwood currently
serves on the board of directors of Verdugo Hills Hospital, a non-profit
hospital organization.
Kenneth Olsen has been a Director of the Company and Chairman of the
Board's Audit Committee since June 1994. Mr. Olsen served as President and
Chief Executive Officer of the Vons Company, Inc., a leading grocery store
chain, from 1974 to 1983, at which time he retired from full time
responsibilities after thirty-eight years with that company. Mr. Olsen
currently serves as a director of several nonprofit organizations and is a
management consultant advising both national and international companies on
marketing and merchandising consumer products.
Craig L. Levra, Director since November 1998 and President and Chief
Operating Officer since November 1997. Prior to joining the Company, Mr. Levra
had been employed by The Sports Authority, the nation's largest sporting goods
retailer. During his five year tenure with that company, he held positions of
increasing responsibility in merchandising and operations and was Vice President
of Store Operations at the time of his departure. Mr. Levra has an extensive
retail background having worked for several major retail chains including the
HomeClub (the predecessor to HomeBase) and the All-American SportsClub. Mr.
Levra received a Bachelors degree and a Masters degree in Business
Administration from the University of Kansas.
Dennis D. Trausch, Executive Vice President since June 1988. Since
joining the Company in 1976, Mr. Trausch has served in various positions of
increasing responsibility in store and Company operations. He oversees all
store and distribution center operations, including human resources and customer
service, as well as being responsible for site selection and leasing.
Howard K. Kaminsky, Chief Financial Officer since joining the Company
in 1985, Senior Vice President - Finance since April 1997 and Secretary since
July 1995. Mr. Kaminsky was also the Company's Vice-President - Finance from
January through April 1997 and Treasurer from October 1992 through January 1997.
Prior to joining the Company, Mr. Kaminsky was employed in the auditing division
of Ernst & Young LLP. He is a Certified Public Accountant and received his
Bachelor of Science degree in Business Administration from California State
University, Northridge. Mr. Kaminsky is a member of the California Society of
Certified Public Accountants and the Retail Financial Executives Professional
Association.
Ronald G. Mann, Senior Vice President - General Merchandise Manager
since August 1998. Before joining the Company, Mr. Mann had been employed since
1976 at the large sporting goods retailer Big 5 Sporting Goods, where he held
positions of increasing responsibility in operations and merchandising and was
the Assistant Merchandise Manager at the time of his departure. Mr. Mann
received his Bachelor of Arts degree from California State University,
Northridge immediately prior to joining Big 5.
Norbert J. Olberz, the Principal Shareholder, owns approximately 67%
of the Company's outstanding Common Stock at March 31, 1999. As a result, the
Principal Shareholder has sufficient voting power to determine the outcome of
any matters submitted to the Company's shareholders for approval.
Other information responding to Item 10 was included in the
Registrant's Proxy Statement with respect to its 1999 Annual Meeting of
Shareholders and is incorporated by reference herein pursuant to General
Instruction G(3).
15
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
Information responding to Item 11 was included in the Registrant's
proxy statement with respect to its 1999 Annual Meeting of Shareholders and is
incorporated by reference herein pursuant to General Instruction G(3).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Information responding to Item 12 was included in the Registrant's
proxy statement with respect to its 1999 Annual Meeting of Shareholders and is
incorporated by reference herein pursuant to General Instruction G(3).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Information responding to Item 13 was included in the Registrant's
proxy statement with respect to its 1999 Annual Meeting of Shareholders and is
incorporated by reference herein pursuant to General Instruction G(3).
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 Financial Statements are filed as part of this report.
(2) Schedules - Not applicable.
(3) Exhibits - See Index on Page E-1 hereof.
(b) Reports on Form 8-K
None.
16
<PAGE>
Sport Chalet, Inc.
Index to Audited Financial Statements
Report of Independent Auditors
Statements of Income for each of the three years in the period ended March 31,
1999
Balance Sheets as of March 31, 1999 and 1998
Statements of Shareholders' Equity for each of the three years in the period
ended March 31, 1999
Statements of Cash Flows for each of the three years in the period ended March
31, 1999
Notes to Financial Statements
17
<PAGE>
Report of Independent Auditors
The Shareholders and Board of Directors
Sport Chalet, Inc.
We have audited the accompanying balance sheets of Sport Chalet, Inc. as of
March 31, 1999 and 1998, and the related statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended March 31,
1999. 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 generally accepted auditing
standards. 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,
1999 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended March 31, 1999, in conformity with generally
accepted accounting principles.
/s/ Ernest & Young LLP
Los Angeles, California
May 19, 1999
18
<PAGE>
Sport Chalet, Inc.
Statements of Income
<TABLE>
<CAPTION>
Year ended March 31
1999 1998 1997
----------------------------------------------------------------
<S> <C> <C> <C>
Net sales............................................ $154,573,318 $143,014,062 $137,705,280
Cost of goods sold, buying and occupancy............. 106,920,821 100,239,085 98,237,416
----------------------------------------------------------------
Gross profit......................................... 47,652,497 42,774,977 39,467,864
Selling, general and administrative expenses......... 38,872,850 35,668,411 34,804,322
Stock award (Note 6)................................. 1,468,125
----------------------------------------------------------------
Income from operations............................... 8,779,647 5,638,441 4,663,542
Interest expense (income)............................ (243,366) 175,594 805,284
----------------------------------------------------------------
Income before taxes.................................. 9,023,013 5,462,847 3,858,258
Income tax provision................................. 3,609,000 2,236,000 1,555,000
----------------------------------------------------------------
Net income........................................... $ 5,414,013 $ 3,226,847 $ 2,303,258
================================================================
Earnings (loss) per share:
Basic............................................... $ .83 $ .50 $ .35
================================================================
Diluted............................................. $ .80 $ .49 $ .35
================================================================
Weighted average number of common shares outstanding:
Basic.............................................. 6,529,667 6,504,000 6,500,000
Diluted............................................ 6,731,244 6,587,000 6,500,000
</TABLE>
See accompanying notes.
19
<PAGE>
<TABLE>
<CAPTION>
Sport Chalet, Inc.
Balance Sheets
March 31
Assets 1999 1998
-----------------------------------
<S> <C> <C>
Current assets:
Cash....................................................................... $10,829,102 $ 4,970,335
Accounts receivable, less allowance of $28,000 in 1999
and 1998................................................................... 604,296 409,635
Merchandise inventories (Note 2)........................................... 29,518,546 27,812,058
Prepaid expenses and other current assets.................................. 268,343 205,297
Deferred income taxes (Note 5)............................................. 1,263,779 1,134,400
Refundable income tax...................................................... -- 675,521
-----------------------------------
Total current assets........................................................ 42,484,066 35,207,246
Furniture, equipment and leasehold improvements:............................
Furniture, fixtures and office equipment................................... 14,191,841 12,615,227
Rental equipment........................................................... 3,238,145 2,684,207
Vehicles................................................................... 813,168 813,168
Leasehold improvements..................................................... 10,657,242 10,177,392
-----------------------------------
28,900,396 26,289,994
Less allowance for depreciation and amortization........................... 15,398,980 12,846,057
-----------------------------------
13,501,416 13,443,937
Other assets (Note 6)....................................................... 581,262 66,730
-----------------------------------
Total assets................................................................ $56,566,744 $48,717,913
===================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable........................................................... $11,228,511 $ 9,610,860
Salaries and wages payable................................................. 2,962,400 2,842,807
Other accrued expenses (Note 4)............................................ 4,491,568 4,552,352
Income tax payable......................................................... 802,943 --
-----------------------------------
Total current liabilities................................................... 19,485,422 17,006,019
Deferred income taxes (Note 5).............................................. 101,140 191,225
Commitments and contingencies (Note 4)
Shareholders' equity (Note 6):
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 -- 6,532,000 in 1999 and 6,525,000 in 1998.. 65,320 65,250
Additional paid-in capital................................................. 21,532,107 21,486,677
Retained earnings.......................................................... 15,382,755 9,968,742
-----------------------------------
Total shareholders' equity.................................................. 36,980,182 31,520,669
-----------------------------------
Total liabilities and shareholders' equity.................................. $56,566,744 $48,717,913
===================================
</TABLE>
See accompanying notes.
20
<PAGE>
Sport Chalet, Inc.
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional Retained
Shares Amount Paid-in Capital Earnings Total
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1996............ 6,500,000 $65,000 $19,900,052 $ 4,438,637 $24,403,689
Net income for 1997 -- -- -- 2,303,258 2,303,258
---------------------------------------------------------------------
Balance at March 31, 1997............ 6,500,000 65,000 19,900,052 6,741,895 26,706,947
Shares granted to officer........... 25,000 250 118,500 -- 118,750
Contribution by principal
shareholder (Note 6)................ -- -- 1,468,125 -- 1,468,125
Net income for 1998................. -- -- -- 3,226,847 3,226,847
---------------------------------------------------------------------
Balance at March 31, 1998............ 6,525,000 65,250 21,486,677 9,968,742 31,520,669
Shares granted to employees......... 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
=====================================================================
</TABLE>
See accompanying notes.
21
<PAGE>
Sport Chalet, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended March 31
---------------------------------------------------------
1999 1998 1997
---------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income.................................................. $ 5,414,013 $ 3,226,847 $ 2,303,258
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 3,215,312 2,926,309 2,903,070
Loss (gain) on disposal of equipment...................... (33,706) 287,025 478,878
Stock compensation........................................ 45,500 1,586,875 --
Deferred income taxes..................................... (219,464) 445,853 (268,124)
Changes in operating assets and liabilities:
Accounts receivable...................................... (194,661) 66,435 485,805
Merchandise inventories.................................. (1,706,488) 281,577 4,975,687
Prepaid expenses and other current assets................ (63,046) 148,984 13,131
Note receivable.......................................... -- -- 212,710
Refundable income taxes.................................. 675,521 (371,363) (18,647)
Accounts payable......................................... 1,617,651 (975,801) 691,006
Salaries and wages payable............................... 119,593 641,912 350,106
Other accrued expenses................................... (60,784) 1,286,270 216,153
Income taxes payable..................................... 802,943 (324,000) 324,000
--------------------------------------------------------
Net cash provided by operating activities................... 9,612,384 9,226,923 12,667,033
Investing activities
Purchases of furniture, equipment and leasehold
improvements.............................................. (3,300,013) (3,355,937) (4,145,686)
Other assets................................................ (514,532) -- --
Proceeds from sale of assets................................ 60,928 -- 117,000
--------------------------------------------------------
Net cash used in investing activities....................... (3,753,617) (3,355,937) (4,028,686)
Financing activities
Proceeds from bank and other borrowings..................... -- 35,987,095 133,618,058
Repayments of bank and other borrowings..................... -- (37,338,860) (142,573,853)
--------------------------------------------------------
Net cash used in financing activities....................... -- (1,351,765) (8,955,795)
--------------------------------------------------------
Increase (decrease) in cash................................. 5,858,767 4,519,221 (317,448)
Cash at beginning of year................................... 4,970,335 451,114 768,562
--------------------------------------------------------
Cash at end of year......................................... $10,829,102 $ 4,970,335 $ 451,114
========================================================
Cash paid during the year for:
Income taxes.............................................. $ 2,350,000 $ 2,575,842 $ 1,516,168
Interest.................................................. -- 175,594 872,073
</TABLE>
See accompanying notes.
22
<PAGE>
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, 1999, the
Company had 19 stores, eight of which are located in Los Angeles County, five in
Orange County, three in San Diego County, two in San Bernardino County, and one
in Ventura County.
The Chairman of the Board (Principal Shareholder) owned approximately 67% of the
Company's outstanding common stock at March 31, 1999.
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 is potentially exposed to 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, Company 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:
<TABLE>
<S> <C>
Furniture, fixtures and office equipment 5-7 years
Rental equipment 3 years
Vehicles 5 years
Leasehold improvements 15 years
</TABLE>
23
<PAGE>
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.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense amounted to
$3,960,886, $2,786,799 and $2,873,299 for the years ended March 31, 1999, 1998
and 1997, respectively.
Income Taxes
The Company uses the liability method of accounting for income taxes.
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.
24
<PAGE>
Sport Chalet, Inc.
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Earnings Per Share (continued)
A reconciliation of the numerators and denominators of the basic and diluted EPS
computations is illustrated below:
<TABLE>
<CAPTION>
March 31
1999 1998 1997
-------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Basic EPS computation:
Numerator............................................ $5,414 $3,227 $2,303
Denominator:
Weighted average common shares
outstanding........................................ 6,530 6,504 6,500
-------------------------------------------------
Basic earnings per share............................. $ .83 $ .50 $ .35
-------------------------------------------------
Diluted EPS computation:
Numerator............................................ $5,414 $3,227 $2,303
Denominator:
Weighted average common shares outstanding.......... 6,530 6,504 6,500
Incremental shares from assumed conversion of
options............................................ 201 83 --
-------------------------------------------------
Total weighted average common shares -- assuming
dilution............................................. 6,731 6,587 6,500
-------------------------------------------------
Diluted earnings per share............................ $ .80 $ .49 $ .35
-------------------------------------------------
</TABLE>
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."
25
<PAGE>
Sport Chalet, Inc.
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Major Supplier
During 1999 and 1998, the Company purchased approximately 9% and 12%,
respectively, of its inventory from one supplier. At March 31, 1999 and 1998,
the amount due to this supplier constituted approximately 7% and 10% of accounts
payable, respectively.
Reclassification
Certain amounts in March 31, 1997 and 1998 financial statements have been
reclassified to conform with the March 31, 1999 classification.
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 (7.25% at March 31, 1999) 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, 2000. 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, 1999, the Company had no letters of credit outstanding.
There were no borrowings during fiscal 1999. The weighted average interest rate
on short-term borrowings was 8.43% and 8.75% for the years ended March 31, 1998
and 1997, respectively.
4. Commitments and Contingencies
The Company leases all buildings (including its corporate office space, two
warehouses and distribution facilities and two stores from the Company's
Principal Shareholder) 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 leases contain renewal options of five years and
certain leases provide for various rate increases over the lease term.
26
<PAGE>
Sport Chalet, Inc.
Notes to Financial Statements (continued)
4. Commitments and Contingencies (continued)
Future minimum payments, by year and in the aggregate, under those leases with
terms of one year or more, consist of the following at March 31, 1999:
<TABLE>
<S> <C>
2000..................................................... $ 7,328,939
2001..................................................... 6,609,649
2002..................................................... 6,648,860
2003..................................................... 6,252,773
2004..................................................... 6,001,355
Thereafter............................................... 35,865,560
-------------
$68,707,136
=============
</TABLE>
Total rent expense amounted to $11,765,848, $11,015,404 and $10,451,676 for the
years ended March 31, 1999, 1998 and 1997, respectively, of which $1,670,113,
$1,524,389 and $1,498,092, respectively, was paid on the leases with the
Principal Shareholder. Also, total rent expense includes contingent rentals
calculated as a percentage of gross sales over certain base amounts of $748,789,
$752,151 and $557,155 for the years ended March 31, 1999, 1998 and 1997,
respectively. Included in the accompanying balance sheets are amounts
representing prepaid rent to the Principal Shareholder of $115,697 at March 31,
1999 and $76,267 at March 31, 1998.
The Company is involved from time to time in routine legal matters incidental to
its business. In the opinion of the Company Management, resolution of such
matters will not have a material effect on its financial position or results of
operations.
5. Income Taxes
The provision (benefit) for income taxes for the years ended March 31, 1999,
1998 and 1997, consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------------
Federal:
<S> <C> <C> <C>
Current................................ $2,876,000 $1,609,000 $1,560,000
Deferred............................... (67,000) 109,000 (363,000)
---------------------------------------------------
2,809,000 1,718,000 1,197,000
State:
Current................................ 803,000 476,000 365,000
Deferred............................... (3,000) 42,000 (7,000)
---------------------------------------------------
800,000 518,000 358,000
---------------------------------------------------
$3,609,000 $2,236,000 $1,555,000
===================================================
</TABLE>
27
<PAGE>
Sport Chalet, Inc.
Notes to Financial Statements (continued)
5. Income Taxes (continued)
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, 1999 and 1998
are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------------
Non- Non-
Current current Current current
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deferred tax liabilities:
Tax over book depreciation............ $ -- $(125,548) $ -- $(208,673)
------------------------------------------------------------------------
Total deferred tax liabilities......... -- (125,548) -- (208,673)
Deferred tax assets:
Uniform cost capitalization........... 53,989 -- 94,628 --
Markdown reserve...................... 642,600 -- 562,900 --
Accrued vacation...................... 214,216 -- 345,282 --
Other................................. 352,974 24,408 131,590 17,448
------------------------------------------------------------------------
Total deferred tax assets.............. 1,263,779 24,408 1,134,400 17,448
------------------------------------------------------------------------
Total deferred tax asset
(liability)............................ $1,263,779 $(101,140) $1,134,400 $(191,225)
========================================================================
</TABLE>
A reconciliation of the provision for income taxes for the years ended March 31,
1999, 1998 and 1997 with the amount computed using the federal statutory rate
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------
<S> <C> <C> <C>
Statutory rate, 34% applied to income before
taxes......................................... $3,068,000 $1,857,000 $1,312,000
State taxes, net of federal tax effect......... 528,000 342,000 237,000
Other, net..................................... 13,000 37,000 6,000
-------------------------------------------------------
$3,609,000 $2,236,000 $1,555,000
=======================================================
</TABLE>
6. Award Plans 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 period and if not exercised, expire 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.
28
<PAGE>
Sport Chalet, Inc.
Notes to Financial Statements (continued)
6. Award Plans and Stock Award (continued)
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
1999, 1998 and 1997: 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 .46 for 1999, .47 for 1998 and .30 for 1997;
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:
<TABLE>
<CAPTION>
March 31
1999 1998 1997
--------------------------------------------------
<S> <C> <C> <C>
Pro forma net income............................. $5,274,449 $3,173,829 $2,273,954
Pro forma earnings per common share:
Basic........................................... .81 0.49 0.35
Diluted......................................... .80 0.49 0.35
</TABLE>
The effect of compensation expense from stock options in the 1997 pro forma net
income reflects the second year of vesting of the 1996 awards and the first year
of vesting of 1997 awards. Not until 1998 was the full effect of recognizing
compensation expense for stock options representative of the possible effects on
pro forma net income for future years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not provide a reliable single measure of the
fair value of employee stock options.
29
<PAGE>
Sport Chalet, Inc.
Notes to Financial Statements (continued)
6. Award Plans and Stock Award (continued)
Award Plan (continued)
A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998 March 31, 1997
---------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
Price Price Price
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year................. 568,000 $3.73 240,000 $2.52 242,000 $2.51
Granted.......................... 50,000 6.46 328,000 4.62 3,000 3.13
Exercised........................ -- -- --
Canceled......................... -- -- (5,000)
-------- -------- --------
Outstanding at end of
year.............................. 618,000 $3.95 568,000 $3.73 240,000 $2.52
======== ======== ========
Exercisable at end of
year.............................. 218,200 $2.88 106,80 $2.63 59,400 $2.80
======== ===== ======= ===== ======== =====
Weighted average fair
value of options
granted during the year........... -- $2.83 -- $2.23 -- $0.88
</TABLE>
Exercise prices for options outstanding as of March 31, 1999, ranged from $2.375
to $7.75. The weighted average remaining contractual life of those options is
nine years.
Stock Award
The Principal Shareholder and his spouse, through their Family Trust, awarded
293,625 unregistered shares to more than 100 employees and certain Directors.
Award recipients were not required to pay consideration; however, the shares
awarded are subject to certain restrictions including a prohibition against
transfer for two years and potential forfeiture in the event certain employment
conditions are not fulfilled. The fair market value of the shares awarded was
treated as a capital contribution by the Principal Shareholder and expensed as
compensation to recipients as of March 31, 1998.
The Company granted loans to employees to pay the income taxes associated with
these awards. These loans bear interest at 6% and are payable over four years
and secured by the awarded shares.
30
<PAGE>
Sport Chalet, Inc.
Notes to Financial Statements (continued)
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 15% 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 $114,973 and $108,623 for the years ended March 31, 1999 and 1998,
respectively.
8. Quarterly Results of Operations (Unaudited)
A summary of the unaudited quarterly results of operations follows (dollar
amounts in thousands, except per share amounts):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1999
Net sales................................. $32,097 $36,192 $47,234 $39,050
Gross profit.............................. 9,518 10,898 15,097 12,139
Income from operations.................... 938 1,554 4,372 1,915
Net income................................ 571 949 2,592 1,302
Basic earnings per share.................. .09 .15 .40 .20
Diluted earnings per share................ .09 .14 .38 .19
First Second Third Fourth(1)
Quarter Quarter Quarter Quarter
-------------------------------------------------------------
Fiscal 1998
Net sales................................. $29,219 $32,906 $43,798 $37,091
Gross profit.............................. 8,049 9,095 14,161 11,470
Income from operations.................... 498 817 3,889 434
Net income................................ 246 456 2,243 281
Basic earnings per share.................. .04 .07 .35 .04
Diluted earnings per share................ .04 .07 .34 .04
</TABLE>
(1) The stock award discussed in Note 6 amounted to a pretax charge of $1,468
in the fourth quarter 1998.
31
<PAGE>
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 29, 1999.
SPORT CHALET, INC.
(Registrant)
By: /s/ NORBERT J. OLBERZ
---------------------------------------
Norbert J. Olberz, Chairman and Interim
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/ NORBERT J. OLBERZ /s/ CRAIG L. LEVRA
- ---------------------------- ---------------------------------------
Norbert J. Olberz Craig L. Levra, Director, President and
Chairman and Interim Chief Chief Operating Officer
Executive Officer
/s/ JACK R. ATTWOOD
----------------------------------------
PRINCIPAL FINANCIAL AND John R. Attwood, Director
ACCOUNTING OFFICER
/s/ HOWARD K. KAMINSKY /s/ KENNETH OLSEN
- ----------------------------- ----------------------------------------
Howard K. Kaminsky Kenneth Olsen, Director
Senior Vice President - Finance,
Chief Financial Officer and Secretary
/s/ ERIC S. OLBERZ
----------------------------------------
Eric S. Olberz, Director
32
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
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 (6)
1, 1992.
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, (8)
Inc., a California Corporation.
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. (10)
Olberz and Camp 7, a California corporation.
10.20 Security Agreement [Debtor in Possession] dated June 23,1995 and executed by Camp 7, Inc., a California (10)
corporation, as Borrower, on behalf of the Company, as Secured Party.
10.21 Continuing Guaranty dated June 23, 1995 executed by Eric S. Olberz, as Guarantor, on behalf of the (10)
Company, as lender.
10.22 Promissory Note dated June 23, 1995 executed by Camp 7, Inc., a California corporation, as Maker on behalf (10)
of the Company.
10.23 Agreement of Assignment and Assumption of Lease and Consent of Landlord, dated June 23, 1995, by and among (10)
the Company, as Assignor, Camp 7, Inc., a California corporation, as Assignee and Eric S. Olberz, as
Landlord.
</TABLE>
E-1
<PAGE>
<TABLE>
<S> <C>
10.24 Pledge Agreement dated June 23, 1995, by and between Eric S. Olberz, as Pledgor, and the Company, as (10)
Pledgee.
10.25 Licensing Agreement dated June 23, 1995, by and between the Company as Licensee, and Camp 7, Inc., a (10)
California corporation, as Licensor
10.26 Indemnification Agreement dated June 23, 1995, by Eric S. Olberz, as Indemnitor, on behalf of the Company, (10)
as Indemnity [if required].
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 (11)
California Corporation.
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, (13)
Inc., together with schedules thereto.
10.31 Letter of Credit Financing Agreement Supplement to Loan and Security Agreement dated as of May 14,1996 (13)
between the Company and BankAmerica Business Credit, Inc.
10.32 Side Letter, dated as of May 14, 1996, between the Company and BankAmerica Business Credit, Inc., (13)
respecting the Aggregate Rent Reserve.
10.33 Termination Agreement and Mutual General Release dated March 25, 1997 among the Company, BankAmerica (14)
Business Credit, Inc. and Bank of America National Trust and Savings Association.
10.34 Business Loan Agreement dated as of March 25, 1997 between the Company and Bank of America National Trust (14)
and Savings Association, together with related exhibits.
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 (17)
and Savings Association.
10.38 La Canada store lease dated June 19, 1998 between the Company and La Canada Properties, Inc., a (17)
California Corporation.
10.39 La Canada office lease dated June 19, 1998 between the Company and La Canada Properties, Inc., a (17)
California Corporation.
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.
23 Consent of Independent Auditors
27.1 Financial Data Schedule
</TABLE>
(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.)
E-2
<PAGE>
(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.
E-3
<PAGE>
EXHIBIT 10.41
LEASE
between
NORTH SAN FERNANDO VALLEY PROPERTIES, INC.,
a California corporation
as Landlord
and
SPORT CHALET, INC.,
a Delaware corporation,
as Tenant
Los Angeles, California
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page
----
<S> <C> <C>
1. Premises................................................................1
--------
2. Improvements............................................................2
------------
3. Term of this Lease......................................................4
------------------
4. Uses....................................................................5
----
5. Rent....................................................................6
----
6. Taxes and Assessments...................................................7
---------------------
7. Utilities...............................................................8
---------
8. Tenant's Alterations, Additions or Improvements.........................8
-----------------------------------------------
9. Common Areas............................................................9
------------
10. Common Area Expenses....................................................10
--------------------
11. Maintenance.............................................................11
-----------
12. Insurance...............................................................13
---------
13. Indemnity...............................................................14
---------
14. Damage and Destruction..................................................15
----------------------
15. Condemnation............................................................16
------------
16. Assignment and Subletting...............................................16
-------------------------
17. Subordination and Attornment............................................17
----------------------------
18. Tenant Defaults.........................................................17
---------------
19. Landlord Defaults.......................................................19
-----------------
20. Tenant's Property; Surrender; Holding Over..............................19
------------------------------------------
21. Limitation of Liability.................................................20
-----------------------
22. Quiet Enjoyment.........................................................20
---------------
23. Estoppel Statements.....................................................20
-------------------
24. Force Majeure...........................................................20
-------------
25. Signs...................................................................20
-----
26. Real Estate Brokers.....................................................20
-------------------
27. Memorandum of Lease.....................................................20
-------------------
28. Notices.................................................................21
-------
29. Attorneys' Fees.........................................................21
---------------
30. Waiver..................................................................21
------
31. Lease Binding Upon Successors...........................................21
-----------------------------
32. Topical Headings........................................................21
----------------
33. Language................................................................21
--------
34. Invalidity..............................................................21
----------
35. Time of the Essence.....................................................21
-------------------
36. Governing Law...........................................................21
-------------
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C> <C>
37. Approvals...............................................................21
---------
38. Counterparts............................................................21
------------
39. Reference...............................................................21
---------
40. Entire Agreement........................................................22
----------------
</TABLE>
Exhibit A - Site Plan
Exhibit B - Memorandum of Lease
Exhibit C - Construction of Premises
-ii-
<PAGE>
LEASE
THIS LEASE (this "Lease") dated as of May 7, 1999, is entered into by and
-----
between NORTH SAN FERNANDO VALLEY PROPERTIES, INC., a California corporation
("Landlord") and SPORT CHALET, INC., a Delaware corporation ("Tenant").
- ---------- ------
BASIC LEASE PROVISIONS
Shopping Center: Porter Ranch Town Center, Los Angeles, California
Lease Term: An initial term of Fifteen (15) Lease Years (the "Initial
-------
Term"), plus five (5) separate "Option Terms") (as
---- ------------
hereinafter defined) of five (5) Lease Years each.
Minimum Rent: Initial Term $50,166.67 per month
First Option Term $55,183.33 per month
Second Option Term $60,701.67 per month
Third Option Term $66,771.83 per month
Second Option Term $73,449.01 per month
Third Option Term $80,793.92 per month
Fourth Option Term $88,873.31 per month
Fifth Option Term $97,760.64 per month
Percentage
Rental Rate: Four percent (4%)
Initial Uses: Display and retail sale and lease of sporting equipment
and apparel as are from time to time sold and leased in
similar sized retail stores operated by Tenant in
Southern California under the trade name "Sport Chalet".
Approximate Floor
Area of the Premises: 43,000 square feet
Address of Landlord: North San Fernando Valley Properties, Inc.
920 Foothill Boulevard
La Canada Flintridge, CA 91011
Attn: Mr. Norbert Olberz
Address of Tenant: Sport Chalet, Inc.
920 Foothill Blvd.
La Canada Flintridge, CA 91011
Tenant's Trade Name: Sport Chalet
Exhibits:
A Site Plan
B Memorandum of Lease
C Construction of the Premises
This summary of Basic Lease Provisions is intended to supplement and/or
summarize the provisions set forth in the balance of this Lease. If there is
any conflict between any provisions contained in this summary of Basic Lease
Provisions and the balance of this Lease, the balance of this Lease shall
control.
1. Premises.
--------
(a) Landlord leases to Tenant and Tenant leases from Landlord certain
premises (the "Premises") being a building (the "Building") to be constructed by
-------- --------
Landlord approximately within that certain area shown as cross-hatched on
Exhibit A attached hereto and incorporated herein by this reference, which
- ---------
Building shall contain approximately forty-three thousand (43,000) square feet
of "Floor Area" (as hereinafter defined), together with certain improvements
----------
(the "Improvements") to be constructed therein by Landlord, for the "Term" (as
------------ ----
hereinafter defined), at the rental, and upon the terms, conditions and
provisions set forth in this Agreement. The Premises shall be a part of a
larger "Shopping Center" located in the City of Los Angeles, County of Los
---------------
Angeles, State of California, the current plan for construction of which is
approximately as shown on the Exhibit A attached hereto and incorporated herein
---------
by this reference, provided that the parties hereby acknowledge that Landlord
owns only the parcel of the Shopping Center
1
<PAGE>
upon which the Premises is located (the "Landlord's Parcel") and the remainder
-----------------
of the Shopping Center is owned by third parties, and, accordingly, the future
development and/or operation of the Shopping Center is not within the control of
Landlord, except for such matters as may require the consent or approval of
Landlord as owner of the Landlord's Parcel under that certain Declaration of
Covenants, Conditions and Restrictions and Reservation of Easements encumbering
the Shopping Center, recorded on July 1, 1998 as Instrument No. 98-1119300 in
the Official Records of Los Angeles County, California (the "CC&R's"). Landlord
------
agrees not to consent to or approve of any matter requiring the consent or
approval of Landlord as owner of the Landlord's Parcel under the CC&R's which
would materially and adversely affect the operation of Tenant's business from
the Premises or the Shopping Center without the prior written consent or
approval of Tenant. The parties hereby agree and acknowledge that as of the date
of this Lease, Landlord does not yet own Landlord's Parcel but has entered into
an agreement for the purchase of Landlord's Parcel; provided that it shall be a
condition to the occurrence of the Commencement Date that Landlord shall have
acquired title to the Landlord's Parcel. Landlord shall deliver notice to Tenant
promptly following the closing of Landlord's acquisition of title to Landlord's
Parcel. As used herein, the term "Floor Area" shall mean all areas available, or
----------
held for the exclusive use and occupancy of occupants or future occupants of the
Landlord's Parcel (including, without limitation, mezzanines used for the sale
of goods and services, provided that mezzanines used for storage or general
offices shall not be included in Floor Area), measured from the interior surface
of exterior walls (and from extensions thereof in the case of openings) and from
the center of interior demising partitions.
(b) The Floor Area of the Premises shall be the estimated Floor Area
stated in Section 1(a) above, unless and until adjusted pursuant hereto. If
------------
either party determines that the actual Floor Area of the Premises varies from
that set forth in Section 1(a), such party (the "Recalculating Party") shall
------------ -------------------
give notice to the other party of the Recalculating Party's determination of the
actual Floor Area of the Premises, together with reasonably detailed supporting
documentation for the making of such determination. In the event the party
receiving such determination of actual Floor Area in the Premises shall in good
faith dispute such determination, such party shall have the right, within thirty
(30) days of receipt of such determination, to deliver written notice (the
"Floor Area Dispute Notice") to the Recalculating Party, stating in reasonable
- --------------------------
detail the nature of such dispute, and in the event of such dispute, Landlord
and Tenant shall meet within fifteen (15) days following the receipt by the
Recalculating Party of the Floor Area Dispute Notice to in good faith endeavor
to reach agreement upon the amount of the actual Floor Area of the Premises. In
the event Landlord and Tenant are unable, despite the exercise of reasonable
good faith efforts, to so reach agreement upon the actual amount of Floor Area
within the Premises within thirty (30) days following the receipt by the
Recalculating Party of the Floor Area Dispute Notice, either party shall have
the right to institute a reference proceeding pursuant to Section 39 below, to
----------
resolve such dispute. In the event the actual amount of Floor Area within the
Premises is agreed upon by the parties to be other than the amount set forth in
Section 1(a) above, by mutual agreement of the parties, a failure of the non-
- ------------
Recalculating Party to dispute a determination of Floor Area in accordance
herewith by delivery of the Floor Area Dispute Notice within the thirty (30) day
period provided above, or by determination pursuant to reference proceeding,
then such agreed upon amount of Floor Area shall be the Floor Area of the
Premises for all purposes of this Lease Minimum Rent under this Lease, shall be
appropriately retroactively and prospectively adjusted, and any appropriate
adjustment payment from one party to the other based upon such Floor Area
(together with interest on the amount of such payment, at the "Interest Rate"
-------------
(as hereinafter defined), from the time such payment would have been due until
the time such payment is made) shall be made within thirty (30) days of such
agreement upon such Floor Area. As used herein, the term "Interest Rate" means
-------------
a per annum rate of interest equal to the lesser of (1) two percent (2%) over
the then "prime rate" most recently published in the Wall Street Journal (or in
-------------------
the event the Wall Street Journal ceases to publish a "prime rate", the "prime
-------------------
rate" of a comparable source reasonably agreed upon by the parties), or (2) the
maximum rate permitted by applicable law.
2. Improvements.
------------
(a) Landlord shall, at Landlord's sole cost and expense, perform
certain work in connection with the construction of the Premises in accordance
with Exhibit C attached hereto and incorporated herein by this reference
---------
("Landlord's Work"). Tenant shall, at Tenant's sole cost and expense, install
- -----------------
all improvements, furniture, trade fixtures, equipment,
2
<PAGE>
personal property and inventory in the Premises, except to the extent included
in Landlord's Work (collectively, "Tenant's Work") in accordance with Exhibit C
------------- ---------
attached hereto.
(b) Landlord hereby represents and warrants, to Landlord's actual
knowledge, that as of the "Substantial Completion Date" (as defined in Exhibit
--------------------------- -------
C), neither the Premises nor any other part of the Landlord's Parcel shall
contain any "Hazardous Substances" (as hereinafter defined) in such quantity as
--------------------
would constitute a violation of applicable federal, state or local governmental
laws, statutes, rules, regulations, ordinances, codes, orders or other
requirements (collectively, any "Laws") or would adversely affect Tenant's use
----
or occupancy of, or operation of business from, the Premises. Landlord agrees
and represents and warrants that it shall not incorporate or permit or suffer to
be incorporated, knowingly or unknowingly, any material containing any Hazardous
Substances into the Premises. Landlord shall prevent any action by any Person
other than Tenant and/or any of Tenant's employees, agents and/or invitees that
will cause the Premises to be in violation of, or will subject the Premises to,
any remedial obligations under federal, state or local Laws relating to
Hazardous Substances. In the event Hazardous Substances are, or become, located
in, upon, under or about the Premises and/or any other portion of the Landlord's
Parcel in such quantity as would constitute a violation of applicable Laws or
would adversely affect Tenant's use or occupancy of, or operation of business
from, the Premises, other than as a result of the acts or omissions of Tenant
and/or any of Tenant's employees and/or agents, Landlord shall promptly
remediate such contamination, at no cost to Tenant (and without inclusion
thereof as a "Common Area Expense" (as hereinafter defined)), upon discovery of
-------------------
such contamination. Landlord agrees to immediately notify Tenant in reasonable
detail of any existing, pending or threatened regulatory action, third party
claims, and/or contamination of the Landlord's Parcel, relating to the presence
of Hazardous Substances within the Landlord's Parcel resulting from other than
the acts or omissions of Tenant and/or any of Tenant's employees and/or agents.
Landlord shall indemnify, defend and hold harmless Tenant from and against any
and all damages, claims, expenses, costs and liabilities (including, without
limitation, reasonable attorneys' fees and expenses) arising out of or in
connection with the presence of Hazardous Substances in, upon, under or about
the Premises and/or any other portion of the Landlord's Parcel at any time
during the Term of this Lease, other than as a result of the acts or omissions
of Tenant and/or any of Tenant's employees and/or agents. As used in this
Lease, the term "Hazardous Substance" means any asbestos, petroleum product or
-------------------
by-product or hazardous or toxic substance, material or waste which is or
becomes regulated by any local government authority, the State of California or
the United States.
(c) Tenant agrees and represents and warrants that it shall not
incorporate or permit or suffer to be incorporated, knowingly or unknowingly,
any material containing any Hazardous Substances into the Premises provided that
nothing contained herein shall be deemed to prohibit Tenant's use within the
Premises of items customarily used in the operation of a store for the permitted
use under this Lease but constituting Hazardous Substances as defined herein
(including, by way of example and without limitation, customary cleaning fluids
and/or lead diving weights). Tenant shall prevent any action by Tenant and/or
any of Tenant's employees and/or agents that will cause the Premises to be in
violation of, or will subject the Premises to, any remedial obligations under
federal, state or local Laws relating to Hazardous Substances. In the event
Hazardous Substances are, or become, located in, upon, under or about the
Premises and/or any other portion of the Landlord's Parcel in such quantity as
would constitute a violation of applicable Laws or would adversely affect the
use or occupancy of, or operation of business from, the Landlord's Parcel
Center, as a result of the acts or omissions of Tenant and/or any of Tenant's
employees and/or agents, Tenant shall promptly remediate such contamination, at
no cost to Landlord, upon discovery of such contamination. Tenant agrees to
immediately notify Landlord in reasonable detail of any existing, pending or
threatened regulatory action, third party claims, and/or contamination of the
Landlord's Parcel, relating to the presence of Hazardous Substances within the
Landlord's Parcel resulting from the acts or omissions of Tenant and/or any of
Tenant's employees and/or agents. Tenant shall indemnify, defend and hold
harmless Landlord from and against any and all damages, claims, expenses, costs
and liabilities (including, without limitation, reasonable attorneys' fees and
expenses) arising out of or in connection with the presence of Hazardous
Substances in, upon, under or about the Premises and/or any other portion of the
Landlord's Parcel at any time during the Term of this Lease, as a result of the
acts or omissions of Tenant and/or any of Tenant's employees and/or agents.
3
<PAGE>
(d) During the pendency of any work of construction which may result
in the imposition of a mechanic's or materialman's lien upon the Premises,
Landlord may post in the Premises in a reasonable manner, file and/or record
notices of non-responsibility in accordance with applicable Laws. The
provisions of this Section 2(d) shall apply to work in the Premises by or on
------------
behalf of Tenant during the Term including Tenant's Work.
(e) Neither Tenant nor Landlord shall permit any mechanic's,
materialman's or other lien against the Premises or the Landlord's Parcel in
connection with any labor, materials or services furnished or claimed to have
been furnished by or on behalf of such party. If any such lien shall be filed
against the Premises or the Landlord's Parcel, the party charged with causing
the lien shall cause the same to be discharged, provided, however, that either
party may contest any such lien, so long as the enforcement thereof is stayed.
Each party shall indemnify, defend and hold harmless the other from and against
any and all costs, losses, liabilities, claims, demands and expenses (including,
without limitation, reasonable attorneys' fees and expenses) arising as a result
of any mechanic's, materialman's or other lien filed against the Premises or the
Landlord's Parcel in connection with any labor, materials or services furnished
or claimed to have been furnished on behalf of the indemnifying party.
3. Term of this Lease.
------------------
(a) The "Term" of this Lease shall be the period commencing upon the
----
"Commencement Date" (as hereinafter defined) and, unless sooner terminated or
- ------------------
extended as herein provided, expiring on the January 31 first following the
expiration of fifteen (15) Full Lease Years following the Commencement Date.
"Full Lease Year" means each successive twelve (12) month period occurring
- ----------------
during the Term commencing with the first day of the month in which the
Commencement Date occurs, or, if the Commencement Date is not the first day of a
month, commencing with the first day of the month following the month during
which the Commencement Date occurs. "Partial Lease Year" means (a) the period
------------------
between the Commencement Date, if that date is not the first day of a month, and
the day before the beginning of the first Full Lease Year, and (b) if the Term
ends on other than the last day of a Full Lease Year, the period beginning on
the first day following the end of the final Full Lease Year of the Term and
ending on the last day of the Term. "Lease Year" means either a Full Lease Year
----------
or Partial Lease Year, as the case may be. As used herein, the term
"Commencement Date" shall mean the date of the earlier to occur of (i) the date
- ------------------
Tenant opens to the public for business from the Premises, or (ii) sixty (60)
days after the Substantial Completion Date. If the Commencement Date does not
occur within three (3) years after the date hereof, this Lease shall
automatically terminate and be of no further force or effect, unless otherwise
approved by both parties, in the event of which termination neither party shall
have any further liability or obligation hereunder.
(b) Tenant and its authorized agents, contractors, subcontractors and
employees shall have the right, without an obligation to pay rent, additional
rent or other charge, to enter the Premises for the purpose of performance of
Tenant's Work prior to the Commencement Date and no such entry by Tenant shall
be deemed an acceptance of the Premises; provided, however, that any such early
entry shall not unreasonably interfere with Landlord's performance of its
construction obligations with respect to the Premises pursuant to this Lease.
Tenant may use such utilities as are available during the course of such entry
for fixturization purposes prior to the Commencement Date. During the course of
any entry by Tenant for fixturization purposes prior to the Commencement Date,
all terms and conditions of this Lease (but not Tenant's obligation to make
payments in respect of rent or additional rent) shall apply, with specific
reference to indemnity and insurance.
(c) Landlord hereby grants Tenant five (5) separate options (the
"Options") to extend the Term of this Lease for five (5) separate consecutive
- --------
terms (the "Option Terms") of five (5) years each, following expiration of the
------------
then existing Term, upon all the terms and conditions contained in this Lease,
except for the payment of Minimum Rent which shall be in accordance with the
provisions of Section 5(a) below. Tenant shall give written notice of the
------------
exercise of each Option to Landlord at least six (6) months prior to the
expiration of the then applicable Term. Should Tenant neglect to exercise any
Option by the dates specified above, Tenant's right to exercise shall not expire
until thirty (30) days after notice from Landlord of Tenant's failure to
exercise such Option. References in this Lease to the "Term" shall mean the
----
initial Term of this Lease, as the same
4
<PAGE>
may be extended by any Option Terms, as applicable. Tenant shall have no other
right to extend the Term beyond the expiration of the fifth (5th) Option Term.
4. Uses.
----
(a) Tenant shall open for business from the Premises for one (1) day
for the Initial Uses set forth in the Basic Lease Provisions under the trade
name of "Sport Chalet". Landlord hereby represents and warrants to Tenant that,
as of the Substantial Completion Date, the operation for business from the
Premises for the retail sale and/or lease of sporting equipment (including,
without limitation, ski equipment), sporting goods, sports apparel and active
wear (including, without limitation, ski apparel), athletic footwear and
provision of incidental services will not violate any agreements respecting
exclusive use rights or restrictions on use within the Landlord's Parcel or any
portion thereof, and Landlord shall indemnify, defend and hold harmless Tenant
from and against any and all costs, losses, demands, claims, liabilities and
expenses (including, without limitation, reasonable attorneys' fees and
expenses) arising as a result of any breach of such representation and warranty.
(b) Following such initial opening for business from the Premises,
Tenant shall have the right to change the trade name under which it operates
from the Premises and the use of the Premises to an alternate lawful retail use,
subject to applicable restrictions of record (including, without limitation, the
CC&R's).
(c) Following such initial opening, Tenant will be open for business
from the Premises during such days and hours as it deems reasonable and
practicable in its sole business judgment for the operation of its business. In
entering into this Lease, Landlord is not relying upon Tenant's operation of its
business from the Premises after Tenant's initial opening for business. Nothing
in this Lease shall be construed to require a business to be continuously
operated in the Premises or to require the Premises to be continuously occupied
following Tenant's initial opening for business. In the event that the Premises
shall, at any time after Tenant's initial opening for business, be closed for
business for a period of ninety (90) consecutive days or more, other than as a
result of a remodeling, casualty, condemnation or other Force Majeure Event, or
due to Tenant's impending subletting of the Premises or assignment of its
interest in this Lease, as permitted under this Lease, then at any time
thereafter so long as the Premises shall be closed for business, Landlord may,
at its election, terminate this Lease by giving Tenant written notice thereof,
whereupon this Lease shall terminate on the sixtieth (60th) day after Tenant's
receipt of such notice in the same manner as if such date were the date
originally set forth herein for the expiration of this Lease; except, however,
that if Tenant shall reopen the Premises for business on or before the sixtieth
(60th) day after Tenant's receipt of such termination notice from Landlord, then
Landlord's election to terminate shall be null and void and this Lease shall
continue in full force and effect.
(d) Intentionally omitted.
(e) Provided Tenant obtains Landlord's prior written consent, which
consent shall not be unreasonably withheld, conditioned or delayed, Tenant shall
have the exclusive right to use the roof of the Premises, such use being for
Tenant's separate HVAC rooftop system, if any, any antennae or other
communications equipment or other roof-top mounted equipment as Tenant may deem
desirable for the operation of its business; provided, however, that no roof
penetrations shall be made without obtaining Landlord's consent, which consent
shall not be unreasonably withheld, conditioned or delayed, and Tenant shall, at
its own expense, promptly repair any damage or wear to the roof resulting from
such use or caused by penetrations made during installation of Tenant's
equipment or by vibration of such equipment.
(f) Tenant shall not keep anything within the Premises for any purpose
which invalidates any insurance policy carried on the Premises or on any other
improvements located on adjacent properties. All property kept, stored or
maintained within the Premises by Tenant shall be at Tenant's sole risk. Tenant
shall procure at its sole expense any permits and licenses required for the
transaction of its business in the Premises and otherwise comply with all
applicable Laws.
(g) Subject in all events to compliance with applicable Laws and
matters of record (including, without limitation, the CC&R's), which approval
shall not be unreasonably withheld, conditioned or delayed, Tenant
5
<PAGE>
may use the sidewalk immediately adjacent to Tenant's storefront (the "Outdoor
-------
Sales Area"), to display merchandise being sold from the Premises ("Tenant's
- ---------- --------
Outdoor Sales"), subject to the following limitations: (i) all structures
- -------------
erected in connection with Tenant Outdoor Sales on the Outdoor Sales Area shall
be first-class, professionally prepared and promptly removed upon completion;
(ii) no Tenant's Outdoor Sales shall materially adversely affect pedestrian and
vehicular traffic within or ingress and egress to and from the Shopping Center;
(iii) Tenant's liability policy carried pursuant to Section 12(b) shall provide
------------
primary coverage for occurrences within the Outdoor Sales Area during any
Tenant's Outdoor Sales; and (iv) Tenant shall maintain the Outdoor Sales Area
during any Tenant's Outdoor Sales in first-class, neat, clean, and otherwise in
an attractive condition, free of litter and debris resulting from the Tenant's
Outdoor Sales.
5. Rent.
----
(a) Tenant shall pay Landlord "Minimum Rent" during the Term in the
------------
monthly amounts specified in the Basic Lease Provisions. Minimum Rent for any
partial month occurring during the Term shall be prorated based upon the number
of days within such month occurring during the Term. Minimum Rent shall be paid
in monthly installments, in advance, on the first day of each calendar month,
without demand, offset or abatement, except as specifically otherwise provided
in this Lease.
(b) (i) Tenant shall pay as "Percentage Rent" for each fiscal year
---------------
of Tenant during the Term (which fiscal year is presently April 1 to March 31,
and is herein referred to as the "Fiscal Year"), (1) four percent (4%) of "Gross
----------- -----
Sales" (as hereinafter defined) made from the Premises during such Fiscal Year
- -----
less (2) Minimum Rent for such Fiscal Year.
(ii) As used herein, "Gross Sales" means the total gross
-----------
receipts of all merchandise sold or leased including the charges for all
services performed by Tenant or by any subtenant, licensee or concessionaire,
wholesale or retail, cash, credit, or otherwise, including, without limitation,
the value of all consideration other than money received therefor (except for
trade-ins which are intended for resale by Tenant from the Premises): (1) where
the orders originate, in, at, from or arising out of the use of the Premises,
whether delivery or performance is made from the Premises or from some other
place and regardless of the place of bookkeeping for, payment of, or collection
of any account; (2) made by means of mechanical or other vending devices; and
(3) which Tenant, or any subtenant, licensee or concessionaire, in the customary
course of its business, would attribute to its operations at the Premises.
Excluded from Gross Sales are: (I) any exchange or transfer of merchandise
between stores or warehouses of Tenant made solely for the convenient operation
of Tenant's or any subtenant's, licensee's or concessionaire's business and not
to consummate a sale made in or from the Premises; (II) returns to shippers or
manufacturers; (III) cash or credit refunds to customers on transactions
otherwise included in Gross Sales; (IV) sales of fixtures and equipment, which
are not stock for sale or trade; (V) sales, luxury or excise taxes, gross
receipt taxes, and other taxes now or hereafter imposed upon the sale or value
of merchandise or services, whether added separately to the selling price of the
merchandise or services and collected from customers or included in the retail
selling price; (VI) the sums and credits received in settlement of claims for
loss or damage to merchandise; (VII) receipts from public telephones, vending
machines, ticket sales (including, without limitation, tickets to sporting or
other entertainment events and/or ski lift and/or travel package tickets), and
fees for fishing, hunting or other sporting licenses; (VIII) interest, carrying
charges, or other finance charges in respect of sales made on credit; (IX) sales
to employees at a discount, not exceeding three percent (3%) of total Gross
Sales in any Fiscal Year; (X) accounts receivable, not to exceed three percent
(3%) of Gross Sales in any Fiscal Year, which have been determined to be
uncollectible for federal income tax purposes during such Fiscal Year, provided,
however, that if any such amounts are actually collected in a later Fiscal Year,
such amount so collected shall be included in the Gross Sales for such later
Fiscal Year; (XI) sublease rents or other consideration received in connection
with an assignment, sublease, license, concession or other grant of a right of
occupancy with respect to any portion of the Premises; (XII) sales of
merchandise ordered by catalogue regardless of place of order or delivery; and
(XIII) charges paid to all credit card companies.
(iii) Tenant shall furnish Landlord within sixty (60) days after
the end of each Fiscal Year during the Term, a statement, certified by Tenant,
setting forth the Gross Sales made during such Fiscal Year including
6
<PAGE>
a calculation of any Percentage Rent owing for such Fiscal Year together with a
payment of the amount of any Percentage Rent owing for such Fiscal Year.
(iv) Tenant and any subtenant, licensee or concessionaire upon the
Premises shall use such devices for controlling sales as are reasonably
necessary to accurately record all sales. During the Term, Tenant shall keep at
the Premises or at its home or regional office, complete, accurate books of
account and records with respect to the business conducted in or from the
Premises, including the recording of Gross Sales and the receipt and delivery of
all merchandise in and from the Premises during the Term, and shall retain such
books and records and reasonable supporting documentation for at least two (2)
years from the end of the period to which they are applicable. Landlord's
acceptance of Percentage Rent shall be without prejudice to Landlord's
examination and audit rights. Landlord may at any reasonable time during normal
business hours, upon ten (10) days' prior notice to Tenant, cause a complete
audit to be made of such books, records and other materials which Tenant is
required to retain (including, without limitation, the books and records of any
subtenant, licensee or concessionaire) for all or any part of the two (2) years
immediately preceding the giving of such notice. Landlord may require Tenant to
produce such information about such books and records as is necessary for a
proper examination and audit thereof and to make such books and records
available to Landlord for examination and audit; provided, however, that nothing
contained in this Lease shall be deemed to provide Landlord with the right to
review any of Tenant's records with respect to any other store locations other
than as may be necessary for determination of Gross Sales from the Premises.
Any such audit shall be conducted in a manner so as to minimize interference
with Tenant's business operations. If such audit discloses any underpayment by
Tenant of Percentage Rent, Tenant shall pay to Landlord the amount of such
underpayment within fifteen (15) days following Tenant's receipt of such audit.
If such audit discloses that Tenant's annual statement of Gross Sales
understates Gross Sales made during the applicable Fiscal Year by three percent
(3%) or more, Tenant shall pay Landlord as Additional Rent within fifteen (15)
days after demand, Landlord's reasonable cost in conducting such audit (as
evidenced by invoices or other reasonable supporting documents delivered to
Tenant). Landlord shall not conduct such an audit of Tenant's records more than
once in any given Fiscal Year (unless necessitated as a result of any dispute
respecting the accuracy of the initial audit with respect to such Fiscal Year).
Failure of Landlord to conduct such an audit within two (2) years following
provision to Landlord of the applicable annual Gross Sales statement shall
constitute waiver by Landlord of any right to audit Gross Sales specified within
such annual Gross Sales statement. Any information obtained by Landlord as a
result of any such audit shall be held in strict confidence by Landlord, except
that such information may be disclosed by Landlord to a proposed lender or
purchaser with respect to a prospective sale or financing of the Shopping Center
or when Landlord is required to comply with lawful orders of a court or
governmental agency.
(c) All monetary obligations of Tenant to Landlord under this Lease
other than Minimum Rent and Percentage Rent are collectively referred to herein
as "Additional Rent". References in this Lease to "Rent" shall mean,
--------------- ----
collectively, Minimum Rent, Percentage Rent and Additional Rent.
6. Taxes and Assessments.
---------------------
(a) Landlord shall pay, on or before the due date, all taxes and
assessments levied against the Landlord's Parcel (including, without limitation,
the land underlying the Landlord's Parcel) during the Term.
(b) Tenant shall pay to Landlord "Tenant's Share" (as hereinafter
--------------
defined) of the real estate taxes and general assessments (collectively,
"Taxes") levied upon and assessed against the Landlord's Parcel, for each tax
-----
year of the Term. Such taxes shall be payable by the later to occur of (i)
thirty (30) days following Tenant's receipt from Landlord of the applicable Tax
bill together with a calculation of the amount of such Tax owing by Tenant in
accordance with this Section 6, and (ii) fourteen (14) days prior to
---------
delinquency. Tenant's schedule of payments (annual or semi-annual) shall be
concurrent with and proportionate to Landlord's schedule of payments to the
taxing authority. Landlord shall furnish Tenant with proof of payment of Taxes
within thirty (30) days after the delinquency date thereof. In the event of
assessments which may be paid in installments by reason of bonding or otherwise,
Landlord may elect to make payment under the installment plan. In any event,
Tenant's payment obligations under this Section shall be as if Landlord made
payment over the longest period of time permitted by the assessment and Tenant
shall bear no
7
<PAGE>
liability as to installments due following the expiration of the Term or earlier
termination of this Lease.
(c) For purposes of this Section 6, "Tenant's Share" is defined as one
--------- --------------
hundred percent (100%).
(d) Should the first or final tax year occurring during the Term
include a period of time prior to or following the Term, as applicable, Tenant
shall be responsible to Landlord for a pro rata portion of its tax obligation as
described herein, based on the portion of such tax year included in the Term of
this Lease. This Section includes Tenant's total responsibility for taxes for
the Shopping Center, including, without limitation, the Common Areas thereof.
(e) There shall be excluded from the tax bill to which Tenant
contributes for the purposes of computing Tenant's Share (i) income, excess
profits, estate, single business, inheritance, succession, transfer, franchise,
capital, rental, gross receipts or any other taxes or assessments upon Landlord
or the Rents or other sums payable under thus Lease; (ii) taxes and assessments,
general (other than ad valorem taxes) or special, which finance the initial
construction or acquisition of the Shopping Center or off-site improvements
(including, without limitation, sewer and/or street improvements) or any one or
more subsequent renovations, improvements and/or alterations thereof; and (iii)
any charge, such as a water meter charge and the sewer rent based thereon, which
is measured by the consumption of the actual user of the item or service on
which such charge is made.
(f) Any rebates, refunds, or abatements of Taxes received by Landlord
subsequent to payment of the applicable Taxes by Tenant shall be refunded to
Tenant on a pro rata basis within ten (10) days of receipt thereof by Landlord.
Any such rebate, refund or abatement realized by Landlord prior to payment by
Tenant shall result in an immediate reduction in the Taxes upon which Tenant's
Share is calculated.
(g) Tenant shall have such rights to contest the validity or amount of
Taxes as are permitted by law, either in its own name or in the name of
Landlord, in either case with Landlord's full cooperation. Any resultant
refund, rebate or reduction shall be used first to repay the expenses of
obtaining such relief. Landlord shall provide Tenant with government notices of
assessment (or reassessment) in time sufficient to reasonably permit Tenant, at
Tenant's election, to make contest; and if Landlord fails to do so, then there
shall be excluded from the Tax bill to which Tenant contributes, any increased
Taxes resulting from such assessment (or reassessment). The term "contest" as
-------
used in this Section 6(g) means contest, appeal, abatement or other proceeding,
------------
prescribed by applicable law to obtain tax reduction or tax refund, howsoever
denominated.
(h) Tenant shall pay prior to delinquency all taxes, assessments, fees
and charges imposed on its furniture, trade fixtures, equipment, inventory and
other personal property (collectively, "Tenant's Personal Property") in the
--------------------------
Premises. If any such Tenant's Personal Property is assessed jointly with the
property of Landlord, such assessment shall be equitably allocated between
Landlord and Tenant.
7. Utilities.
---------
Landlord shall provide to the Premises at all times necessary utilities
services including electric, water, gas, telephone and other necessary utility
lines, as well as Common Area refuse collection service and sewerage lines
capable of adequately providing for Tenant's needs, but in no event of less
capacity than as specified in Exhibit C attached hereto. Landlord shall cause
---------
all such utilities separately serving the Premises to be separately metered for
the Premises. Tenant shall pay applicable use charges for all such utilities
serving the Premises during the Term directly to the applicable utility
provider.
8. Tenant's Alterations, Additions or Improvements.
-----------------------------------------------
Tenant may make non-structural alterations and improvements to the
interior of the Premises without the prior approval of Landlord. Tenant shall
not make any alterations to any structural or exterior portions of the Premises
without first obtaining the prior written approval of Landlord, which approval
shall not be unreasonably withheld, conditioned or delayed, and shall be deemed
granted if Tenant is not notified in writing of a reasonable basis for
Landlord's withholding of such approval within fifteen (15) days of Tenant's
request therefor. Upon the expiration of the Term or sooner termination of this
Lease, Tenant may, provided no structural damage to the Premises will be caused
thereby, remove its furniture, fixtures and equipment. Tenant's
8
<PAGE>
alterations and improvements to the Premises (except Tenant's trade fixtures,
equipment and personal property), shall become Landlord's property upon
expiration of the Term or earlier termination of this Lease, and Landlord will
accept the Premises as altered without any obligation upon Tenant to restore the
Premises to its former condition. Tenant shall be responsible for all damage
resulting from any construction, alterations or additions in or to the Premises
during the Term made by Tenant (collectively, any "Tenant Construction Work"),
------------------------
whether or not Landlord's consent therefor is necessary or was obtained. All
Tenant Construction Work shall be performed in accordance with all necessary
governmental approvals and permits, which Tenant shall obtain at its sole
expense and all applicable Laws. All Tenant Construction Work shall be performed
in a good and workmanlike manner and diligently prosecuted to completion so the
Premises shall always be a complete unit except during performance of such
Construction Work. Tenant shall perform all Tenant Construction Work so as not
to obstruct access to the Common Areas or the premises of any other occupant of
the Shopping Center.
9. Common Areas.
------------
(a) As used in this Lease, the term "Common Areas" shall mean those
------------
portions of, and facilities within, the Shopping Center which are defined as
"Common Areas" under the CC&R's. Tenant acknowledges that prior to the
Commencement Date, Landlord shall enter into that certain Development Agreement
(the "Development Agreement") with Porter Ranch Development Co. ("Developer"), a
--------------------- ---------
memorandum of which shall be recorded in the Official Records of Los Angeles
County, California, as an encumbrance against the Shopping Center (the
"Memorandum of Development Agreement"). The form of the Development Agreement
- ------------------------------------
and Memorandum of Development Agreement shall be subject to Tenant's approval,
which approval shall not be unreasonably withheld, conditioned or delayed.
Prior to the Commencement Date, Landlord shall enforce its rights under the
Development Agreement so as to cause Developer to construct the Common Areas of
the Shopping Center substantially as shown on Exhibit A attached hereto, subject
---------
to such modifications as are permitted under the Development Agreement and/or
CC&R's, as applicable, provided that to the extent that Landlord has any right
of approval or consent thereunder with respect to such modifications, Landlord
shall obtain Tenant's prior written approval or consent thereto, which approval
shall not be unreasonably withheld, conditioned or delayed.
(b) Tenant, as well as its agents, employees and customers
(collectively, "Customers"), shall have and are granted such nonexclusive rights
---------
to use of the Common Areas as are provided under the CC&R's. Landlord and
Tenant each hereby agree and acknowledge that this Lease is subject and
subordinate to all matters of now of record or which are hereafter recorded as
an encumbrance against the Landlord's Parcel (subject to Section 17 below),
----------
including, without limitation, the CC&R's, the Development Agreement, the
Memorandum of Development Agreement, and that certain Separate Agreement (the
"Separate Agreement") to be entered into by and between Landlord and Developer
- -------------------
prior to the Commencement Date, a memorandum of which shall be recorded in the
Official Records of Los Angeles County, California, as an encumbrance against
the Shopping Center (the "Memorandum of Separate Agreement"); provided that
--------------------------------
Tenant's prior approval shall be obtained as to any such future encumbrance
which materially increases Tenant's rights under this Lease or materially
increases Tenant's obligations or liabilities under this Lease). The form of
the Separate Agreement and Memorandum of Separate Agreement shall be subject to
Tenant's approval, which approval shall not be unreasonably withheld,
conditioned or delayed. Each party shall in all respects comply with the
CC&R's, Development Agreement, Separate Agreement, and other matters of record
in performance of their respective obligations under this Lease. Landlord shall
use commercially reasonable efforts to enforce the CC&R's, Development
Agreement, Separate Agreement and other matters of record (including, without
limitation, the rights of Landlord under the CC&R's, Development Agreement,
Separate Agreement and other matters of record and the obligations of the other
parties bound by the CC&R's, Development Agreement, Separate Agreement and other
matters of record). Without limiting the generality of the foregoing, if Tenant
in good faith determines that the CC&R's, Development Agreement, Separate
Agreement and/or any other matters of record are not being complied with,
Landlord shall use commercially reasonable efforts to enforce compliance with
the same by the non-complying party. Landlord agrees not to consent to or
approve of any matter requiring the consent or approval of Landlord as owner of
the Landlord's Parcel under the CC&R's, Development Agreement, Separate
Agreement or other matters of record which would materially and adversely affect
the operation of Tenant's business from the Premises or the Shopping Center
without the prior written consent or approval of Tenant.
9
<PAGE>
(c) If permitted under the CC&R's, subject to the provisions of this
Section 9(c), Landlord may from time to time consent to or approve of the
- ------------
addition of land to or elimination of land from the Shopping Center, or the
elimination or addition of any improvements, or changes to or in the shape,
size, location, number, height or extent of the improvements to any portion of
the Shopping Center; provided, however, that if Landlord has the right under the
CC&R's to consent to or approve of the same, Tenant's prior written approval,
which approval shall not be unreasonably withheld, conditioned or delayed, shall
be required for any such change which would have an adverse affect upon Tenant's
use or occupancy of or operation from the Premises, parking areas serving the
Premises, the visibility of the Premises and/or Tenant's exterior signage from
the Common Areas exterior to the Premises and/or public rights-of-way adjacent
thereto, or pedestrian or vehicular access to the Premises from the Common Areas
and/or public rights-of-way adjacent thereto. Landlord shall not change the
dimensions or location of the Premises. In no event shall any kiosks be located
within the Common Areas on Landlord's Parcel.
10. Common Area Expenses.
--------------------
(a) As used in this Lease, the term "Common Area Expenses" shall mean
--------------------
all costs incurred by Landlord for the operation, maintenance and repair of the
Common Areas, including, without limitation, (i) maintenance, repair and
resurfacing of the parking areas and maintenance, repair and replacement of
Common Area lighting standards (except that if the cost of such resurfacing or
replacement is not fully chargeable to current account in the year incurred in
accordance with generally accepted accounting principles, such cost shall be
amortized over its useful life and only the yearly amortization included in
Common Area Expenses); cleaning, sweeping, repainting and restriping the parking
areas; maintenance of refuse receptacles, landscaping, common utility lines
serving all tenants of the Shopping Center, directional signs and other markers;
Common Area utility costs; provided, however, that the parties hereby agree that
Common Area Expenses under this clause (i) may include, without limitation, all
amounts paid by Landlord as "Common Area Maintenance Expenses" under the CC&R's
as modified by the Separate Agreement, and (ii) if not maintained by the
"Operator" under the CC&R's as a part of "Common Area Maintenance Expenses"
under the CC&R's, costs of Landlord's policy of commercial general liability
insurance for the Common Areas and, if maintained by Landlord, an All Risk
Policy for Common Area improvements on Landlord's Parcel in an amount equal to
the full replacement value thereof (subject only to reasonable deductible
amounts). Except to the extent specifically otherwise provided in this Lease,
unless included within amounts payable by Landlord as "Common Area Maintenance
Expenses" under the CC&R's as modified by the Separate Agreement, in no event
shall "Common Area Expenses" include any expenditures which, in accordance with
--------------------
generally accepted accounting principles, are not fully chargeable to current
account in the year the expenditure is incurred.
(b) Subject to the provisions of Section 9 above, Tenant shall pay
---------
"Tenant's Share" (as hereinafter defined) of the Common Area Expenses. As used
- ---------------
herein, "Tenant's Share" of Common Area Expenses is defined as one hundred
--------------
percent (100%). Tenant's payment under the provisions of this Section 10(b)
-------------
shall be due and payable not sooner than thirty (30) days following receipt by
Tenant of an itemized billing from Landlord, which billing shall be no more
frequently than monthly, nor less frequently than annually during the Term;
provided, however, that Landlord shall have the right to estimate Common Area
Expenses and Tenant's Share thereof, based on the previous year's actual
expenditures and reasonably anticipated increases and so inform Tenant in
writing along with an itemized breakdown of the actual expenditures for such
previous year. Beginning with the first full calendar month following thirty
(30) days after Tenant's receipt of Landlord's written estimate, Tenant shall
include one-twelfth (1/12th) of its annual obligation for Tenant's Share of
Common Area Expenses based upon such estimate with each payment of Minimum Rent
thereafter until actual expenditures are thereafter computed by Landlord. As
soon as reasonably practicable following the end of each calendar year (but not
later than within one hundred eighty (180) days thereafter), Landlord shall
calculate actual expenditures for Common Area Expenses for such calendar year
and Tenant's Share thereof and provide such accounting to Tenant (the "Annual
------
Statement"). If the Annual Statement shows that Tenant's payments of estimated
- ---------
Tenant's Share of Common Area Expenses exceeds actual Tenant's Share of Common
Area Expenses for such calendar year, Landlord shall accompany said Annual
Statement with a payment to Tenant of the amount of such excess. If the Annual
Statement shows that Tenant's payments of estimated Tenant's Share of Common
Area Expenses were less than actual Tenant's Share of Common Area Expenses for
such calendar year, Tenant shall
10
<PAGE>
pay said difference to Landlord within thirty (30) days of Tenant's receipt of
the Annual Statement.
(c) Landlord shall keep at the Shopping Center or at another location
in Southern California, complete, accurate books of account and records with
respect to the Common Area Expenses, and shall retain such books and records and
reasonable supporting documentation for at least two (2) years from the end of
the period to which they are applicable. Tenant's payment of Tenant's Share of
Common Area Expenses shall be without prejudice to Tenant's examination and
audit rights. Tenant may at any reasonable time during normal business hours,
upon ten (10) days' prior notice to Landlord, cause a complete audit to be made
of such books, records and other materials which Landlord is required to retain
for all or any part of the two (2) years immediately preceding the giving of
such notice. Tenant may require Landlord to produce such information about such
books and records as is necessary for a proper examination and audit thereof and
to make such books and records available to Tenant for examination and audit.
Any such audit shall be conducted in a manner so as to minimize interference
with Landlord's business operations. If such audit discloses any overpayment by
Tenant of Tenant's Share of Common Area Expenses, Landlord shall refund to
Tenant the amount of such overpayment within fifteen (15) days following
Landlord's receipt of such audit. If such audit discloses an overpayment by
Tenant of Tenant's Share of Common Area Expenses by three percent (3%) or more,
Landlord shall pay to Tenant within fifteen (15) days after demand, Tenant's
reasonable cost in conducting such audit (as evidenced by invoices or other
reasonable supporting documents delivered to Landlord). Tenant shall not
conduct such an audit of Landlord's records more than once in any given calendar
year (unless necessitated as a result of any dispute respecting the accuracy of
the initial audit with respect to such calendar year). Failure of Tenant to
conduct such an audit within two (2) years following provision to Tenant of the
applicable Annual Statement shall constitute waiver by Tenant of any right to
audit Common Area Expenses set forth in such Annual Statement.
11. Maintenance.
-----------
(a) Tenant will at its expense maintain the interior portions of the
Premises (which Landlord is not obligated to repair in accordance with Section
-------
11(b) below) in good and tenantable condition and make all needed repairs
- -----
thereto, including, without limitation, exposed interior utility lines, meters,
pipes, conduits, fixtures and other equipment and systems serving exclusively
the Premises and equipment and personal property of Tenant within the Premises.
Tenant shall permit no waste, damage or injury to the Premises and Tenant shall
carry out a program of regular maintenance and repair of the Premises. Tenant
shall perform all necessary repairs, alterations and improvements to cause the
Premises to comply with all applicable Laws to the extent that such compliance
is required as a result of Tenant's particular use of, or alterations or
improvements to, the Premises. Tenant will not overload the electrical wiring
serving the Premises, and will install at its expense, but only after obtaining
Landlord's written approval any additional electrical wiring which is required
in connection the operation of Tenant's business, in excess of such electrical
wiring and capacity as is provided pursuant to Exhibit C.
---------
(b) Landlord will, at its sole cost and expense, keep, maintain,
repair and replace in first-class and professional manner and repair consistent
with the standards of first-class shopping centers comparable to the Shopping
Center located in the vicinity of the Shopping Center, and (subject to Tenant's
obligation to perform necessary repairs, alterations or improvements to the
Premises to comply with applicable Laws where such compliance is required as a
result of Tenant's particular use of the Premises) perform any repairs,
improvements or alterations required by applicable Laws to, the foundation,
footings, roof, roof membrane, exterior walls and structural portions of, the
Premises (excluding front doors, windows, and plate glass), utility lines,
meters, pipes, conduits, fixtures and other equipment and systems (except if
exposed within the Premises and serving exclusively the Premises), and sprinkler
systems and gutters. In addition, Landlord shall use commercially reasonable
efforts to enforce the CC&R's so as to cause the Common Areas to be maintained,
repaired, replaced and operated in accordance with the CC&R's. Tenant may give
Landlord notice of such repairs as may be required under the terms of this
Section, and Landlord shall proceed forthwith to effect the same with reasonable
diligence, but in no event later than thirty (30) days after having received
notice (or such greater period of time as is reasonably necessary to complete
such repairs in the event such repairs are not susceptible of completion within
thirty (30) days, provided Landlord shall, following receipt of such notice from
Tenant, promptly commence such repairs and diligently prosecute
11
<PAGE>
the same to completion). In event of an emergency, Tenant shall have the right,
but not the obligation, to undertake immediate repairs of such nature as would
normally be Landlord's responsibility, and notify Landlord promptly after such
repairs have been undertaken (including, without limitation, notice by
telephone, to the extent reasonably practicable). If Landlord fails to repair
any portion of the Premises which is Landlord's responsibility, within the
thirty (30) day period set forth above (or such greater period of time as is
reasonably necessary to complete such repairs in the event such repairs are not
susceptible of completion within thirty (30) days, provided that following
receipt of such notice from Tenant, Landlord promptly commences such repairs and
diligently prosecutes the same to completion), or in the case of any emergency
as above stated, Tenant may perform the repairs or maintenance and Landlord
shall reimburse Tenant for the reasonable cost of such repairs within thirty
(30) days following Landlord's receipt from Tenant of invoices or other
reasonable evidence of the amount of such costs; provided, however, that in the
event Landlord in good faith disputes whether Tenant properly performed an
obligation of Landlord hereunder, Landlord shall have the right to dispute the
same by institution of a reference proceeding in accordance with the provisions
of Section 39 below. If it is determined pursuant to such proceeding that Tenant
----------
did not properly perform an obligation of Landlord in accordance herewith, then
Tenant shall not have any right to reimbursement for the cost of performance as
herein provided. If it is determined pursuant to such proceeding that Tenant
properly performed an obligation of Landlord hereunder, then Landlord shall
within ten (10) days following such determination, reimburse Tenant for the
reasonable cost of such performance as determined pursuant to such action, plus
interest thereon at the Interest Rate from the date of Tenant's expenditure
until Landlord's reimbursement. Should Landlord fail to pay such amount as is
owing in accordance herewith (i) within thirty (30) days of receipt of invoice
(if Landlord does not institute an action within such thirty (30) day period to
in good faith dispute as herein provided), or (ii) within ten (10) days after
such determination by such action, as applicable, Tenant may deduct and offset
such amount (including interest at the Interest Rate from the time such
expenditure was made by Tenant until paid by Landlord) from Rent and other
monetary obligations of Tenant owing to Landlord hereunder.
(c) Landlord and its authorized representatives may enter the Premises
during usual business hours, upon not less than twenty-four (24) hours' prior
written notice to Tenant to (i) inspect the same; and (ii) show the same to
prospective mortgagees, buyers and, in the final six (6) months of the Term,
tenants. Landlord may, upon reasonable prior notice to Tenant, enter the
Premises to make additions, alterations or repairs to the Premises as Landlord
is required to make in accordance with this Lease or in order to comply with
applicable Laws, provided, however, that all such additions, alterations and/or
repairs shall be performed in a manner so as to minimize interference with the
operation of Tenant's business from the Premises. In addition, in event of an
emergency, Landlord shall have the right, but not the obligation, to undertake
immediate repairs of such nature as would normally be Tenant's responsibility,
and notify Tenant promptly after such repairs have been undertaken (including,
without limitation, notice by telephone, to the extent reasonably practicable).
If Tenant fails to repair any portion of the Premises which is Tenant's
responsibility, within thirty (30) days after notice from Landlord of the
necessity for such repair (or such greater period of time as is reasonably
necessary to complete such repairs in the event such repairs are not susceptible
of completion within thirty (30) days, provided that following receipt of such
notice from Landlord, Tenant promptly commences such repairs and diligently
prosecutes the same to completion), or in the case of any emergency as above
stated, Landlord may perform the repairs or maintenance and Tenant shall
reimburse Landlord for the reasonable cost of such repairs within thirty (30)
days following Tenant's receipt from Landlord of invoices or other reasonable
evidence of the amount of such costs; provided, however, that in the event
Tenant in good faith disputes whether Landlord properly performed an obligation
of Tenant hereunder, Tenant shall have the right to dispute the same by
institution of a reference proceeding in accordance with the provisions of
Section 39 below. If it is determined pursuant to such proceeding that Landlord
- ----------
did not properly perform an obligation of Tenant in accordance herewith, then
Landlord shall not have any right to reimbursement for the cost of performance
as herein provided. If it is determined pursuant to such proceeding that
Landlord properly performed an obligation of Tenant hereunder, then Tenant shall
within ten (10) days following such determination, reimburse Landlord for the
reasonable cost of such performance as determined pursuant to such action, plus
interest thereon at the Interest Rate from the date of Landlord's expenditure
until Tenant's reimbursement.
12
<PAGE>
12. Insurance.
---------
(a) (i) Landlord shall maintain at all times during the Term an "All
---
Risk Policy" (as hereinafter defined) insuring against damage to any portion of
- -----------
the Premises, and appurtenances thereto. Such insurance shall be in the full
amount of replacement value (subject only to reasonable deductible amounts),
without deduction for physical depreciation and shall provide that the proceeds
of any loss shall be payable in the manner provided for in this Lease. Such
policy shall be obtained from an insurer licensed to do business within the
State of California having a policy holder's rating of at least A- and a
financial rating of not less than VIII in the most recently published Best's
Insurance Reports. Landlord shall, at least ten (10) days prior to the
Commencement Date, and thereafter annually provide Tenant with a certification
of such insurance coverage, which certificate shall indicate, among other
things, that Tenant is a named insured along with Landlord and that the Premises
and all the improvements and Landlord's fixtures appurtenant thereto, have been
insured to their full replacement value, without deduction for physical
depreciation. As used herein, the term "All Risk Policy" shall mean a policy of
---------------
fire and other property insurance in the form commonly referred to in the
industry as "all risk" with extended endorsement (false arrest, libel, slander,
assault, battery, invasion of privacy, theft, vandalism and malicious mischief
coverage) and including broad form water damage, or if such policy is no longer
issued, such other policy as would cover the same risks and perils; provided
that although Landlord may elect to obtain coverage for flood and earthquake in
addition to such policy, Tenant shall not be required to pay any part of the
premium allocable to such coverages.
(ii) Tenant shall reimburse Landlord for "Tenant's Share" (as
--------------
hereinafter defined) of the premium costs of the insurance described in Section
-------
12(a)(i) above. Tenant's schedule of payments for reimbursement shall be
- --------
established in the same manner as described in Section 6 above, for Tenant's
---------
Share of Taxes. "Tenant's Share" for purposes of this Section 12(a)(ii) shall
-------------- -----------------
be one hundred percent (100%).
(iii) In lieu of Landlord assuming the obligation specified in
Section 12(a)(i) above, subject to Tenant's reimbursement as described in
- ----------------
Section 12(a)(ii) above, Tenant may, at its option, elect to carry such
- -----------------
insurance on the Premises including such other endorsements as the Tenant in its
judgment deems prudent under the circumstances, all at Tenant's sole cost and
expense, in which event Tenant shall not be responsible for reimbursement under
Section 12(a)(ii) and Tenant's Share of insurance costs pursuant to this Section
- ----------------- -------
12(a) for purposes of this Lease shall equal the amount of Tenant's cost for
- -----
such insurance.
(iv) As used herein, the term "Lender" means the holder of
------
indebtedness secured by a first lien upon the real property including the
Premises, whether the interest creating such lien is denominated as a mortgage,
deed of trust or other security instrument, but only if Lender (1) is a
financial institution, such as a bank, savings and loan, insurance company, or
other entity regularly engaged in making loans secured by real property, and (2)
has Fifty Million Dollars ($50,000,000.00) of such loans outstanding. Insurance
proceeds for damage or destruction to the Premises ("Proceeds"), if under One
--------
Dollar ($1.00) per square foot of Floor Area in the Premises shall be paid
directly to Landlord. If in excess of such amount, upon Tenant's request, the
Proceeds shall be deposited with Lender provided Lender agrees to apply the
Proceeds in the manner described herein. If Lender does not so agree, or there
is no Lender, then, upon Tenant's request, the Proceeds shall be deposited with
a bank, trust company, or title insurance company (collectively, with Lender,
referred to herein as "Stakeholder") designated by Tenant and reasonably
-----------
approved by Landlord, for use as provided in Section 14 below. The Stakeholder
----------
shall disburse the Proceeds to the party performing restoration upon
certification by the architect in charge of restoration that the amounts
requested shall be paid in accordance with standard construction disbursement
procedures in connection with such restoration to the contractor,
subcontractors, materialmen, architects or other persons who have rendered
services or have furnished materials for such restoration, and upon the
completion of such restoration the remaining balance of any of such Proceeds
shall be paid to Landlord upon demand.
(b) (i) From the date of delivery of the Premises to Tenant, Tenant
will carry at its sole cost commercial general liability insurance covering the
Premises and Tenant's use thereof against claims from personal injury, bodily
injury, death and property damage occurring in or about the
13
<PAGE>
Premises and Outdoor Sales Area, such insurance in each case to afford
protection to a combined single limit of at least Three Million Dollars
($3,000,000.00) (such insurance extending to any liability of Tenant arising out
of the indemnities provided for in Section 13 below), and naming Landlord as an
----------
additional insured thereunder.
(ii) From the date of delivery of the Premises to Tenant,
Landlord will carry, as a Common Area Expense, commercial general liability
insurance covering the Common Areas on Landlord's Parcel against claims from
personal injury, bodily injury, death and property damage occurring in or about
the Premises, such insurance in each case to afford protection to a combined
single limit of at least Three Million Dollars ($3,000,000.00) (such insurance
extending to any liability of Landlord arising out of the indemnities provided
for in Section 13 below), and naming Tenant as an additional insured thereunder;
----------
provided, however, that for so long as the "Operator" under the CC&R's maintains
liability insurance with respect to the Common Areas as provided under Section
9.4 of the CC&R's, Landlord shall not be required to maintain liability
insurance pursuant to this Section 12(b)(ii).
-----------------
(iii) The policies maintained by Landlord and Tenant pursuant to
this Section 12(b) shall each (1) include a cross-liability endorsement
-------------
providing that Landlord and Tenant, although insureds, may recover on account of
the negligence of the other, (2) be obtained from an insurer with a policy
holder's rating of at least A- and a financial rating of not less than VIII in
the most recently published Best's Insurance Reports, (3) shall provide that
such insurance is not contributory with the coverage which the other party may
carry and is primary insurance coverage and not excess insurance coverage or
overage insurance coverage, and (4) shall provide that the insurance provider
will give at least thirty (30) days' written notice of any cancellation,
reduction in coverage, lapse or failure to renew, to the party designated on the
insurance certificate as the holder thereof.
(iv) Landlord and Tenant agree to deliver to the other
certificates of insurance evidencing the existence in force of the policies of
insurance described in this Section 12(b). Each of such certificates shall
-------------
provide that such insurance shall not be canceled, reduced in coverage, lapse or
materially amended unless thirty (30) days' prior written notice of such
cancellation, reduction in coverage, lapse or amendment is given to the party
designated on such certificate as the holder thereof.
(v) Any insurance required by this Section 12(b) may be by
-------------
satisfied by blanket insurance, covering additional items or locations or
insureds, so long as the coverage afforded (including, without limitation,
coverage as to additional insureds) will not be reduced or diminished by reason
of the use of such blanket policy of insurance.
(c) Landlord and Tenant waive any rights each may have against the
other on account of any loss or damage caused to Landlord or Tenant, as the case
may be, their respective property, the Premises or its contents or to the other
portions of the Landlord's Parcel, arising from any risk generally covered by
all-risk insurance if such waiver does not invalidate such policies or prohibit
recovery thereunder. The parties each, for their respective insurance, waive
any right of subrogation that any insurer may have against Landlord or Tenant.
Landlord and Tenant shall use their respective reasonable good faith efforts to
obtain such waiver.
13. Indemnity.
---------
Tenant shall indemnify, hold harmless and defend Landlord from and against
any and all claims, actions, demands, expenses and liability whatsoever,
including reasonable attorneys' fees, on account of any such real or claimed
damage or liability and from all liens, claims, demands, expenses and liability
whatsoever arising out of the negligence or wilful misconduct of Tenant and/or
any of Tenant's employees, agents, representatives and/or contractors, to the
extent the same is not covered by the insurance required to be maintained by
Landlord pursuant to this Lease. Landlord shall indemnify, hold harmless and
defend Tenant from and against any and all claims, actions, demands, expenses
and liability whatsoever, including reasonable attorneys' fees, on account of
any such real or claimed damage or liability and from all liens, claims,
demands, expenses and liability whatsoever arising out of the negligence or
wilful misconduct of any of Landlord and/or any of Landlord's employees, agents,
representatives and/or contractors, to the extent the same is not covered by the
insurance required to be maintained by Tenant pursuant to this Lease.
14
<PAGE>
14. Damage and Destruction.
----------------------
(a) If the Premises and/or any portion of the Common Areas which if
not available for use would have an adverse affect upon the operation of
Tenant's business from the Premises is damaged or destroyed by any risk covered
by an All Risk Policy, Landlord shall (subject to being able to obtain all
necessary permits and approvals) promptly, but not later than one (100) days
after such damage or destruction (unless either party terminates this Lease
pursuant to Section 14(b)), commence and thereafter diligently prosecute to
-------------
completion, the repair and/or reconstruction of (i) the Premises to
substantially the same condition as when the Premises were originally delivered
to Tenant pursuant to Landlord's obligations under Exhibit C (the parties hereby
---------
agreeing that Landlord shall not be obligated for the repair and/or restoration
of any items of Tenant's Work or alterations and improvements made by Tenant not
covered by the insurance maintained by Landlord pursuant to this Lease) and (ii)
such of the Common Areas on Landlord's Parcel to the condition existing prior to
such damage or destruction, and use reasonable efforts to enforce the provisions
of the CC&R's to cause the Common Areas outside of the Landlord's Parcel to be
repaired and/or reconstructed to the condition required by the CC&R's. Landlord
shall prosecute all such work by Landlord diligently to completion in a good and
workmanlike manner.
(b) Landlord may terminate this Lease by notice to Tenant within sixty
(60) days after the occurrence of damage to or destruction of the Premises if
the Premises is damaged or destroyed as a result of any risk not covered by an
All Risk Policy and the cost of such repair and/or restoration exceeds ten
percent (10%) of the replacement value of the Premises; provided that Tenant may
nullify such an election by Landlord to terminate by agreeing by written notice
to Landlord within ten (10) days following receipt of Landlord's termination
notice to agree to be solely responsible for the cost of repair not covered by
an All Risk Policy and which is actually not covered by the insurance maintained
by Landlord, to the extent in excess of ten percent (10%) of the replacement
value of the Premises. In addition, following any casualty to the Premises
and/or the Common Areas which materially and adversely affects the operation of
Tenant's business from the Premises, the parties shall meet and reasonably agree
upon an estimate of the time necessary to complete the repair and/or restoration
necessitated by such casualty, and in the event it is so determined that such
repair shall not be completed within one hundred eighty (180) days following the
occurrence of such casualty and/or in the event such repair in fact is not
completed within such one hundred eighty (180) day period (or such longer period
as Tenant may approve in writing prior to the commencement of the repair and/or
restoration), Tenant shall have the right to terminate this Lease by written
notice to Landlord delivered within thirty (30) days following the making of
such determination and/or the expiration of such one hundred eighty (180) day
(or longer, as applicable) period, as the case may be. In addition to the
foregoing, in the event of any casualty to the Premises or a material portion of
the Common Areas occurring during the final two (2) Lease Years of the Term,
requiring in excess of ninety (90) days to repair, either party may terminate
this Lease by written notice to the other within sixty (60) days of the
occurrence of the casualty unless Tenant exercises or has exercised its next
available Option, if any, to extend the Term within such thirty (30) day period,
and in the event of the exercise of such Option to extend the Term, such
casualty shall be treated in the manner of casualties occurring other than
during the final two (2) Lease Years of the Term. Unless this Lease is so
terminated in accordance with this Section 14(b), this Lease shall continue in
-------------
full force, and Landlord shall perform its repair obligation under Section
-------
14(a). Upon any termination of this Lease under this Section 14(b), the Rent
-------------
shall be adjusted as of the date of such termination and the parties shall be
released without further obligation to the other coincident with the surrender
of possession of the Premises to Landlord, except for items which have accrued
and are unpaid.
(c) If neither party terminates this Lease pursuant to Section 14(b)
-------------
above, and if the operation of Tenant's business from the Premises is materially
interfered with as a result of such damage or destruction, Tenant's obligation
for the payment of Rent pursuant to this Lease during the period the Premises
are so rendered unfit shall be equitably abated based upon the extent of the
interference with Tenant's business resulting from such casualty.
(d) The parties waive such rights of Lease termination as are granted
to them under the laws of the state of California, it being their agreement that
the rights of termination in the event of casualty, as set forth herein, shall
be exclusive.
15
<PAGE>
15. Condemnation.
------------
(a) If during the Term, all or any portion of the Premises is taken by
right of eminent domain or condemnation by a competent governmental authority or
by conveyance in lieu thereof (collectively, any "Taking") other than in a
------
"Temporary Taking" (as hereinafter defined), or if such a portion of the Common
- -----------------
Areas is so Taken (other than in a Temporary Taking) as Tenant reasonably
determines shall have an adverse affect upon the operation of Tenant's business
from the Premises, within thirty (30) days following the date of such Taking,
Tenant may terminate this Lease upon written notice to the Landlord. In the
event Tenant does not so terminate this Lease, Landlord shall promptly and
diligently restore the Premises and Common Areas on Landlord's Parcel, and use
reasonable efforts to enforce provisions of the CC&R's so as to cause other
portions of the Common Areas as are so Taken to be restored, to as near their
condition as existed prior to such Taking as is reasonably possible. In the
event of a Taking which does not result in the termination of this Lease,
Tenant's obligations for Rent under this Lease shall be equitably abated
following such Taking based upon the extent of the interference with the
operation of Tenant's business from the Premises. In the event of a "Temporary
---------
Taking" (which for purposes hereof shall mean a Taking not extended beyond the
- ------
Term) which adversely affects Tenant's operation from its Premises, Tenant shall
have the right to elect either to terminate this Lease in accordance herewith or
to not terminate this Lease and receive all compensation awarded by the
condemning authority with respect to such temporary Taking of the Premises
(provided that if such Temporary Taking shall adversely affect Tenant's
operation from its Premises for a period of less than six (6) months, Tenant
shall not have any such right to terminate this Lease as a result thereof, but
Tenant shall be entitled to receive all compensation awarded by the condemning
authority with respect to such temporary Taking).
(b) Landlord shall be entitled to that portion of the award payable in
connection with any such Taking attributable to the diminution in value of
Landlord's reversionary interest in the Premises and fee interest in other
portions of the Landlord's Parcel, and Tenant shall be entitled to that portion
of the award payable in connection with such Taking attributable to diminution
in value of Tenant's leasehold, damage to Tenant's business and loss of goodwill
and Tenant's relocation costs.
(c) The parties waive such rights of Lease termination as may be
granted them in the event of condemnation by the laws of the State of
California, it being their agreement that the rights of termination set forth in
this Lease shall be exclusive.
16. Assignment and Subletting.
-------------------------
(a) Except as otherwise specifically provided herein, Tenant shall not
assign Tenant's interest in this Lease or sublet any portion of the Premises
(collectively, "Transfer") without obtaining in each instance the prior consent
--------
of Landlord, which consent shall not be unreasonably withheld, conditioned or
delayed. No acceptance of Rent by Landlord from any Person shall be deemed
Landlord's consent to any Transfer. Landlord's consent to any Transfer shall
not constitute a waiver of the necessity for such consent to any subsequent
Transfer. Notwithstanding a permitted Transfer, Tenant shall remain fully
liable for the full performance of every obligation under this Lease to be
performed by Tenant. Any permitted assignee or subtenant pursuant to this
Section 16 may change the trade name under which the business operating from the
- ----------
Premises is operated and/or the use of the Premises in accordance with the
provisions of Section 4(b) above.
------------
(b) Notwithstanding anything to the contrary contained in Section
-------
16(a) above, Tenant may, without Landlord's consent, (but upon reasonable prior
- -----
notice to Landlord) at any time (i) assign this Lease or sublease the whole or
any part of the Premises to any entity controlled by, controlling or under
common control with Tenant or to any entity resulting from the consolidation or
merger of Tenant into or with such other entity or the acquisition of all or
substantially all of the assets of Tenant by such entity, or (ii) license, grant
a concession of or otherwise permit the use of one or more portions of the
Premises which are not separately demised to licensees, concessionaires or users
consistent with Tenant's permitted use of the Premises (including, without
limitation, any licensee selling golf equipment, ski and/or other sports-
oriented vacation tours or packages).
(c) If Tenant is a corporation, unincorporated association or
partnership, Tenant shall not transfer, assign or hypothecate (or permit the
16
<PAGE>
transfer, assignment or hypothecation) of all or substantially all of the assets
of such corporation, association or partnership, or all or substantially all of
any stock or interest in such corporation, association or partnership so as to
result in a change in the control thereof by the Person(s) owning a majority
interest therein on the date of this Lease. This Section 16(c) shall not apply
-------------
to Tenant if such transaction involves an assignment or subletting permitted
under Section 16(b), nor shall this Section 16(c) or any other provision of this
------------- -------------
Lease prohibit or require Landlord's consent for the transfer of stock
(including, without limitation, a majority interest in such stock) in a
corporation whose voting stock is listed on a national securities exchange.
17. Subordination and Attornment.
----------------------------
(a) Upon notice by Landlord, Tenant shall subordinate its rights under
this Lease to any lease(s) wherein Landlord is the lessee and to the lien of any
mortgage(s) or deed(s) of trust (collectively, "Instrument"), regardless of
----------
whether such Instrument now exists or is hereafter created, to all advances
thereunder, to any interest thereon, and to all modifications, consolidations,
renewals, replacements and extensions thereof, provided the lessors, mortgagees
or trustees agree to provide Tenant with an agreement of non-disturbance in a
form reasonably acceptable to Tenant, agreeing to recognize this Lease and
Tenant's rights hereunder in the event of termination or foreclosure under the
Instrument. Tenant agrees to execute any agreement evidencing such
subordination and non-disturbance in a form reasonably acceptable to Tenant, at
Landlord's request. Any such lessor, mortgagee or trustee may elect to have
this Lease prior to its instrument, and in the event of such election and upon
notification by such lease, mortgagee or trustee to Tenant, this Lease shall be
deemed prior to said Instrument, whether this Lease is dated prior or subsequent
to said Instrument. Notwithstanding anything to the contrary contained in this
Lease, it shall be a condition precedent to the performance of each of Tenant's
obligations under this Lease (including, without limitation, Tenant's obligation
for the payment of Rent), that Tenant obtain from each lessor, mortgagee or
trustee under an Instrument presently encumbering the Premises, an agreement of
non-disturbance in a form reasonably acceptable to Tenant.
(b) If Landlord's interest in the Premises is transferred (except in a
sale-leaseback financing transaction), or if any proceedings are brought for the
foreclosure of, or in the event of the exercise of the power of sale under, any
Instrument, or if any lease in a sale-leaseback transaction wherein Landlord is
the lessee is terminated, Tenant shall attorn to and recognize such purchaser,
assignee, mortgagee or trustee as Landlord under this Lease, provided such
purchaser, assignee, mortgagee or trustee has executed or agrees to execute an
agreement of non-disturbance in a form reasonably acceptable to Tenant,
recognizing this Lease and Tenant's rights hereunder.
18. Tenant Defaults.
---------------
(a) The occurrence of either of the following shall constitute a
default by Tenant pursuant to this Lease: (i) Tenant's failure to pay Rent when
due under this Lease, where such failure continues for ten (10) days after
notice that such payment is due (which notice shall be lieu of and not in
addition to any notice required under applicable law); and (ii) Tenant's failure
to observe or perform any covenant, term or condition of this Lease (other than
the payment of Rent) where such failure continues for thirty (30) days after
notice thereof from Landlord to Tenant (which notice shall be lieu of and not in
addition to any notice required under applicable law); provided that if such
failure cannot reasonably be cured within such thirty (30) day period, Tenant
shall not be in default hereunder so long as Tenant commences such cure within
such thirty (30) day period and thereafter diligently prosecutes such cure to
completion.
(b) In the event of any default by Tenant pursuant to Section 18(a)
-------------
above, in addition to any other remedies available to Landlord at law or in
equity, Landlord shall have the immediate option to terminate this Lease and all
rights of Tenant hereunder by giving written notice of such intention to
terminate. In the event that Landlord shall elect so to terminate this Lease,
then Landlord may recover from Tenant:
(i) The worth at the time of award of any unpaid rent which
had been earned at the time of such termination; plus
17
<PAGE>
(ii) The worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss Tenant proves could have been
reasonably avoided; plus
(iii) The worth at the time of award of the amount by which the
unpaid rent for the balance of the Term after the time of award exceeds the
amount of such rental loss that Tenant proves could have been reasonably
avoided; plus
(iv) Any other amount necessary to compensate Landlord for all
the detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course of things would be likely to
result therefrom.
The term "rent" as used herein shall be deemed to mean Minimum Rent and
----
Additional Rent but not Percentage Rent. As used in Sections 18(b)(i) and (ii)
----------------- ----
above, the "worth at the time of award" is computed by allowing interest at the
Interest Rate. As used in Section 18(b)(iii) above, the "worth at the time of
------------------
award" is computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of award plus one percent
(1%).
(c) In the event of any default by Tenant pursuant to Section 18(a)
-------------
above and Tenant's abandonment of the Premises, Landlord shall also have the
right to reenter the Premises and remove all persons and property therefrom by
summary proceedings or otherwise; such property may be removed and stored in a
public warehouse or elsewhere at the cost of and for the account of Tenant or
disposed of in a reasonable manner by Landlord.
(d) In the event Landlord shall elect to reenter as provided in
Section 18(c) above, or shall take possession of the Premises pursuant to legal
- -------------
proceedings or pursuant to any notice provided by law, and if Landlord does not
elect to terminate this Lease, then Landlord may from time to time, without
terminating this Lease, either recover all rental as it becomes due or relet the
Premises or any part thereof for such term or terms and at such rental or
rentals and upon such other terms and conditions as Landlord in its reasonable
discretion may deem advisable, with the right to make alterations and repairs to
the Premises. In the event that Landlord shall elect to relet, then rentals
received by Landlord from such reletting shall be applied first, to the payment
of any indebtedness, other than Minimum Rent due hereunder, owed by Tenant to
Landlord; second, to the payment of any reasonable cost actually incurred in
such reletting; third, to the payment of the reasonable cost actually incurred
in making any alterations and repairs to the Premises; fourth, to the payment of
Minimum Rent due and unpaid hereunder; and the residue, if any, shall be held by
Landlord and applied in payment of future rent as the same may become due and
payable hereunder. Should that portion of such rentals received from such
reletting during any month, which is applied to the payment of rent hereunder,
be less than the rent payable during that month by Tenant hereunder, then Tenant
shall pay such deficiency to Landlord. Such deficiency shall be calculated and
paid monthly. Tenant shall also pay to Landlord, as soon as ascertained, any
costs and expenses reasonably incurred by Landlord in such reletting, including
but not limited to brokerage commissions, or in making alterations and repairs
not covered by the rentals received from such reletting. No reentry or taking
possession of the Premises by Landlord pursuant to this Section 18, shall be
----------
construed as an election to terminate this Lease unless a written notice of such
intention be given by Landlord to Tenant or unless the termination thereof be
decreed by a court of competent jurisdiction. Landlord may at any time after
such reletting elect to terminate this Lease for any such default by Tenant.
(e) All rights, options and remedies of Landlord contained in this
Lease shall be construed and held to be cumulative, and no one of them shall be
exclusive of the other, and Landlord shall have the right to pursue any one or
all of such remedies or any other remedy or relief which may be provided by law,
whether or not stated in this Lease.
(f) Landlord waives such liens, if any, to which it may have a right
with respect to the merchandise, furniture, trade fixtures and other personal
property of Tenant located on or about the Premises and shall from time to time
execute such documents as Tenant may reasonably request to acknowledge such
waiver.
18
<PAGE>
19. Landlord Defaults. Except as otherwise provided in this Lease, Landlord
-----------------
shall be in default under this Lease if Landlord fails to perform any of its
obligations hereunder and said failure continues for a period of thirty (30)
days after Tenant gives Landlord notice thereof (unless such failure cannot
reasonably be cured within thirty (30) days) and Landlord shall have commenced
to cure within said thirty (30) days and continues diligently to pursue the
curing of the same). Tenant agrees to give to any holder of indebtedness secured
by a first and/or second lien upon the Premises whose address has previously
been provided to Tenant, a copy of any notice of default served upon the
Landlord. Tenant further agrees that any such holder of indebtedness shall have
the right to cure any Landlord default within the time period provided for such
cure by Landlord pursuant to this Lease. If such default is not cured within the
specified time period, Tenant may exercise any right or remedy available to it
at law or in equity or under this Lease. Tenant shall have the right to cure any
such default and Landlord shall reimburse Tenant for the reasonable cost thereof
within thirty (30) days following receipt from Tenant of invoices or other
reasonable evidence of the amount of such costs; provided, however, in the event
Landlord in good faith disputes whether Tenant properly performed an obligation
of Landlord, Landlord may dispute the same by institution of a reference
proceeding pursuant to Section 39 below within thirty (30) days following
----------
Tenant's request for reimbursement. If it is determined pursuant to such
proceeding that Tenant's cure was proper, Landlord shall, within ten (10) days
following such determination, reimburse Tenant for the cost of such cure (plus
interest at the Interest Rate from the date of Tenant's expenditure until
reimbursement). Should Landlord fail to pay Tenant any amount due Tenant (a)
within thirty (30) days following receipt of Tenant's invoices or other evidence
(if Landlord does not institute a reference proceeding disputing such cure), or
(b) within ten (10) days after determination by reference, Tenant may,
notwithstanding anything to the contrary contained in this Lease, deduct and
offset such amount (including, without limitation, interest at the Interest Rate
from the time of Tenant's expenditure until repaid) from any monetary obligation
of Tenant owing Landlord hereunder. Notwithstanding anything to the contrary
contained in this Lease, Tenant shall have the right to offset any unpaid
reference or court award from any monetary obligation due under this Lease. Any
amount due from Landlord to Tenant shall bear interest at the Interest Rate from
the date due until paid. All rights, options and remedies of Tenant contained in
this Lease shall be construed and held to be cumulative, and no one of them
shall be exclusive of the other, and Tenant shall have the right to pursue any
one or all of such remedies or any other remedy or relief which may be provided
by law, whether or not stated in this Lease. Tenant's failure to insist upon
strict performance of any term, covenant or condition of this Lease or to
exercise any right or remedy it has shall not be deemed a waiver or
relinquishment for the future of such performance, right or remedy unless in
writing signed by Tenant. No waiver by Tenant shall constitute a waiver of any
subsequent breach.
20. Tenant's Property; Surrender; Holding Over.
------------------------------------------
(a) Any furniture, trade fixtures and other equipment and personal
property of Tenant not permanently affixed to the Premises shall be Tenant's
property. Tenant may remove its personal property which it has stored or placed
in the Premises. Tenant, at its sole expense, shall immediately repair any
damage to the Premises caused by installation or removal of any personal
property unless such damage is caused by the negligence or wilful misconduct of
Landlord and/or any of Landlord's employees, agents, representatives and/or
contractors. Any personal property of Tenant not removed from the Premises
before the expiration of the Term or within thirty (30) days following any
earlier termination of this Lease in accordance with the terms of this Lease
shall become Landlord's property, except to the extent Landlord elects to
require its removal, in which case Tenant shall promptly cause the removal of
the same at Tenant's expense.
(b) Tenant shall surrender possession of the Premises upon the
expiration of the Term or earlier termination of this Lease, broom clean, free
of debris, in good order and state of repair (excepting Landlord's obligations
under this Lease and ordinary wear and tear), and deliver the keys as Landlord
designates. In the event Tenant holds over in the Premises following the
expiration of the Term or earlier termination of this Lease, and Tenant's
occupancy shall be considered a tenancy from month to month (terminable upon
thirty (30) days' notice by either party) on all terms and conditions of this
Lease, except that Tenant's obligation for monthly Minimum Rent during such
holdover shall equal one hundred ten percent (110%) of the monthly Minimum Rent
in effect immediately preceding the expiration of the Term or earlier
termination of the Lease.
19
<PAGE>
21. Limitation of Liability. In consideration of the benefits accruing under
-----------------------
the Lease, and notwithstanding anything contained in this Lease to the contrary,
Tenant and all successors and assigns covenant and agree that, in the event of
any actual or alleged failure, breach or default under the Lease by Landlord,
their sole and exclusive remedy shall be against Landlord's interest in the
Landlord's Parcel. Tenant and all such successors and assigns agree that the
obligations of Landlord under the Lease do not constitute personal obligations
of the individual partners, whether general or limited, directors, officers or
shareholders of Landlord, and Tenant shall not seek recourse against the
individual partners, directors, officers or shareholders of Landlord or any of
their personal assets for satisfaction of any liability with respect to the
Lease.
22. Quiet Enjoyment. Upon payment by Tenant of the rent and the observance
---------------
and performance of all of the agreements, covenants, terms and conditions on
Tenant's part to be observed and performed, Tenant shall quietly enjoy the
Premises for the Term without hindrance or interruption by Landlord or any other
person or persons lawfully or equitably claiming by, through or under Landlord,
subject to the terms of this Lease, the CC&R's, the Development Agreement, the
Separate Agreement and applicable matters of record.
23. Estoppel Statements. Within twenty (20) days after each written request
-------------------
from either party in connection with a sale, financing or other transfer of such
party's interest in this Lease, the non-requesting party shall execute and
deliver to the requesting party or its designee (and the requesting party and
each designee may rely thereon) an estoppel certificate in form reasonably
satisfactory to the requesting party certifying as to such matters as may be
reasonably requested by the requesting party.
24. Force Majeure. If either party is delayed or hindered in or prevented
-------------
from the performance of any act required hereunder because of strikes, lockouts,
inability to procure labor or materials, failure of power, restrictive Laws,
riots, insurrection, war, fire or other casualty or other reason of a similar or
dissimilar nature beyond the reasonable control of the party delayed (any "Force
-----
Majeure Event"), performance of such act shall be excused for the period of the
- -------------
Force Majeure Event, and the period for the performance of such act shall be
extended for an equivalent period. Delays or failures to perform resulting from
lack of funds shall not be Force Majeure Events.
25. Signs. Tenant shall be entitled to the maximum lawful building signage,
-----
provided that such signage shall be subject to compliance with applicable Laws,
the CC&R's, Development Agreement, Separate Agreement and other matters of
record. In addition, subject to compliance with applicable Laws, Tenant shall
be entitled to all pylon and/or monument signage rights to which Landlord may be
entitled for Landlord's Parcel under the CC&R's, Development Agreement and/or
Separate Agreement (including, without limitation, under Section 3.3 of the
Separate Agreement), provided that Tenant shall be responsible for all costs of
fabrication of its identification panels upon such signage and any costs for
such pylon and/or monument signage which Landlord is required to pay under the
CC&R's, Development Agreement and/or Separate Agreement.
26. Real Estate Brokers. Tenant warrants that it has not dealt with a broker
-------------------
regarding this Lease, and shall indemnify, defend and hold harmless Landlord
from and against any and all claims, actions, damages, expenses and liability
whatsoever, including reasonable attorneys' fees, arising from any claim for
commission or finder's fee regarding this Lease by reason of dealings with
Tenant. Landlord warrants that it has not dealt with a broker regarding this
Lease, and shall indemnify, defend and hold harmless Tenant from and against any
and all claims, actions, damages, expenses and liability whatsoever, including
reasonable attorneys' fees, arising from any claim for commission or finder's
fee regarding this Lease by reason of dealings with Landlord.
27. Memorandum of Lease. This Lease shall not be recorded. However, a
-------------------
Memorandum hereof in the form attached hereto as Exhibit B shall be executed, in
---------
recordable form, by both parties concurrently herewith and recorded by Landlord,
at Landlord's expense, with the official charged with recordation duties for the
county in which the Shopping Center is located, with directions that it be
returned to Tenant. Upon the expiration of the Term or earlier termination of
this Lease, Tenant shall cooperate with Landlord in executing a memorandum, in
recordable form, acknowledging Tenant's release of its leasehold interest in the
Premises.
20
<PAGE>
28. Notices. Any notice, demand, request, approval, consent or other
-------
instrument which is, or is required to be, given under this Lease shall be in
writing and shall be deemed to have been given two (2) days after when mailed by
United States registered or certified mail return receipt requested, postage
prepaid, or when received, if sent by overnight courier or delivery service,
addressed to Landlord or Tenant at the respective addresses set forth in the
Basic Lease Provisions or such other address or addresses as either party may
designate by notice to the other in accordance with this Section 28.
----------
29. Attorneys' Fees. In the event either party shall institute any action or
----------------
proceeding against the other party relating to this Lease, the unsuccessful
party in such action or proceeding shall reimburse the successful party for its
disbursements incurred in connection therewith and for its reasonable attorneys'
fees as fixed by the court. In addition to the foregoing award of attorneys'
fees to the successful party, the successful party in any lawsuit on this Lease
shall be entitled to its attorneys' fees incurred in any post-judgment
proceedings to collect or enforce the judgment. This provision is separate and
several and shall survive the merger of this Lease into any judgment on this
Lease.
30. Waiver. No waiver of any breach of any of the terms, covenants,
------
agreements, restrictions or conditions of this Lease shall be construed as a
waiver of any succeeding breach of any of the same or other covenants,
agreements, restrictions, or conditions hereof.
31. Lease Binding Upon Successors. Subject to the provisions of Section 16
----------------------------- ----------
above, each of the terms, covenants and conditions of this Lease shall extend to
and be binding upon and shall inure to the benefit of not only Landlord and
Tenant, but each of their respective heirs, administrators, legal
representatives, successors and assigns. Whenever in this Lease reference is
made to either Landlord or Tenant, the reference shall be deemed to include,
wherever applicable, the heirs, legal representatives and administrators,
successors and assigns, the same as if such parties were named in every case.
32. Topical Headings. Captions of the sections or parts of this Lease are for
----------------
convenience only and shall not be considered or referred to in resolving
questions of interpretation or construction.
33. Language. The words "Landlord" and "Tenant" when used herein shall be
-------- -------- ------
applicable to one or more persons as the case may be, and the singular shall
include the plural, and the neuter shall include the masculine and feminine, and
if there be more than one, the obligations hereof shall be joint and several.
The word "persons" wherever used shall include individuals, firms, associations
-------
and corporations. The language in all parts of this Lease shall in all cases be
construed as a whole and in accordance with its fair meaning and shall not be
construed strictly for or against Landlord or Tenant.
34. Invalidity. If any provision of this Lease shall prove to be invalid,
----------
void or illegal, it shall in no way affect, impair or invalidate any other
provision hereof.
35. Time of the Essence. Time is expressly declared to be "of the essence" in
-------------------
this Lease and in each and every provision hereof wherein time for performance
is a factor.
36. Governing Law. This Lease shall be governed by, and construed in
-------------
accordance with, the laws of the State of California.
37. Approvals. Except to the extent specifically otherwise provided in this
---------
Lease, whenever the approval or consent of either of the parties hereto is
required under this Lease, such approval or consent shall not be unreasonably
withheld, conditioned or delayed.
38. Counterparts. This Lease may be executed in any number of counterparts,
------------
each of which shall be deemed an original, but all of which, taken together,
shall constitute one and the same instrument.
39. Reference. At the election of either Landlord or Tenant, any dispute with
---------
respect to the subject matter of this Lease (except an unlawful detainer action
by Landlord) shall be resolved by reference pursuant to the provisions of
California Code of Civil Procedure Section 638 et seq., for a determination to
-- ---
be made which shall be binding upon the parties as if tried before a court or
jury. The parties agree specifically as to the following:
21
<PAGE>
(a) Within five (5) business days after service of a demand by a party
hereto, the parties shall agree upon a single referee who shall then try all
issues, whether of fact or law, and then report a finding or judgment thereon.
If the parties are unable to agree upon a referee either party may seek to have
one appointed, pursuant to California Code of Civil Procedure Section 640, by
the presiding judge of the Los Angeles County Superior Court.
(b) The compensation of the referee shall be such charge as is
customarily charged by the referee for like services. The cost of such
proceedings shall initially be borne equally by the parties. However, the
prevailing party in such proceedings shall be entitled, in addition to all other
costs, to recover its contribution for the cost of the reference as an item of
damages and/or recoverable costs.
(c) If a reporter is requested by either party, then a reporter shall
be present at all proceedings, and the fees of such reporter shall be borne by
the party requesting such reporter. Such fees shall be an item of recoverable
costs. Only a party shall be authorized to request a reporter.
(d) The referee shall apply all California Rules of Procedure and
Evidence and shall apply the substantive law of California in deciding the
issues to be heard. Notice of any motions before the referee shall be given,
and all matters shall be set at the convenience of the referee.
(e) The referee's decision under California Code of Civil Procedure
Section 644, shall stand as the judgment of the court, subject to appellate
review as provided by the laws of the State of California.
(f) The parties agree that they shall in good faith endeavor to cause
any such dispute to be decided within four (4) months. The date of hearing for
any proceeding shall be determined by agreement of the parties and the referee,
or if the parties cannot agree, then by the referee.
(g) The referee shall have the power to award damages and all other
relief.
40. Entire Agreement. This Lease contains the entire agreement of the parties
----------------
hereto with respect to the matters covered thereby, and no other agreement,
statement or promise made by any party hereto, or to any employee, officer or
agent of any party hereto, which is not contained herein, shall be binding or
valid. All prior or contemporaneous agreements or writings between or among the
parties are specifically merged into this Lease. This Lease may not be amended,
modified or supplemented except by written instrument executed by Landlord and
Tenant.
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the
day and year written next to their respective signatures.
LANDLORD: TENANT:
NORTH SAN FERNANDO VALLEY PROPERTIES, SPORT CHALET, INC.,
INC., a California corporation a Delaware corporation
By: /S/ Norbert Olberz By: /S/ Dennis Trausch
------------------------- ---------------------------
Print Name: Norbert Olberz Print Name: Dennis Trausch
----------------- -------------------
Its: President Its: Executive Vice President
------------------------ -------------------------
22
<PAGE>
EXHIBIT A
---------
SITE PLAN
Exhibit A - Page 1
<PAGE>
EXHIBIT B
---------
RECORDING REQUESTED BY
AND WHEN RECORDED RETURN TO:
Sport Chalet, Inc.
920 Foothill Boulevard
La Canada, California 91011
Attn: Mr. Dennis Trausch
- --------------------------------------------------------------------------------
Space above this line for Recorder's use only
MEMORANDUM OF LEASE
-------------------
This Memorandum of Lease (this "Memorandum") is dated as of May 7, 1999, by
----------
and between NORTH SAN FERNANDO VALLEY PROPERTIES, INC., a California corporation
("Landlord"), and SPORT CHALET, INC., a Delaware corporation ("Tenant"), with
-------- ------
reference to the following facts:
Concurrently herewith, Landlord and Tenant have entered into that certain
Lease (the "Lease") for that certain premises (the "Premises") consisting of a
----- --------
building to be constructed by Landlord within the area shown as cross-hatched on
the site plan attached hereto as Schedule 1 and incorporated herein by this
----------
reference, which building shall contain approximately forty-three thousand
(43,000) square feet of "Floor Area" (as defined in the Lease). The Premises is
----------
located upon a parcel of real property ("Landlord's Parcel") in the City of Los
-----------------
Angeles, County of Los Angeles, and State of California as legally described on
Schedule 2 attached hereto and made a part hereof. The Landlord's Parcel is a
- ----------
portion of a larger commercial project commonly known as "Porter Ranch Town
Center" (the "Shopping Center").
---------------
NOW, THEREFORE, for and in consideration of the foregoing, Landlord and
Tenant hereby agree as follows:
1. Agreement to Lease. Landlord hereby leases to Tenant, and Tenant
------------------
hereby leases from Landlord, the Premises together with the right to the use of
the "Common Areas" (as defined in the Lease) pursuant to the Lease, at the
------------
rental and upon all of the terms and conditions set forth in the Lease, which
Lease is incorporated herein by this reference. In the event of any
inconsistency between the terms and conditions of this Memorandum and the terms
and conditions of the Lease, the terms and conditions of the Lease shall govern
and control.
2. Term. Subject to the terms and conditions contained in the Lease, the
----
Premises is leased for an initial term which is to expire on the January 31 next
following the expiration of 15 "Full Lease Years" (as defined in the Lease)
----------------
following the "Commencement Date" (as defined in the Lease), together with
-----------------
options to extend the term of the Lease for five (5) consecutive five (5) year
periods.
3. Covenants Running with the Land. The covenants of Landlord set forth
-------------------------------
in the Lease shall run with the land of Landlord's Parcel in accordance with the
provisions of applicable law, including, without limitation, Sections 1469 and
1470 of the California Code of Civil Procedure.
IN WITNESS WHEREOF, each of the parties hereto has executed this instrument
as of the date first above written.
LANDLORD: TENANT:
NORTH SAN FERNANDO VALLEY PROPERTIES, SPORT CHALET, INC.,
INC., a California corporation a Delaware corporation
By:________________________ By:_________________________
Print Name:________________ Print Name:_________________
Its:_______________________ Its:________________________
Exhibit B - Page 1
<PAGE>
STATE OF CALIFORNIA )
) ss.
COUNTY OF __________)
On ________________, 199__, before me, the undersigned, a Notary Public in
and for said County and State, personally appeared ___________________________,
personally known to me;
proved to me on the basis of satisfactory evidence,
to be the person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
authorized capacity(ies), and that by his/her/their signature(s) on the
instrument the person(s), or the entity upon behalf of which the person(s)
acted, executed the within instrument.
WITNESS my hand and official seal.
_________________________________
Notary Public
STATE OF CALIFORNIA )
) ss.
COUNTY OF __________)
On ________________, 199__, before me, the undersigned, a Notary Public in
and for said County and State, personally appeared ___________________________,
personally known to me;
proved to me on the basis of satisfactory evidence,
to be the person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
authorized capacity(ies), and that by his/her/their signature(s) on the
instrument the person(s), or the entity upon behalf of which the person(s)
acted, executed the within instrument.
WITNESS my hand and official seal.
_________________________________
Notary Public
<PAGE>
SCHEDULE 1 TO MEMORANDUM OF LEASE
---------------------------------
DEPICTION OF PREMISES ON SITE PLAN
<PAGE>
SCHEDULE 2 TO MEMORANDUM OF LEASE
---------------------------------
LEGAL DESCRIPTION
<PAGE>
EXHIBIT C
---------
CONSTRUCTION OF PREMISES
1. Landlord's Work.
---------------
(a) Landlord shall cause the Premises to be improved upon the Substantial
Completion Date in accordance with certain specifications therefor which, if not
approved by the parties prior to the execution of this Lease, shall be mutually,
reasonably approved by Landlord and Tenant promptly following the execution of
this Lease (collectively, "Landlord's Work").
---------------
(b) Landlord's Work shall be performed in accordance with detailed plans
and specifications therefor, prepared by a qualified and experienced design
professional reasonably approved by Tenant, at Landlord's sole cost and expense,
which shall have been previously approved in writing by Tenant in accordance
with the following. If the "Final Working Drawings" (as hereinafter defined)
----------------------
have not been approved prior to the execution of this Lease, then the following
provisions regarding preparation and approval of Preliminary Drawings and Final
Working Drawings shall apply: Promptly following the execution of this Lease,
Landlord shall submit to Tenant for Tenant's approval, three (3) complete sets
of the "Preliminary Drawings" showing the schematic design of Landlord's Work.
--------------------
Tenant shall return to Landlord the Preliminary Drawings, marked "approved" or
"disapproved", within fifteen (15) days of receipt. If no response from Tenant
is received within such fifteen (15) day period, such Preliminary Drawings shall
be deemed disapproved. If such Preliminary Drawings are so disapproved or
deemed disapproved, the parties shall promptly meet to resolve any objections of
Tenant and Landlord shall thereafter promptly submit revised Preliminary
Drawings to Tenant for reevaluation in accordance herewith. Upon return by
Tenant of approved Preliminary Drawings, Landlord shall prepare for submittal to
Tenant for Tenant's approval three (3) complete sets of the Final Working
Drawings (the "Final Working Drawings") which shall include architectural,
----------------------
structural, mechanical, electrical, and plumbing drawings for Landlord's Work.
The Final Working Drawings shall be prepared strictly in accordance with the
Preliminary Drawings approved by Tenant. Tenant will return to Landlord the
Final Working Drawings, marked either "approved" or "disapproved", within
fifteen (15) days of receipt. If no response from Tenant is received within
such fifteen (15) day period, such Final Working Drawings shall be deemed
disapproved. If such Final Working Drawings are so disapproved or deemed
disapproved, the parties shall promptly meet to resolve any objections of Tenant
and Landlord shall thereafter promptly submit revised Final Working Drawings to
Tenant for reevaluation in accordance herewith. Tenant shall have the right to
reasonably approve the general contractor and the subcontractors for performance
of all major trades for the performance of Landlord's Work. All contractors and
subcontractors for the performance of Landlord's Work shall be duly qualified,
licensed and experienced in the construction of comparable improvements.
(c) For all purposes of this Exhibit C and the Lease of which this Exhibit
--------- -------
C is a part, the "Substantial Completion Date" shall be deemed to occur upon the
- - ---------------------------
latest to occur of (i) receipt by Tenant of factually correct certification from
Landlord's architect for the performance of Landlord's Work of the completion of
all of Landlord's Work in accordance with the provisions of this Exhibit C,
---------
other than such customary "punch-list" items which do not adversely affect
Tenant's performance of Tenant's Work or Tenant's use or occupancy of, or
operation of business from, the Premises and/or such items, if any, as cannot be
completed prior to the completion of Tenant's Work, (ii) the completion of such
portions of the Common Areas and off-site improvements benefitting the Project
as are necessary for Tenant's unimpaired use and operation of business from the
Premises, and (iii) the receipt by Tenant of all "Tenant's Permits" (as
----------------
hereinafter defined). As used herein, "Tenant's Permits" shall mean (1) all
----------------
zoning approvals and other governmental permits and approvals, if any, required
as a condition to Tenant's operation of its business from the Premises (except
for such permits or approvals which require the completion of Tenant's Work
prior to issuance) (collectively, "Tenant's Use Permits"), and (2) building
--------------------
permits for the performance of Tenant's Work ("Tenant's Building Permits").
-------------------------
Tenant shall use commercially reasonable efforts to obtain Tenant's Use Permits
as soon as reasonably possible following the execution of this Lease subject to
the provisions of this Exhibit C. Landlord shall deliver to Tenant not less
---------
than sixty (60) days' prior written notice of Landlord's good faith estimate of
the occurrence of the Substantial Completion Date and thereafter provide Tenant
with progress reports and other information reasonably necessary to inform
Tenant of the Substantial Completion Date. All such "punch-list"
Exhibit C - Page 1
<PAGE>
items and such other unperformed items of Landlord's Work not completed upon the
Substantial Completion Date shall be completed by Landlord as soon as possible
following such Substantial Completion Date but in no event later than thirty
(30) days thereafter. In addition, at any time following the Substantial
Completion Date, Tenant shall have the right to notify Landlord of incomplete or
defective items of Landlord's Work and Landlord shall promptly complete or
repair, as the case may be, such items of work.
2. Tenant's Work. Tenant shall, at Tenant's sole cost and expense, perform
-------------
all work in the Premises (other than Landlord's Work) and install such
furniture, trade fixtures and equipment as Tenant deems necessary for the
operation of Tenant's business from the Premises (collectively, "Tenant's
--------
Work"). To the extent Tenant's Work constitutes alterations which would require
- ----
the consent of Landlord pursuant to the Lease, such Tenant's Work shall be
performed in accordance with plans and specifications therefor which shall be
subject to Landlord's prior written approval (which approval shall not be
unreasonably withheld or delayed). All Tenant's Work shall be performed in a
good and workmanlike manner and in accordance with all applicable Laws. Tenant
shall use commercially reasonable efforts to obtain Tenant's Building Permits
for the performance of Tenant's Work to the extent required for such work as
soon as possible following approval of the plans and specifications therefor,
and, following receipt thereof, shall deliver copies of such permits to Landlord
upon request. Tenant shall commence the performance of Tenant's Work promptly
following the Substantial Completion Date, and thereafter diligently prosecute
the same to completion.
Exhibit C - Page 1
<PAGE>
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-61612) pertaining to the Sport Chalet, Inc. 1992 Incentive Award Plan
of our report dated May 19, 1999, with respect to the financial statements of
Sport Chalet, Inc. included in the Annual Report (Form 10-K) for the year ended
March 31, 1999.
/s/ Ernst & Young LLP
Los Angeles, California
June 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S MARCH 31, 1999 10-K AND IS QUALIFIED IN ITS ENTIRETY TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 10,829,102
<SECURITIES> 0
<RECEIVABLES> 604,296
<ALLOWANCES> 28,000
<INVENTORY> 29,518,546
<CURRENT-ASSETS> 42,484,066
<PP&E> 28,900,396
<DEPRECIATION> 15,398,980
<TOTAL-ASSETS> 56,566,744
<CURRENT-LIABILITIES> 19,485,422
<BONDS> 0
0
0
<COMMON> 65,320
<OTHER-SE> 36,914,862
<TOTAL-LIABILITY-AND-EQUITY> 56,566,744
<SALES> 154,573,318
<TOTAL-REVENUES> 154,573,318
<CGS> 106,920,821
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 38,872,850
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (243,366)
<INCOME-PRETAX> 9,023,013
<INCOME-TAX> 3,609,000
<INCOME-CONTINUING> 5,414,013
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,414,013
<EPS-BASIC> .83
<EPS-DILUTED> .80
</TABLE>
