<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act for 1934
For the quarterly period ended December 31, 1998
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act for 1934
For the Transition period from __________ to ___________
Commission file number: 0-20736
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Sport Chalet, Inc.
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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 No.)
incorporation or organization)
920 Foothill Boulevard, La Canada California 91011
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(Address of principal executive offices) (Zip)
(818) 790-2717
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(Registrant's telephone number, including area code)
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(Former name former address and former fiscal year, if changes since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date, February 1, 1999:
6,532,000
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SPORT CHALET, INC.
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Index to Form 10-Q
Part I
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1. Item 1. Condensed Financial Statements
2. Item 2. Management's Discussion and Analysis of Financial Condition and
the Results of Operations
Part II
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1. Item 6. Exhibits and Reports on Form 8-K
2
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SPORT CHALET, INC.
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Part I
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Item 1. Condensed Financial Statements.
------------------------------
The condensed financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the information
presented not misleading. In the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for a fair statement of
results for the interim period have been made.
It is suggested that these condensed financial statements be read in
conjunction with the financial statements and the notes thereto included in the
Company's 1998 Annual Report to Shareholders filed with the Commission on June
30, 1998.
3
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SPORT CHALET, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales...................................... $47,234,297 $43,797,953 $115,523,159 $105,922,809
Cost of goods sold, buying and occupancy....... 32,137,224 29,636,685 80,009,951 74,617,333
----------- ----------- ------------ ------------
Gross profit................................... 15,097,073 14,161,268 35,513,208 31,305,476
Selling, general and administrative expenses... 10,724,878 10,272,735 28,648,812 26,101,532
----------- ----------- ------------ ------------
Income from operations......................... 4,372,195 3,888,533 6,864,396 5,203,944
Interest (income) expense...................... (41,672) 90,124 (118,595) 215,394
---------- ----------- ------------ ------------
Income before taxes............................ 4,413,867 3,798,409 6,982,991 4,988,550
Income tax provision........................... 1,822,000 1,555,000 2,871,000 2,043,000
----------- ----------- ------------ ------------
Net income..................................... $ 2,591,867 $ 2,243,409 $ 4,111,991 $ 2,945,550
=========== =========== ============ ============
Earnings per share:
Basic............................. $ .40 $ .35 $ .63 $ .45
=========== =========== ============ ============
Diluted........................... $ .38 $ .34 $ .61 $ .45
=========== =========== ============ ============
Weighted average number
of common shares outstanding:
Basic............................. 6,532,000 6,500,000 6,528,889 6,500,000
=========== =========== ============ ============
Diluted........................... 6,779,044 6,616,447 6,696,307 6,565,559
=========== =========== ============ ============
</TABLE>
See accompanying notes.
4
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SPORT CHALET, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
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(Unaudited)
<S> <C> <C>
ASSETS
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Current assets:
Cash................................................. $10,126,132 $ 4,970,335
Accounts receivable - net............................ 344,390 409,635
Merchandise inventories.............................. 32,461,764 27,812,058
Prepaid expenses and other current assets............ 251,415 205,297
Deferred and refundable income taxes................. 1,105,510 1,809,921
----------- -----------
Total current assets........................ 44,289,211 35,207,246
Furniture, equipment and leasehold improvements net... 13,696,193 13,443,937
Other assets (note 2)................................... 646,000 66,730
----------- -----------
Total assets................................ $58,631,404 $48,717,913
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable..................................... $10,927,290 $ 9,610,860
Salaries and wages payable........................... 2,513,222 2,842,807
Income tax payable................................... 1,707,094
Other accrued expenses............................... 7,704,681 4,552,352
----------- -----------
Total current liabilities................... 22,852,287 17,006,019
Deferred income taxes.................................. 100,957 191,225
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 - 6,532,000.................. 65,320 65,250
Additional paid-in capital...................... 21,532,107 21,486,677
Retained earnings.................................... 14,080,733 9,968,742
----------- -----------
Total shareholders' equity........................... 35,678,160 31,520,669
----------- -----------
Total liabilities and shareholders' equity.. $58,631,404 $48,717,913
=========== ===========
</TABLE>
See accompanying notes.
5
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SPORT CHALET, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended December 31,
------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Operating activities
Net income..................................................... $ 4,111,991 $ 2,945,550
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization.............................. 1,770,000 2,042,500
Stock compensation......................................... 45,500 -
Deferred income taxes...................................... 614,143 1,074,429
Changes in operating assets and liabilities:
Accounts receivable..................................... 65,245 227,279
Merchandise inventories................................. (4,649,706) (4,531,562)
Prepaid expenses and other current assets............... (46,118) (58,337)
Accounts payable........................................ 1,316,430 1,951,843
Salaries and wages expenses............................. (329,585) 141,935
Other accrued expenses.................................. 3,152,329 3,158,863
Income tax payable...................................... 1,707,094 892,622
----------- ------------
Net cash provided by operating activities...................... 7,757,323 7,845,122
Investing activities
Other assets................................................... (579,270) -
Purchase of furniture, equipment and leasehold improvements.... (2,022,256) (2,343,448)
----------- ------------
Net cash used in investing activities.......................... (2,601,526) (2,343,448)
Financing activities
Proceeds from bank borrowings.................................. - 43,000,357
Principal payments on bank loans............................... - (44,352,122)
----------- ------------
Net cash used in financing activities.......................... - (1,351,765)
Increase in cash............................................... 5,155,797 4,149,909
Cash at beginning of period.................................... 4,970,335 451,114
----------- ------------
Cash at end of period.......................................... $10,126,132 $ 4,601,023
=========== ============
Cash paid during the year for:
Income taxes.............................................. $ 550,000 $ 75,842
Interest.................................................. - 215,394
</TABLE>
See accompanying notes.
6
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SPORT CHALET, INC.
NOTE TO FINANCIAL STATEMENTS
(UNAUDITED)
1. For a summary of significant accounting policies and other information
which relates to these interim statements, reference should be made to the
notes to financial statements included in the Company's 1998 Annual Report
to Shareholders.
2. On March 31, 1998, the Principal Shareholder and his spouse, through their
Family Trust, awarded 293,625 unregistered shares of common stock to
certain employees and Directors. 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.
7
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Item 2. Management's Discussion and Analysis of Financial Condition and the
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Results of Operations.
---------------------
The following should be read in conjunction with the Company's financial
statements and related notes thereto provided under Item 1 above.
Three Months Ended December 31, 1998 Compared to Three Months Ended
December 31, 1997. Sales have increased 7.8%, $47.2 million for the current
fiscal quarter compared to $43.8 million for the same quarter last year.
Comparable store sales are up 2.7%, which Management believes is the result of
improved merchandising, customer service and other factors partially offset by
reductions in sales of winter related merchandise due to relatively dry weather
compared to the same quarter last year. In addition, one new store was opened
in San Diego during June 1998 and another in Laguna Niguel during November 1997,
while the under-performing El Cajon store was closed in September 1997.
Gross profit as a percent of sales decreased slightly, 32.0% compared to
32.3% for the same quarter last year, as the Company acted to offset the effects
of warm and dry weather with promotional markdowns.
Selling, general and administrative expenses as a percent of sales
decreased from 23.5% to 22.7% reflecting cost savings from reduced professional
and outsourcing fees and other expenses.
The Company recorded interest income of $42,000 in the current fiscal
quarter as opposed to $90,000 interest expense during the same quarter last year
because no amounts were borrowed during the three months ended December 31,
1998.
The effective income tax rate was 41.3%, compared to 40.9% for the same
period last year. These rates differ from the statutory rate of 40.1% as a
result of permanent differences between financial reporting and tax-basis
income.
Net income increased from $2.2 million or $.34 per diluted share to $2.6
million or $.38 per diluted share, primarily as a result of increased sales.
Nine Months Ended December 31, 1998 Compared to Nine Months Ended December
31, 1997. Sales have increased 9.1%, $115.5 million compared to $105.9 million
for the same period last year. Comparable store sales are up 4.4%, which
Management believes is due to unseasonably cool weather resulting in increased
demand for winter-related merchandise during April 1998 as well as improved
merchandising, customer service and other factors partially offset by decreased
demand for winter-related merchandise due to relatively dry weather during the
quarter ended December 31, 1998. In addition, one new store was opened in San
Diego during June 1998 and one in Laguna Niguel during November 1997, while the
under-performing El Cajon store was closed in September 1997.
Gross profit increased as a percent of sales to 30.7% compared to 29.6%,
due to strong consumer demand and buying efficiencies.
8
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Selling, general and administrative expenses as a percent of sales
increased slightly from 24.6% to 24.8%, due to increased labor costs
attributable to hiring management personnel in connection with the Company's
expansion program, additional warehouse staff to ensure more merchandise is
delivered in a "floor-ready" condition and to new store opening expenses, offset
partially by the impact of higher sales and savings from reduced professional
and outsourcing fees and other expenses.
The Company recorded interest income of $119,000 in the current none month
period as opposed to $215,000 interest expense during the same period last year
because no money was borrowed during the nine months ended December 31, 1998.
The effective income tax rate was 41.1%, compared to 40.9% for the same
period last year. 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 $4.1 million from $2.9 million and earnings per
share increased to $.61 per diluted share from $.45 per diluted share, as a
result of improved sales and gross profit partially offset by increased selling,
general and administrative expenses.
Liquidity and Capital Resources
The Company's primary capital requirements are for inventory and store
openings, relocations and remodeling. The Company is actively pursuing and
evaluating potential store locations in connection with its expansion program
and expects to open one new store in Spring 1999. The Company's plans to
relocate and expand the La Canada store and corporate offices into the proposed
"Sport Chalet Village" shopping center have been delayed by the entitlement
process with the City of La Canada. A projected move-in date has not been set
and no assurance can be provided that the City of La Canada will approve the
entitlements necessary to permit construction of the shopping center.
Historically, the Company's liquidity needs have been met by cash from
operations, credit terms from vendors and bank borrowings. The Company believes
that these sources will be sufficient to fund currently anticipated cash
requirements, including the Company's expansion program, for the next 2 to 3
fiscal years.
Net cash provided by operating activities was $7.8 million in both the
nine-month periods ended December 31, 1998 and 1997, respectively. Net income
provided $4.1 million and $2.9 million for the nine months ended December 31,
1998 and 1997, respectively. Depreciation also provided $1.8 million and $2.0
million of cash for the same periods.
Inventories decreased by $4.6 million and $4.5 million for the nine months
ended December 31, 1998 and 1997, respectively. Accounts payable increased by
$1.3 million and $1.9 million for the respective periods due the timing of
payments to vendors.
9
<PAGE>
Net cash used in investing activities increased to $2.6 million from $2.3
million for the periods ended December 31, 1998 and 1997, respectively,
primarily due to the opening of one new store during June 1998 and one new store
in November 1997 as well as loans made to certain employees pursuant to the
March 31, 1998 stock award described in Note 2 to the Condensed Financial
Statements set forth in Item 1.
Net cash provided by financing activities has primarily reflected advances
or pay downs of the Company's revolving credit line. There were no borrowings
during the period ended December 31, 1998, while $1.4 million of cash was paid
down during the nine months ended December 31, 1997.
Year 2000
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 and as of December 31, 1998, all
programs and data have been appropriately modified. The Company is now in the
testing phase. The Company's point of sale systems require minor modifications,
while the payroll and phone systems are believed to be Year 2000 compliant.
The Company is planning to implement substantially all of its Year 2000-
conversion project by February 1999, and is primarily using internal staff for
this effort. Based upon information currently known about its computer and other
business systems, the Company estimates it will spend approximately $200,000 in
this effort of which approximately $125,000 has already been expensed. The
Company believes that the cost associated with becoming Year 2000 compliant will
not materially affect its future operating results or financial condition.
While the Company currently believes that it will be able to implement its
Year 2000 conversion project in a timely manner, failure to do so 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. The Company
currently has no contingency plans in place in the event it does not complete
all phases of the Year 2000 project. The Company plans to evaluate the status
of completion in March 1999 and determine whether such a plan is necessary.
10
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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. The Company currently does not anticipate any
material disruptions to its operations due to the Year 2000 issues related to
third parties. 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 currently does not have a contingency
plan for this scenario and will consider establishing one in March 1999 based on
the results surveying its major vendors and banking relationships.
Disclosure Regarding Forward-Looking Statements
The statements which are not historical facts contained in this Quarterly
Report on Form 10-Q are "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, that involve risks and
uncertainties. The words "anticipate", "believes", "expect", "intend", "may",
or similar expressions used in this Quarterly Report as they relate to the
Company or its Management are generally intended to identify such forward
looking statements. These risks and uncertainties contained in this Quarterly
Report include but are not limited to, product demand and market acceptance
risks, the effect of economic conditions generally and in Southern California,
and retail and sporting goods business conditions specifically, the impact of
competition, technological difficulties, capacity and supply constraints or
difficulties, the results of financing efforts, changes in consumer preferences
and trends, the effect of the Company's accounting policies, weather conditions,
acts of God, and other risks detailed in the Company's Security and Exchange
Commission filings.
11
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Part II
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.
12
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officer and principal financial officer.
SPORT CHALET, INC.
DATE: February 5, 1999 /s/ Norbert J. Olberz
-------------------------------------
Norbert J. Olberz
Chairman of the Board and
Interim Chief Executive Officer
(Duly Authorized Officer)
DATE: February 5, 1999 /s/ Howard K. Kaminsky
------------------------------------
Howard K. Kaminsky
Senior Vice President-Finance, Chief
Financial Officer, and Secretary
(Principal Financial and Accounting
Officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S DECEMBER 31, 1998 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,126,132
<SECURITIES> 0
<RECEIVABLES> 344,390
<ALLOWANCES> 28,000
<INVENTORY> 32,461,764
<CURRENT-ASSETS> 44,289,211
<PP&E> 28,312,250
<DEPRECIATION> 14,616,057
<TOTAL-ASSETS> 58,631,404
<CURRENT-LIABILITIES> 22,852,287
<BONDS> 0
0
0
<COMMON> 65,320
<OTHER-SE> 35,612,840
<TOTAL-LIABILITY-AND-EQUITY> 58,631,404
<SALES> 115,523,159
<TOTAL-REVENUES> 115,523,159
<CGS> 80,009,951
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 28,648,812
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (118,595)
<INCOME-PRETAX> 6,982,991
<INCOME-TAX> 2,871,000
<INCOME-CONTINUING> 4,111,991
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,111,991
<EPS-PRIMARY> .63
<EPS-DILUTED> .61
</TABLE>
