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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act for 1934 for the quarterly period ended September 30, 1999
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act for 1934 for the Transition period from ______ to ______
Commission File Number: 0-20736
Sport Chalet, Inc.
(Exact name of registrant as specified in its charter)
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<S> <C>
Delaware 95-4390071
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
920 Foothill Boulevard, La Canada California 91011
(Address of principal executive offices) (Zip Code)
(818) 790-2717
(Registrant's telephone number, including area code)
Not Applicable
(Former name former address and former fiscal year, if changes since last report)
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
--
Number of shares outstanding of the registrant's common stock as of
November 1, 1999:
6,577,000
1
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SPORT CHALET, INC.
------------------
Index to Form 10-Q
Part I
------
Page
----
1 Item 1. Financial Statements....................................... 3
2. Item 2. Management's Discussion and Analysis of Financial Condition
and the Results of Operations.............................. 7
Part II
-------
1. Item 4. Submission of Matters to a Vote of Security Holders........ 10
2. Item 5. Other Information.......................................... 10
3. Item 6. Exhibits and Reports on Form 8-K........................... 10
2
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Part I - Financial Information
------------------------------
Item 1. Financial Statements.
---------------------
SPORT CHALET, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
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<CAPTION>
Three months ended Six months ended
---------------------------- -----------------------------
September 30, September 30,
---------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net sales........................................ $ 41,678,562 $ 36,191,622 $76,347,189 $ 68,288,862
Cost of goods sold, buying and occupancy......... 29,372,766 25,293,955 53,588,767 47,872,727
------------ ------------ ----------- ------------
Gross profit..................................... 12,305,796 10,897,667 22,758,422 20,416,135
Selling, general and administrative
expenses................................ 10,601,671 9,343,529 20,044,343 17,923,934
----------- ------------ ----------- ------------
Income from operations........................... 1,704,125 1,554,138 2,714,079 2,492,201
Interest income.................................. 64,688 50,269 149,210 76,923
----------- ------------ ----------- ------------
Income before taxes.............................. 1,768,813 1,604,407 2,863,289 2,569,124
Income tax provision............................. 704,000 655,000 1,140,000 1,049,000
----------- ------------ ----------- ------------
Net income....................................... $ 1,064,813 $ 949,407 $ 1,723,289 $ 1,520,124
============ ============ =========== ============
Earnings per share:
Basic................................... $ .16 $ .15 $ .26 $ .23
============ ============ =========== ============
Diluted................................. $ .16 $ .14 $ .25 $ .23
============ ============ =========== ============
Weighted average number
of common shares outstanding:
Basic................................... 6,577,000 6,529,667 6,577,000 6,527,333
============ ============ =========== ============
Diluted................................. 6,755,035 6,680,617 6,776,110 6,694,752
============ ============ =========== ============
</TABLE>
See accompanying note.
3
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SPORT CHALET, INC.
CONDENSED BALANCE SHEETS
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<CAPTION>
September 30, March 31,
1999 1999
---------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash........................................................... $ 4,424,782 $10,829,102
Accounts receivable - net...................................... 709,194 604,296
Merchandise inventories........................................ 40,240,628 29,518,546
Prepaid expenses and other current assets...................... 118,370 268,343
Deferred income tax............................................ 1,158,920 1,263,779
----------- -----------
Total current assets................................. 46,651,894 42,484,066
Furniture, equipment and leasehold improvements - net............ 15,690,606 13,501,416
Other assets..................................................... 489,966 581,262
----------- -----------
Total assets......................................... $62,832,466 $56,566,744
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable............................................... $16,448,007 $11,228,511
Salaries and wages payable..................................... 1,966,055 2,962,400
Other accrued expenses......................................... 5,042,459 4,491,568
Income tax payable............................................. 449,871 802,943
----------- -----------
Total current liabilities............................ 23,906,392 19,485,422
Deferred income taxes............................................ 94,353 101,140
Shareholders' equity
Preferred stock, $.01 par value:
Authorized shares - 2,000,000
Issued and outstanding shares - none
Common stock, $.01 par value:
Authorized shares - 15,000,000
Issued and outstanding shares - 6,577,000 at
June 30, 1999 and 6,532,000 at
March 31, 1999....................................... 65,770 65,320
Additional paid-in capital................................. 21,659,907 21,532,107
Retained earnings................................................ 17,106,044 15,382,755
----------- -----------
Total shareholders' equity........................... 38,831,721 36,980,182
----------- -----------
Total liabilities and shareholders' equity........... $62,832,466 $56,566,744
=========== ===========
</TABLE>
See accompanying note.
4
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SPORT CHALET, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
Six months ended September 30,
--------------------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
Operating activities
Net income........................................................... $ 1,723,289 $ 1,520,124
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization............................... 1,938,502 1,567,001
Stock compensation.......................................... 128,250 45,500
Deferred income taxes....................................... 98,072 1,049,000
Changes in operating assets and liabilities:
Accounts receivable................................... (104,898) 226,337
Merchandise inventories............................... (10,722,082) (10,119,689)
Prepaid expenses and other current assets............. 149,973 152,759
Accounts payable...................................... 5,219,496 7,600,414
Salaries and wages expenses........................... (996,345) (668,587)
Other accrued expenses................................ 550,891 248,080
Income tax payable.................................... (353,072) -
------------ ------------
Net cash (used in) provided by operating activities.................. (2,367,924) 1,620,939
Investing activities
Other assets......................................................... 91,296 (627,131)
Purchase of furniture, equipment and leasehold improvements.......... (4,127,692) (2,117,973)
------------ ------------
Net cash used in investing activities................................ (4,036,396) (2,745,104)
Financing activities
Proceeds from bank borrowings........................................ - -
Principal payments on bank loans..................................... - -
------------ ------------
Net cash used in financing activities................................ - -
Decrease in cash..................................................... (6,404,320) (1,124,165)
Cash at beginning of period.......................................... 10,829,102 4,970,335
------------ ------------
Cash at end of period................................................ $ 4,424,782 $ 3,846,170
============ ============
Cash paid during the year for:
Income taxes.................................................... $ 1,050,000 $ -
Interest........................................................ - -
</TABLE>
See accompanying note.
5
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SPORT CHALET, INC.
NOTE TO FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation of the results of
operations for the periods presented have been included.
The financial data at March 31, 1999 is derived from audited financial
statements which are included in the Company's Annual Report on Form 10-K for
the year ended March 31, 1999, and should be read in conjunction with the
audited financial statements and notes thereto. Interim results are not
necessarily indicative of results for the full year.
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.
6
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Item 2. Management's Discussion and Analysis of Financial Condition and the
-------------------------------------------------------------------
Results of Operations.
---------------------
The following should be read in conjunction with the Company's financial
statements and related notes thereto provided under Item 1 above.
Results of Operations
Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998. Sales have increased 15.2%, $41.7 million for the current
fiscal quarter compared to $36.2 million for the same quarter last year. One new
store was opened during June 1999 and another during July 1999. In addition,
comparable store sales, store opened throughout both periods, are up 4.5%,
somewhat higher than the last few quarters trend, due in part to promotional
pricing during the period.
Gross profit as a percent of sales decreased to 29.5% compared to 30.1% for
the same quarter last year, as markdowns were taken in excess of those taken
during the same period last year to further stimulate sales growth.
Selling, general and administrative expenses as a percent of sales
decreased from 25.8% to 25.4% as new store opening costs were offset by the
impact of increased sales.
Interest income increased slightly from $50,000 to $65,000.
The effective income tax rate was 39.8%, compared to 40.8% for the same
period last year, which differs from the statutory rate as a result of permanent
differences between financial reporting and tax-basis income.
Net income increased from $949,000, or $.14 per diluted share to $1.1
million or $.16 per diluted share, primarily as a result of increased sales.
Six Months Ended September 30, 1999 Compared to Six Months Ended September
30, 1998. Sales have increased 11.8%, $76.3 million compared to $68.3 million
for the same period last year. Since June 1998 a total of three new stores were
opened. These stores were opened during each on June 1998, June 1999 and July
1999. Comparable store sales are up 3.1% in part due to promotional pricing
during the period.
Gross profit as a percent of sales decreased slightly to 29.8% from 29.9%,
reflecting continued strong consumer demand and improvements to inventory
procurement practices offset by promotional markdowns taken to stimulate sales
in the second quarter.
Selling, general and administrative expenses as a percent of sales
decreased slightly from 26.3% to 26.2% as new store opening costs were offset by
the impact of increased sales.
Interest income increased to $149,000 this quarter from $77,000 during the
same period last year primarily because of higher average cash balances compared
to balances during the six months ended September 30, 1998.
7
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The effective income tax rate was 39.8%, compared to 40.8% for the same
period last year, which differs from the statutory rate as a result of permanent
differences between financial reporting and tax-basis income
Net income increased to $1.7 million from $1.5 million and earnings per
share increased to $.25 per diluted share from $.23 per diluted share, primarily
as a result of increased sales.
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. Management believes that these sources will be sufficient to fund
currently anticipated cash requirements for the next 2 to 3 fiscal years.
Net cash used in operating activities was $2.4 million for the six months
ended September 30, 1999 compared to net cash provided by operating activities
of $1.6 million for the same period last year. Net income provided $1.7 million
and $1.5 million for the six months ended September 30, 1999 and 1998,
respectively. Depreciation also provided $1.9 million and $1.6 million of non-
cash for the same periods.
Inventories increased by $10.7 million and $10.1 million for the six months
ended September 30, 1999 and 1998, respectively, due to the seasonal build-up of
summer inventory. Inventory at September 30, 1999 is $2.3 million greater than
the same time last year primarily due to new stores. Accounts payable increased
by $5.2 million and $7.6 million for the respective periods due primarily to
inventory build-up and the timing of payments to vendors.
Net cash used in investing activities increased to $4.0 million from $2.7
million primarily due to the opening of two new store during the six months
ended September 30, 1999 compared to one new store in the same time period last
year.
Net cash provided by financing activities has historically reflected
advances or pay down of the Company's revolving credit line. There were no
borrowings during either six-month period ended September 30, 1999 or 1998.
Year 2000
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 that the mainframe hardware and
operating system are now
8
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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 currently 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 Management 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 that 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.
Disclosure Regarding Forward-Looking Statements
The statements which are not historical facts contained in this Quarterly
Report on Form 10-Q are "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, that involve risks and
uncertainties. The words "anticipate", "believes", "expect", "intend", "may",
"likely" or similar expressions used in this Quarterly Report as they relate to
the Company or its Management are generally intended to identify such forward
looking statements. These risks and uncertainties contained in this Quarterly
Report include but are not limited to, product demand and market acceptance
risks, the effect of economic conditions generally and in Southern California,
and retail and sporting goods business conditions specifically, the impact of
competition, technological difficulties including Year 2000 issues, capacity and
supply constraints or difficulties, the results of financing efforts, changes in
consumer preferences and trends, the effect of the Company's accounting
policies, weather conditions, acts of God, and other risks detailed in the
Company's Security and Exchange Commission filings.
9
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Part II
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
At the annual meeting of shareholders on August 5, 1999, the one Class 1
Director, Eric S. Olberz, was re-elected to the Company's Board of Directors.
There were 6,236,065 votes for and 28,405 votes withheld. The Company's Class 3
Directors, Norbert J. Olberz and Kenneth Olsen and Class 2 Directors, John R.
Attwood and Craig L. Levra, continue to serve on the Board. The terms of the
Class 1, 2 and 3 Directors presently expire in fiscal year 2003, 2001 and 2002,
respectively.
Item 5. Other Information.
------------------
On August 5, 1999 the Board of Directors elected Craig Levra as Chief
Executive Officer of the registrant. Mr. Levra will also retain his previous
title of President. Norbert Olberz, the principal shareholder and Chairman of
the Board of registrant, who had served as Interim Chief Executive Officer will
retain his position as Chairman of the Board. Mr. Levra's base salary will be
$250,000 and Mr. Olberz base salary will be $300,000 under written employment
agreements not as yet finalized.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
During the quarter for which this report on Form 10-Q is filed,
no reports on Form 8-K were filed.
10
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officer and principal financial officer.
SPORT CHALET, INC.
DATE: November 3, 1999 /S/ Craig L. Levra
-----------------------------------------
Craig L. Levra
President and Chief Executive Officer
(Duly Authorized Officer)
DATE: November 3, 1999 /S/ Howard K. Kaminsky
-----------------------------------------
Howard K. Kaminsky
Senior Vice President-Finance, Chief
Financial Officer, and Secretary
(Principal Financial and Accounting Officer)
11
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S SEPTEMBER 30, 1999 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,424,782
<SECURITIES> 0
<RECEIVABLES> 709,194
<ALLOWANCES> 73,000
<INVENTORY> 40,240,628
<CURRENT-ASSETS> 46,651,894
<PP&E> 32,476,699
<DEPRECIATION> 16,786,093
<TOTAL-ASSETS> 62,832,466
<CURRENT-LIABILITIES> 23,906,392
<BONDS> 0
0
0
<COMMON> 65,770
<OTHER-SE> 38,765,351
<TOTAL-LIABILITY-AND-EQUITY> 62,832,466
<SALES> 76,347,189
<TOTAL-REVENUES> 76,347,189
<CGS> 53,588,767
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 20,044,343
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (149,210)
<INCOME-PRETAX> 2,863,289
<INCOME-TAX> 1,140,000
<INCOME-CONTINUING> 1,723,289
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,723,289
<EPS-BASIC> .25
<EPS-DILUTED> .25
</TABLE>
