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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 [FEE REQUIRED]
For the fiscal year ended March 31, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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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
(State or other jurisdiction (I.R.S. employer identification number)
of 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
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Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.01 par value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229, 405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 7, 1996 was $4.1 million. The number of shares of the
registrant's common stock outstanding as of June 7, 1996 was 6,500,000.
Documents Incorporated by Reference
(1) Portions of the Registrant's definitive proxy statement relating to its 1996
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.
CONTAINS 107 SEQUENTIALLY NUMBERED PAGES.
1
PART I
ITEM 1. BUSINESS
A. GENERAL
Sport Chalet, Inc. is a leading operator of full service, specialty
sporting goods superstores in Southern California. The Company currently has 18
stores, eight located in Los Angeles County, four in Orange County, three in San
Diego County, two in San Bernardino County and one in Ventura County. These
stores average 35,000 square feet in size, and the last eleven superstores
opened by the Company range from 34,000 to 50,000 square feet. The Company's
executive offices are located at 920 Foothill Boulevard, La Canada, California
91011, and its telephone number is (818) 790-2717.
The Company began operations in 1959. During the mid-1980's, the Company
embarked on an expansion program that resulted in the opening of one store in
fiscal 1987, two stores in each of fiscal 1988, 1990 and 1991, one store in
fiscal 1992, another two stores in each of fiscal 1993, 1994 and the opening of
one store and relocation and expansion of another store in both 1995 and 1996.
During fiscal 1995, the Board of Directors began an evaluation of the Company's
strategic policies, operations and management (the "Board Review"). As a result,
the expansion program has been scaled down. For fiscal 1997 only a relocation
and expansion of an existing store is planned. No other store openings are
contemplated at this time.
The previously mentioned Board Review culminated with the recent
implementation of several programs aimed at improving the Company's competitive
position and overall profitability. The Company has embarked on and will
continue to implement a series of cost-cutting actions and productivity
improvements which include downsizing the Company's labor force, streamlining
management by reducing the number of executives and outsourcing certain
management functions, developing more advanced inventory and procurement
systems, and creating a new loss prevention department. To improve sales, the
Company has renewed its focus on customer service through an expansion of and
emphasis on its in-store training of personnel and the Company-wide adoption of
an incentive program to reward store personnel for sales productivity. The
Company also may be implementing additional programs in the future to stimulate
sales.
Management believes that the adoption and implementation of programs
developed in response to the Board Review eventually will have an overall
favorable impact on the Company's performance, but to some extent may restrain
short-run profits. Many programs require significant investment in up-front
costs, while the principal benefits derived from implementation are not expected
to be fully realized until future periods.
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 and nontraditional merchandise such as downhill
skiing, mountaineering, SCUBA, mountain bicycling, in-line skating and roller
hockey. 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. A combination of superstore selection supported
by specialty store service has distinguished the Company from its competitors
and has resulted in average sales per store of $7.4 million for fiscal 1996.
Furthermore, this strategy has resulted in higher than average gross margins and
higher than average sales per transaction compared to the industry.
Historically, the Company's average transaction was approximately $60. The
majority of the sales dollars came from transactions ranging from $50 to $300.
The Company had its own manufacturing operations (the "Manufacturing
Operations"), which produced a wide range of soft goods such as duffle bags and
aerobic clothing, accounting for approximately 2% of the Company's sales in
fiscal 1995. In June 1995, the Company, Director Eric S. Olberz, and Camp 7, a
California corporation under the control of Eric S. Olberz, entered into
agreements pursuant to which the Company sold the Manufacturing Operations to
Camp 7 under the terms and conditions described more fully in the Registrant's
Proxy Statement with respect to its 1996 Annual Meeting of Shareholders. The
Company now purchases its soft goods products from additional competitive
sources as well as Camp 7 and is able to apply the sales proceeds towards
reducing outstanding debt, and improving working capital balances rather than
tying up capital to finance manufacturing inventories and manufacturing
operations.
2
The Company's business is highly seasonal in nature. Historically, its
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. Similar to the business
of other retailers, the Company's business is heavily affected by sales of
merchandise during the Christmas season. In addition, the Company's product mix
emphasizes cold weather sporting goods merchandise, particularly ski-related
products, thus boosting sales levels during the winter months and increasing the
seasonality of the Company's business. In fiscal 1994, 1995 and 1996, sales of
ski apparel and equipment accounted for 26%, 25% and 20%, respectively, of the
Company's total sales for those fiscal years. In each of fiscal 1994, 1995 and
1996, 37%, 36% and 33%, respectively, of the Company's sales and traditionally
all 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 ski areas 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 with higher sales in the spring, summer and fall seasons.
The retail sporting goods industry is dependent on the general strength of
the economic environment and level of consumer spending. The economy in Southern
California, where all the Company's stores are located, had experienced an
economic downturn which began in 1990. Management believes that stagnant
economic conditions and a weak and exceedingly price-competitive retail
environment has adversely affected price margins, same store sales levels and
sales growth in new stores, thereby negatively impacting the Company's overall
financial performance.
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.
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 36 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.
B. INDUSTRY AND COMPETITION
The National Sporting Goods Association (NSGA), in its 1996 annual consumer
study, reported that the amount of national sales in 1995 for athletic
equipment, footwear and apparel was $36.2 billion and forecasted to be $37.6
billion in 1996. Many retailers strive to compete in this large market,
resulting in a highly fragmented and competitive marketplace and certain of the
Company's competitors are affiliated with large national or regional chains and
have substantially greater resources than the Company. Competitive retailers are
generally classified into four basic categories: mass merchandisers, traditional
sporting goods stores, specialty sporting goods stores and sporting goods
superstores, as described below:
(i) MASS MERCHANDISERS. This category includes discount retailers such as
Wal-Mart and Kmart, and department stores like JC Penney and Sears. These stores
sell large quantities of sporting goods and are usually very price competitive.
However, their sporting goods assortments are limited, with fewer specialty
items and fewer high quality name brands than offered by other sporting goods
retailers.
3
(ii) Traditional Sporting Goods Stores. This category consists of the
traditional sporting goods chains that started 20 to 30 plus years ago. Among
those that directly compete with the Company in Southern California are Oshman's
Sporting Goods and Big 5 Sporting Goods. These companies have numerous small
stores throughout the area, typically ranging in size from 5,000 to 20,000
square feet, frequently located in malls and strip centers. With the large
number of store fronts, customers tend to view them as convenient neighborhood
stores. However, their limited floor space severely restricts the breadth and
depth of merchandise assortments and the number of specialty items they can
carry. Also, they are promotion driven, with frequent sales advertised in the
local newspapers. With their limited assortments and promotional sales, they
offer fewer high quality name brands. Management believes that this category has
not grown as much as the superstore category over the last decade and that the
relative market share of businesses in this category has eroded.
(iii) Specialty Sporting Goods Stores. This category consists of two
groups. The first group includes athletic footwear specialty stores, which are
typically 2,000 to 10,000 square feet in size and are located in shopping malls.
Examples are Foot Locker, Lady Foot Locker, Champs, and The Athlete's Foot.
These retailers are highly focused, with most of their sales coming from
athletic footwear and team licensed apparel. The second group consists of stores
specializing in a particular sport or recreation. This group includes
Recreational Equipment Incorporated (REI) and Adventure 16 (A16), both
specializing in backpacking and mountaineering, as well as retailers
specializing in SCUBA products. Many of these SCUBA retailers are one-to-three
store operations specializing only in dive equipment and certification lessons,
and offer excellent customer service but lack sufficient capital and floor space
to carry a broad assortment of products. Typically, prices at specialty stores
tend to be higher than prices at the sporting goods superstores and traditional
sporting goods stores.
(iv) Sporting Goods Superstores. Stores in this category typically are
larger than 30,000 square feet and tend to be free-standing locations. In
Southern California, the most established sporting goods superstore retailer
besides Sport Chalet is Sportmart, with 15 stores. In addition, Oshman's has one
superstore in San Diego County, and the Sport Authority has three in San Diego
County and one in Orange County. Several superstore retailers have publicly
announced plans to expand in or enter into the Southern California region;
however, during fiscal 1996, only three new superstores were opened, while two
were closed, in the Southern California area by the Company's competitors. Most
superstores emphasize low prices and high volume sales with frequent sales
promotions and a large number of stock-keeping-units. Unlike the Company, they
generally avoid marketing high-end specialty items which require significant
service.
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 mass merchandisers,
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, limited assortments offered by
many sporting goods retailers, consumer preference for one-stop shopping, and a
growing importance of delivering value through selection, quality, service and
price.
C. EMPLOYEES
In connection with the Board Review, the labor force was downsized during
fiscal 1996 resulting in a 13% reduction in the number of total employees since
March 31, 1995, notwithstanding the opening of an additional store in November
1995. As of March 31, 1996, the Company had a total of 1303 full and part-time
employees, 1128 of whom were employed in the Company's stores and 175 of whom
were employed in warehouse and delivery operations or 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 six to eight area managers who supervise the sales associates.
Additional part-time employees typically are hired during the holiday season.
4
ITEM 2. PROPERTIES
At March 31, 1996, the Company had eighteen store locations. The following table
summarizes the key information on the Company's retail properties:
GROSS
SQUARE
LOCATION OPENING DATE FOOTAGE
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La Canada(1) (2) July 1975 35,000
Huntington Beach(3)(6) June 1981 50,000
La Jolla(1)(4) June 1983 15,000
Mission Viejo August 1986 30,000
Point Loma(3) November1987 31,000
Santa Clarita November 1987 30,000
Marina Del Rey November 1989 42,000
Beverly Hills November 1989 35,000
Brea(3) April 1990 34,000
Oxnard(3) June 1990 36,000
West Hills(3) June 1991 44,000
Burbank August 1992 45,000
Montclair(5) November 1992 20,000
Torrance November 1993 40,000
Glendora November 1993 40,000
Rancho Cucamonga(3) June 1994 36,000
El Cajon November 1994 38,000
Irvine(3) November 1995 35,000
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(1) Consists of two nearby facilities.
(2) The original facility at this location opened June 1960.
(3) Includes swimming pool facility for SCUBA and kayaking instruction.
(4) The La Jolla store was originally opened in a different location in
the shopping mall and has been relocated.
(5) Store opened within the distribution center building in order to
utilize excess space.
(6) Relocated to a newly constructed facility on the same property in
August 1995.
All retail facilities are located on leased property. The initial terms of
the retail leases expire in 1998 through 2015. Leases for two stores expire
without options to renew in 1999 and 2004. 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 most cases, the Company expects
that percentage rent will more than offset the base rental amounts. Certain
leases permit the lessor and, in some cases, the Company, to terminate the
leases if the gross sales from the store are below specified levels.
The Company leases from 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 facility in Montclair,
and its stores in La Canada and Huntington Beach. The Company has incurred
rental expense to the Principal Shareholder of $1.4 million, $1.6 million, and
$1.7 million in fiscal 1996, 1995, and 1994, 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.
5
In August 1994, the Company's non-employee Directors approved a proposal to
relocate the Huntington Beach store. In August 1995, the existing store lease
was terminated and the store relocated to a facility developed by and leased
from Huntington Beach Properties, Inc., a California corporation under the
control of the Principal Shareholder. The new rental rate is the amount by which
four percent times monthly Gross Sales exceeds the $41,667 monthly minimum rent.
Management believes that the new facilities are more advantageous given certain
logistical problems associated with the old store location and the reduction in
rent which would be achieved at anticipated store sales levels. The occupancy
costs under the new lease are believed to be no higher than those which would be
charged by an unrelated third party under similar circumstances.
A portion of the property in La Canada leased by the Company from the
Principal Shareholder was, until the late 1970's, used as a gas station and
contained underground storage tanks. In June 1991, petroleum hydrocarbon
pollution at the site was detected in connection with the removal of the
underground storage tanks. The Company has received regular approval of a site
investigation work plan for the property. Site remediation costs cannot be
accurately estimated until the site investigation work is completed. However, a
visual inspection of the storage tanks conducted with the tanks removed showed
no obvious leaks or damage. This suggests that site contamination may have been
the result of spillage during filling of the tanks and is not extensive. Based
on visual inspection, Management believes that the clean-up costs will not be
material. The Principal Shareholder has agreed to indemnify the Company against
all investigation and remediation costs relating to the property.
Starting in January 1993, the Company's manufacturing operations had been
located in a facility which is leased by the Company from Director Eric S.
Olberz, the son of the Principal Shareholder, in Santa Ana, California and
consists of a tilt-up concrete building of approximately 18,500 square feet. The
monthly rental rate was $7,380, triple net. The Company believes that the
occupancy costs under this lease were no higher than those which would be
charged by an unrelated third party under similar circumstances. In connection
with the sale of the Company's Manufacturing Operations to Eric S. Olberz and
Camp 7, Inc., in June 1995, the lease was terminated.
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
Inapplicable.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
(a) Market Price for Common Shares -
The Company's Common Stock is traded on the NASDAQ National Market System
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;
Fiscal 1995 High Low
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First Quarter $4-1/2 $3-3/4
Second Quarter $4-1/4 $3-3/4
Third Quarter $4-1/8 $3-3/4
Fourth Quarter $5-1/8 $3-1/2
Fiscal 1996 High Low
- -------------- ------ ---
First Quarter $3-3/4 $2-1/2
Second Quarter $4-1/16 $2-3/8
Third Quarter $3-1/4 $1-5/8
Fourth Quarter $2-3/4 $1-3/4
(b) Approximate Number of Holders of Common Shares -
The approximate number of shareholders of the Company's Common Stock as of
June 7, 1996 was 164 (excluding individual participants in nominee security
position listings).
(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 no cash
dividends will be declared or paid. That is, 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.
(d) Dividend Restriction -
For information required by this section see the discussion in Item 7 under
the heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
7
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth selected financial data as of and for the
periods presented. This data should be read in conjunction with the Financial
Statements and related Notes thereto and other financial information included
herein.
Year ended March 31
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1996 1995 1994 1993 1992
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(In thousands, except per share amounts and selected operating data)
Statements of Income Data:
Net sales $133,741 $134,735 $122,241 $106,392 $94,785
Cost of goods sold(1) 90,389 88,775 81,661 67,844 61,935
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Gross profit 43,352 45,960 40,580 38,548 32,850
Selling, general and administrative expenses 44,368 44,520 39,832 33,854 29,418
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(Loss) income from operations (1,016) 1,440 748 4,694 3,432
Interest expense 1,224 894 736 1,053 1,533
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(Loss) income before taxes (2,240) 546 12 3,641 1,899
Income tax (benefit) provision (2) (880) 254 23 1,474 771
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Net (loss) income (2) (1,360) 292 (11) $ 2,167 $ 1,129
=====================================================================
(Loss) earnings per share (2) $ (.21) $ .04 $ .00 $ .40 $ .23
=====================================================================
Selected Operating Data:
Stores open at end of period 18 17 16 14 12
Comparable store sales increase (decrease)(3) (4.1)% 1.4% 2.2% 4.7% 8.1%
Balance Sheet Data:
Working capital $11,240 $ 14,916 $ 14,838 $ 16,286 $ 4,364
Total assets 49,508 51,565 43,679 44,623 33,917
Total loans payable 10,308 9,333 4,917 4,850 12,045
Total shareholders' equity 24,404 25,764 25,472 25,483 10,617
(1) Includes the direct cost of merchandise and internal costs associated with
merchandise procurement, storage, handling and distribution.
(2) Prior to November 19, 1992, the Company was an S Corporation and not
subject to federal and some state income taxes. Fiscal 1993 and earlier
periods are adjusted to reflect a proforma income tax provision as if the
Company were subject to corporate income taxes.
(3) A store's sales are included in the comparable store sales calculation
after its twelfth full month of operation.
8
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).
Year ended March 31 Quarter ended March 31
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1996 1995 1994 1996 1995
---------------- ---------------- --------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Net sales $133,741 100.0% $134,735 100.0% $122,241 100.0% $36,156 100.0% $35,713 100.0%
Gross profit 43,352 32.4 45,960 34.1 40,580 33.2 9,360 25.9 9,424 26.4
Selling, general and
administrative expenses 44,368 33.2 44,520 33.0 39,832 32.6 11,023 30.5 11,587 32.4
Income (loss) from operations (1,016) (0.8) 1,440 1.1 748 0.6 (1,663) (4.6) (2,163) (6.1)
Interest expense 1,224 0.9 894 0.7 736 0.6 260 0.7 263 0.7
Income (loss) before taxes (2,240) (1.7) 546 0.4 12 0.0 (1,923) (5.3) (2,426) (6.8)
Net income (loss) (1,360) (1.0) 292 0.2 (11) 0.0 (1,143) (3.2) (1,482) (4.2)
(Loss) earnings per share (.21) .04 .00 (.18) (.24)
Fiscal 1996 Compared to Fiscal 1995. Sales decreased from $134.7 million to
$133.7 million, a 0.7% decrease. Although the Company relocated and expanded one
store in August and opened one new store in each of November 1995 and 1994 which
added to sales, these increases where offset by a comparable store sales
decrease of 4.1%, because of warm and dry weather in California during the third
quarter of fiscal 1996, when compared to the same period last year, which
severely impacted the sales of winter-related merchandise. Specifically, sales
of winter-related products decreased 31%. In addition, the slow Christmas sales
experienced by retailers nationally, along with the impact of a sluggish economy
in Southern California, also affected the Company's sales.
Gross profit for the period decreased as a percent of sales from 34.1% to
32.4%, primarily as a result of increased inventory shrinkage, as well as,
markdowns taken to stimulate the sales of winter-related merchandise.
Selling, general and administrative expenses remained relatively constant
as a percent of sales, 33.2% compared to 33.0% last year, even though sales
decreased, which obscured the full impact of Management's implementation of cost
reducing programs. The primary components of selling, general and administrative
expenses are labor, rent and other occupancy costs and advertising.
Interest expense increased to $1.2 million from $894,000 due to an increase
in average debt outstanding.
The effective tax rate as a percent of pretax loss is 39.3% for fiscal 1996
and 46.6% for fiscal 1995. These rates differ from the statutory rate of 40.1%
as a result of permanent differences between financial reporting and tax-basis
income, and for fiscal 1995, the relatively low level of pretax income.
Net income decreased from $292,000 to a loss of $1.4 million primarily due
to the previously discussed decrease in sales and gross profit margins. Earnings
per share decreased from $.04 to a loss per share of $.21 due to decreased net
income.
Fourth Quarter 1996 Compared to Fourth Quarter 1995. Sales increased from
$35.7 million to $36.2 million, a 1.4% increase. The Company relocated and
expanded one store in August 1995 and opened one new store in November 1995
which added to sales; however, these increases where offset by a comparable
store sales decrease of 3.4%, due to the adverse impact of unseasonably warm
weather in California on the sales of winter-related merchandise.
9
Gross profit for the period decreased as a percent of sales from 26.4% to
25.9%, primarily as a result of increased inventory shrinkage. Because less ski
related merchandise was purchased during fiscal 1996 due to Management's focus
on improving procurement practices, markdowns taken to stimulate sales of
winter-related merchandise were high by historical measures, although equal to
the prior year as a percent of sales.
Selling, general and administrative expenses decreased as a percent of
sales from 32.4% to 30.5% reflecting the impact of Management's recently
implemented cost reduction program.
Interest expense remained relatively constant, $260,000 compared to
$263,000 for the same period last year. Lower interest rates were offset by
larger average debt outstanding.
The effective income tax rate as a percent of pretax loss for the fourth
quarter 1996 is 40.6% compared to 38.9% for the same period of fiscal 1995.
Net loss decreased from $1.5 million to $1.1 million and loss per share
decreased from $.24 to $.18 despite lower gross profit margins due to relatively
lower selling, general and administrative expenses.
Fiscal 1995 Compared to Fiscal 1994. Sales increased from $122.2 million to
$134.7 million, a 10.2% increase. The Company relocated and expanded one store
in June and opened one new store in November 1994 which added to sales. In
addition, comparable store sales increased 1.4%, a disappointing increase given
that California returned to more typical winter weather patterns in fiscal 1995
after warm and dry weather in fiscal 1994 resulted in the lack of snowfall in
ski areas frequented by Southern California residents, and the fact that five
stores were temporarily closed in fiscal 1994 due to the January 17, 1994
Northridge earthquake. Christmas sales were slow, similar to the experience of
retailers nationally, and ski clothing and equipment sales did not increase as
expected despite improved skiing conditions, possibly due to stagnant economic
conditions in Southern California.
Gross profit for the period increased as a percent of sales from 33.2% to
34.1%, primarily because lower margin sales from promotional and off-site sales
events during the third quarter of fiscal 1995 constituted a smaller portion of
overall sales than during the third quarter of 1994. However, higher margins in
the third quarter of fiscal 1995 were partially offset by reduced margins during
the fourth quarter of fiscal 1995 as disappointing sales of winter related
products prompted significant post-ski season markdowns in order to stimulate
sales.
Selling, general and administrative expenses remained relatively constant
as a percent of sales, 33.0% compared to 32.6% last year. The primary components
of selling, general and administrative expenses are labor, rent and other
occupancy costs and advertising.
Interest expense increased to $894,000 from $736,000 due to higher interest
rates and an increase in average debt outstanding.
The effective tax rate as a percent of pretax income for fiscal 1995 is
46.6%. In 1994, the provision for income taxes exceeded pretax income. These
rates differ from the statutory rate of 40.1% as a result of permanent
differences between financial reporting and tax basis income and the relatively
low level of pretax income.
Net income increased to $292,000 from a loss of $11,000 primarily due to
the previously discussed increase in sales and gross profit margins. Earnings
per share increased from $.00 to $.04 due to increased net income.
Liquidity and Capital Resources
The Company's primary capital requirements are for inventory, expansion and
remodeling. 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 for the next 2 to 3 fiscal years.
10
Net cash provided by operating activities was $3.2 million and $4.2 million
for fiscal 1996 and 1994, respectively, while for fiscal 1995, net cash used in
operating activities was $850,000. Net loss accounted for the use of $1.4
million and $11,000 cash in fiscal 1996 and 1994, respectively. Net income
provided cash of $292,000 in fiscal 1995. Depreciation provided $2.7 million,
$2.5 million and $2.3 million of cash for fiscal 1996, 1995, and 1994,
respectively.
During fiscal 1996 and 1994 inventories decreased $3.1 million and $3.6
million as a result of aggressive markdowns taken to stimulate sales of ski
related products. In addition, the implementation of a perpetual inventory
system helped reduce overall inventory during fiscal 1996. During fiscal 1995,
inventories increased $6.2 million primarily due to slower than expected sales
during the Christmas season and the fourth quarter.
Accounts payable decreased $1.6 million for fiscal 1996 primarily due to
reduced inventory. For fiscal 1995 accounts payable increased $1.9 million as a
result of increased inventory. For fiscal 1994 the increase in accounts payable
was due to changes in the timing of payments.
There were no income taxes payable at either March 31, 1996 or 1995 due to
the loss or low taxable income and overpayment of estimated taxes. For fiscal
1994, taxes payable decreased $1.7 million due to the payment of taxes accrued
in fiscal 1993.
Net cash used in investing activities was $3.8 million, $3.3 million and
$4.3 million for fiscal 1996, 1995 and 1994, respectively. The Company used a
substantial portion of this cash to open new stores. In each of fiscal 1996 and
1995, one store was relocated and one new store was opened. Two new stores were
opened in fiscal 1994. In fiscal 1996, 1995 and 1994, ongoing capital
expenditures for the Company's existing stores totalled $1.4 million, $1.8
million and $2.5 million, respectively.
Historically, net cash used or provided by financing activities has
resulted primarily from the advance or pay down of a revolving credit line.
During fiscal 1994 through fiscal 1996, the Company maintained a revolving line
of credit with Wells Fargo Bank, NA (the "Prior Lender"). During fiscal 1996,
the Company was authorized to borrow from up to $17.0 million to up to $30.0
million, based on the Company's projected seasonal needs, at an interest rate of
prime plus 1/8%. For fiscal 1996, and 1995 and 1994, peak borrowings on that
credit line were $17.0 million, $12.6 million, $14.0 million, respectively. In
addition, the Prior Lender provided an additional $2.5 million in the form of a
term commitment for the purpose of financing the opening of future new stores,
of which no money was borrowed during fiscal 1996. The balance, when drawn on
this term commitment, was to be amortized over a 3-year period, beginning June
1, 1995. During the last two quarters of fiscal 1996, the Company violated
certain financial covenants set forth in the loan agreement with the Prior
Lender. These violations were either waived by the Prior Lender or were rendered
moot because the Prior Lender's loan was paid off with the proceeds from the new
credit facility described below.
In May 1996, the Company obtained a two-year credit facility from
BankAmerica Business Credit, Inc., an affiliate of Bank of America (the "New
Lender"), which provides a new line of credit to borrow up to $20 million less
the amount of any outstanding draws on a maximum of $2.5 million in authorized
letters of credit and/or any applicable limitations on maximum borrowings.
Maximum borrowings generally may not exceed 50% of the value of eligible
inventory and may also be reduced, under certain circumstances, to reflect
reserves or other adjustments. Interest shall accrue at prime plus 1/2% or at
the election of the Company (and assuming certain conditions have been
satisfied), at an annual rate equal to 2-3/4% over the New Lender's LIBOR rate.
The initial proceeds of $13.0 million from the new financing were used to
extinguish all of the Company's obligations under the credit facility with the
Prior Lender on May 14, 1996.
The Company's obligation to the New Lender is secured by a first priority
lien on the Company's non-real estate assets, and the Company is subject to
several restrictive covenants as set forth in the Loan and Security Agreement
with the New Lender which is attached as an exhibit to this Form 10-K. The
principal operating covenants require the Company to maintain minimum levels of
net worth and cash flow coverage, restrict capital expenditures and lease
payments, and limit the amount of dividend payments. The Company currently is in
full compliance with these covenants and expects to remain in compliance during
the term of the credit facility. Management also believes that these operating
covenants provide the Company with greater flexibility than did the operating
covenants set forth in the agreement with the Prior Lender. However, unexpected
11
conditions could cause the Company to alter its plans to avoid a breach of the
agreement with the New Lender or could cause the Company to violate a
restrictive covenant or otherwise breach that agreement. If a breach occurs, the
new lender will have all rights customarily provided to a secured lender,
including the right to foreclose on the secured collateral or to accelerate the
maturity of the loan obligations.
No cash dividends have been declared on common stock in fiscal 1996. The
Company intends to retain earnings for use in the operation and limited
expansion of its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. In addition, the amount of dividend payment
is restricted in the agreement with the New Lender.
Seasonality and Quarterly Fluctuations
As noted previously, the months of November, December and January have
historically accounted for the largest percentage of the Company's net sales and
all 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 season generally corresponds to this three-month period.
The Company's operating results are also influenced by the amount and
timing of snowfall at the ski areas frequented by those living in Southern
California, particularly the Mammoth Mountain ski resort in the eastern Sierra
Nevada mountains. The Company believes that snowfall at the Mammoth Mountain ski
area generally is an indicator of the Company's likely sales of ski apparel and
equipment. First, because of prevailing weather patterns, the Mammoth snowfall
is generally similar to that of Southern California ski areas. Second, for more
than twenty years, the Company has experienced better customer demand for skiing
apparel and equipment when there were early snowfalls and excellent ski
conditions at Mammoth. An early snowfall is more likely to influence sales
because it extends the demand for ski apparel and equipment. A late snowfall may
have the opposite effect.
The snowfall at Mammoth Mountain over the past 28 years has ranged from 26
to 343 inches and has averaged 156 inches for the three months ended January 31.
The following table sets forth the snowfall at Mammoth Mountain for the
three-month period ended January 31 over the last five years:
Three months Snowfall
ended January 31 in inches
---------------- ---------
1996 ......................... 170
1995 ......................... 315
1994 ......................... 68
1993 ......................... 343
1992 ......................... 116
Even though fiscal 1996 snowfall for the three months ended January 31 is
above average, 60% of the snowfall occurred in the month of January and
therefore did not produce the positive effect on sales that might have been
expected by a more even distribution of snowfall over the three month period. In
addition, the effect of significant early snowfall on Company sales was less
than expected during fiscal 1995. Management believes this was possibly due in
part to then stagnant economic conditions in Southern California. The effect of
snowfall on the Company's results has been mitigated to some extent by
Management's attempt to diversify the Company's product mix. Sales of ski
apparel and equipment have decreased over the last five fiscal years from 28% to
20% of total sales revenue.
Suppliers in the ski industry require that commitments must 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 a good snowfall in the
winter. If the snowfall does not at least provide an adequate base or occurs
late in the season, as was the case in fiscal 1994 and 1996, or if sales do not
meet projections as occurred in fiscal 1995, the Company may be required to mark
down its ski merchandise. Generally, ski merchandise carries a higher margin
than other sporting goods items.
12
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
Inapplicable.
13
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 27, 1996, indicating all positions and offices
presently held by each.
Name Age Position
- ---- --- --------
Norbert J. Olberz 71 Chairman of the Board, Interim President
and Chief Executive Officer
Eric S. Olberz 33 Director
John R. Attwood 66 Director
Kenneth Olsen 78 Director
Dennis D. Trausch 46 Executive Vice President
Howard K. Kaminsky 38 Chief Financial Officer, Treasurer and Secretary
Robert W. Haueter 44 Vice President-Marketing
Norbert J. Olberz is the Company's founder and has been its Principal
Shareholder and Chairman of the Board since its formation. Mr. Olberz assumed
the duties of Interim President and Chief Executive Officer on April 3, 1995. In
connection with the Board Review, the Board of Directors will determine whether
to commence search activities for a new President and/or Chief Operating
Officer.
Eric S. Olberz has been a Director since 1992. He previously worked for the
Company from 1975 through July 1995. During that period, Mr. Olberz held several
positions with the Company including Vice President from 1984 through October
1994, and Secretary and Vice Chairman from October 1992 and October 1994,
respectively, through his resignation as an officer and employee in July 1995.
John R. Attwood has been a Director 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 WB Bottling Corp. and Verdugo Hills
Hospital, a non-profit hospital organization.
Kenneth Olsen has been a Director of the Company since June 1994. Mr. Olsen
has also 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 a director of several nonprofit organizations, and was a
trustee of Loyola Marymount University.
Dennis D. Trausch joined the Company in 1976 and has served in various
positions within the Company. He assumed his present position in June 1988. He
is responsible for all store operations and leasing.
Howard K. Kaminsky joined the Company as Chief Financial Officer in 1985,
Treasurer since October 1992 and Secretary since July 1995. Prior to joining the
Company, he was employed in the auditing division of Ernst & Young. Mr. Kaminsky
is a Certified Public Accountant and received his Bachelor of Science degree in
Business Administration from California State University, Northridge.
Robert W. Haueter joined the Company as Vice President-Marketing in 1989.
He spent the previous ten years as a senior aide in the California Legislature.
During this period, he coordinated marketing and strategy for a number of
political campaigns.
Norbert Olberz, the Principal Shareholder, owns approximately 72% of the
Company's outstanding Common Stock at March 31, 1996. 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.
14
Other information responding to Item 10 was included in the Registrant's
Proxy Statement with respect to its 1996 Annual Meeting of Shareholders and is
incorporated by reference herein pursuant to General Instruction G(3).
ITEM 11. EXECUTIVE COMPENSATION
Information responding to Item 11 was included in the Registrant's proxy
statement with respect to its 1996 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 1996 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 1996 Annual Meeting of Shareholders and is
incorporated by reference herein pursuant to General Instruction G(3).
15
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
Sport Chalet, Inc.
Index to Audited Financial Statements
Report of Independent Auditors
Statements of Operations for each of the three years in the period ended March
31, 1996
Balance Sheets as of March 31, 1996 and 1995
Statements of Shareholders' Equity for each of the three years in the period
ended March 31, 1996
Statements of Cash Flows for each of the three years in the period ended
March 31, 1996
Notes to Financial Statements
17
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, 1996 and 1995, and the related statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended March 31,
1996. 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,
1996 and 1995 and the results of its operations and its cash flows for each of
the three years in the period ended March 31, 1996, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG
Los Angeles, California
June 4, 1996
18
Sport Chalet, Inc.
Statements of Operations
Year ended March 31
1996 1995 1994
----------------------------------------------------
Net sales $133,740,747 $134,734,540 $122,240,915
Cost of goods sold 90,389,348 88,774,812 81,661,114
----------------------------------------------------
Gross profit 43,351,399 45,959,728 40,579,801
Selling, general and administrative expenses (Note 4) 44,367,566 44,520,185 39,832,195
----------------------------------------------------
(Loss) income from operations (1,016,167) 1,439,543 747,606
Interest expense 1,223,656 893,962 735,733
----------------------------------------------------
(Loss) income before taxes (2,239,823) 545,581 11,873
Income tax (benefit) provision (Note 5) (880,000) 254,000 23,000
----------------------------------------------------
Net (loss) income $ (1,359,823) $ 291,581 $ (11,127)
====================================================
(Loss) earnings per share $ (.21) $ .04 $ .00
====================================================
Weighted average number of common shares
outstanding 6,500,000 6,500,000 6,500,000
====================================================
See accompanying notes.
19
Sport Chalet, Inc.
Balance Sheets
March 31
ASSETS 1996 1995
-------------------------
Current assets:
Cash ........................................................... $ 768,562 $ 492,303
Accounts receivable, less allowance of $28,000 in 1996 and
$13,000 in 1995 ........................................... 961,875 575,151
Merchandise inventories (Note 3) ............................... 33,069,322 36,150,256
Prepaid expenses and other current assets ...................... 367,412 833,568
Note receivable ................................................ 212,710
Deferred income taxes (Note 5) ................................. 678,523 902,966
Refundable income taxes ........................................ 285,511 389,433
-------------------------
Total current assets ................................................ 36,343,915 39,343,677
Furniture, equipment and leasehold improvements:
Furniture, fixtures and office equipment ....................... 12,151,631 11,241,150
Rental equipment ............................................... 2,379,805 2,530,320
Vehicles ....................................................... 617,822 688,403
Leasehold improvements ......................................... 8,649,990 7,813,904
-------------------------
23,799,248 22,273,777
Less allowance for depreciation and amortization ............... 11,144,652 10,119,263
-------------------------
12,654,596 12,154,514
Deferred income taxes (Note 5) ...................................... 442,381
Deposits ............................................................ 66,730 66,730
-------------------------
Total assets ........................................................ $49,507,622 $51,564,921
=========================
Liabilities and shareholders' equity Current liabilities:
Current portion of loans payable to bank (Note 3) .............. $10,307,560 $ 8,360,596
Accounts payable ............................................... 9,895,655 11,522,154
Salaries and wages payable ..................................... 1,850,789 2,154,195
Other accrued expenses ......................................... 2,999,617 2,323,205
Amounts due to Principal Shareholder (Note 4) .................. 50,312 67,987
-------------------------
Total current liabilities ........................................... 25,103,933 24,428,137
Deferred income taxes (Note 5) ...................................... 401,058
Loans payable to bank, less current portion (Note 3) ................ 972,214
Commitments and contingencies (Note 4)
Shareholders' equity (Note 2):
Preferred stock, $.01 par value:
Authorized shares - 2,000,000
Issued and outstanding shares - none
Common stock, $.01 par value:
Authorized Shares - 15,000,000
Issued and outstanding shares - 6,500,000 .................. 65,000 65,000
Additional paid-in capital ..................................... 19,900,052 19,900,052
Retained earnings .............................................. 4,438,637 5,798,460
-------------------------
Total shareholders' equity .......................................... 24,403,689 25,763,512
-------------------------
Total liabilities and shareholders' equity .......................... $49,507,622 $51,564,921
=========================
See accompanying notes
20
Sport Chalet, Inc.
Statements of Shareholders' Equity
Common Stock Additional Retained
Shares Amount Paid-in Capital Earnings Total
-------------------------------------------------------------------
Balance at March 31, 1993 6,500,000 $ 65,000 $ 19,900,052 $ 5,518,006 $ 25,483,058
Net loss for 1994 ............... (11,127) (11,127)
-------------------------------------------------------------------
Balance at March 31, 1994 6,500,000 65,000 19,900,052 5,506,879 25,471,931
Net income for 1995 ............. 291,581 291,581
-------------------------------------------------------------------
Balance at March 31, 1995 6,500,000 65,000 19,900,052 5,798,460 25,763,512
Net loss for 1996 ............... (1,359,823) (1,359,823)
-------------------------------------------------------------------
Balance at March 31, 1996 .......... 6,500,000 $65,000 $19,900,052 $ 4,438,637 $ 24,403,689
===================================================================
See accompanying notes.
21
Sport Chalet, Inc.
Statements of Cash Flows
Year ended March 31
-----------------------------------------------
1996 1995 1994
-----------------------------------------------
OPERATING ACTIVITIES
Net (loss) income ...................................... $ (1,359,823) $ 291,581 $ (11,127)
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities: .........
Depreciation and amortization ...................... 2,732,865 2,518,414 2,259,368
Write-off of equipment ............................. 627,783 38,133 22,588
Deferred income taxes .............................. (618,996) (175,762) (307,375)
Deposits ........................................... (6,638)
Changes in operating assets and liabilities:
Accounts receivable .............................. (386,724) (159,415) (119,727)
Merchandise inventories .......................... 3,080,934 (6,237,047) 3,641,942
Prepaid expenses and other current assets ........ 466,156 89,037 (167,388)
Note receivable .................................. (212,710)
Refundable income taxes .......................... 103,922 (238,665) (150,768)
Accounts payable ................................. (1,626,499) 1,854,171 716,444
Salaries and wages payable ....................... (303,406) 426,922 (351,800)
Other accrued expenses ........................... 676,412 846,865 313,876
Income taxes payable ............................. (1,712,015)
Amounts due to Principal Shareholder ............. (17,675) (104,294) 51,226
-----------------------------------------------
Net cash provided by (used in) operating activities ..... 3,162,239 (850,060) 4,178,606
INVESTING ACTIVITIES
Purchases of furniture, equipment and leasehold
improvements ................................... (3,860,730) (3,313,934) (4,278,516)
-----------------------------------------------
Net cash used in investing activities .............. (3,860,730) (3,313,934) (4,278,516)
FINANCING ACTIVITIES
Proceeds from bank and other borrowings ............ 47,435,883 39,001,374 15,453,000
Repayments of bank and other borrowings ............ (46,461,133) (34,585,230) (15,386,334)
-----------------------------------------------
Net cash provided by financing activities .......... 974,750 4,416,144 66,666
-----------------------------------------------
Increase (decrease) in cash ............................. 276,259 252,150 (33,244)
Cash at beginning of year ............................... 492,303 240,153 273,397
-----------------------------------------------
Cash at end of year ..................................... $ 768,562 $ 492,303 $ 240,153
===============================================
Cash paid (refunded) during the year for:
Income taxes ....................................... $ (369,190) $ 665,489 $ 2,193,158
Interest ........................................... 1,234,938 832,415 731,295
See accompanying notes.
22
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, 1996, the
Company had 18 stores, eight of which are located in Los Angeles County, four 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 72% of the
Company's outstanding common stock at March 31, 1996.
2. Summary of Significant Accounting Policies
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, handling and distribution.
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 life of the
asset. The estimated useful lives of the assets are as follows:
Furniture, fixtures and office equipment 5-7 years
Rental equipment 3 years
Vehicles 5 years
Leasehold improvements 15 years
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
$2,790,643, $3,394,194 and $3,101,977 for the years ending March 31, 1996, 1995
and 1994, respectively.
23
Sport Chalet, Inc.
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Income Taxes
The Company uses the liability method of accounting for income taxes.
Earnings Per Share
Earnings (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding during each period. Stock
options are not included as they do not have a dilutive effect.
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 its stock compensation arrangements under the
provisions of APB 25, "Accounting for Stock Issued to Employees," and intends to
continue to do so.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 establishes a fair value-based method of
accounting for compensation cost related to stock options and other forms of
stock-based compensation plans. However, SFAS 123 allows an entity to continue
to measure compensation costs using the principles of APB 25 if certain pro
forma disclosures are made. SFAS 123 is effective for fiscal years beginning
after December 15, 1995. The Company intends to adopt the provisions for pro
forma disclosure requirements of SFAS 123 in fiscal 1997.
24
Sport Chalet, Inc.
Notes to Financial Statements (continued)
3. Loans Payable to Bank
Loans payable to bank consist of the following:
March 31
1996 1995
-------------------------------
Revolving line of credit, interest at prime plus 1/8%
(8 3/8% at March 31, 1996), due June 1, 1996 ................. $ 9,607,566 $ 7,749,480
Two term loans with interest at 1/2% above prime (9 1/2%
at March 31, 1996), principal payments of $27,778 due
monthly through December 1, 1996 and June 1, 1998 ............ 699,994 1,583,330
-------------------------------
10,307,560 9,332,810
Less current portion ........................................... 10,307,560 8,360,596
-------------------------------
$ - $ 972,214
===============================
The Company obtained a two year credit facility from BankAmerica Business
Credit, Inc. on May 14, 1996, which provides for advances up to $20 million less
the amount of any outstanding draws up to a maximum of $2.5 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 plus 1/2% or at 2-3/4% over the Lender's LIBOR rate, at the
Company's option. Proceeds from this loan were used to extinguish all
obligations to the former lender, Wells Fargo Bank NA, for amounts outstanding
under the revolving line of credit and two term loans discussed above. The
primary covenants in the new agreement require the Company to maintain certain
minimum levels of net worth and cash flow coverage, as well as restrict capital
expenditures, calculated on a monthly, quarterly and annual basis, respectively.
This loan is secured by all of the Company's non-real estate assets.
During fiscal 1996, the Company violated the financial covenants of its Wells
Fargo Bank agreement. At December 31, 1995, the bank waived the violation and
the new facility made it unnecessary to obtain a waiver at March 31, 1996. The
Company's previous bank agreement provided for a revolving line of credit that
permitted the Company to borrow from up to $17 million to $30 million based on
the Company's projected seasonal needs at an interest rate of prime plus 1/8%.
In addition, the agreement provided for term loans for the purpose of financing
the opening of new stores. All term loans were paid off with the initial
proceeds from the new facility described above.
At March 31, 1996, the Company has $137,147 of letters of credit outstanding.
The new agreement provides for letters of credit up to $2,500,000.
The weighted average interest rates on short-term borrowings were 6.71%, 8.39%
and 6.38% for the years ending March 31, 1996, 1995 and 1994, respectively.
25
Sport Chalet, Inc.
Notes to Financial Statements (continued)
4. Leases
The Company leases all buildings (including four from the Company's Principal
Shareholder) }nder 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.
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, 1996:
1997 ......................... $ 7,047,840
1998 ......................... 6,982,706
1999 ......................... 6,964,913
2000 ......................... 6,637,271
2001 ......................... 4,947,456
Thereafter ................... 42,499,762
-----------
$75,079,948
===========
Total rent expense amounted to $10,132,188, $9,668,068 and $8,459,896 for the
years ended March 31, 1996, 1995 and 1994, respectively, of which, $1,413,120,
$1,616,438 and $1,671,573, 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 $567,165,
$981,420 and $975,211 for the years ended March 31, 1996, 1995 and 1994,
respectively. Included in the accompanying balance sheets are amounts due to the
Principal Shareholder for accrued rents of $50,312 at March 31, 1996 and $67,987
at March 31, 1995.
5. Income Taxes
The (benefit) provision for income taxes for the years ended March 31, 1996,
1995 and 1994, consists of the following:
1996 1995 1994
----------------------------------------------
Federal:
Current .................. $(200,000) $ 232,000 $ 229,000
Deferred ............... (558,000) (39,000) (213,000)
----------------------------------------------
(758,000) 193,000 16,000
State:
Current ................ 69,000 101,300
Deferred ............... (122,000) (8,000) (94,300)
----------------------------------------------
(122,000) 61,000 7,000
----------------------------------------------
$(880,000) $ 254,000 $ 23,000
==============================================
26
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, 1996 and 1995
are as follows:
1996 1995
-------------------------------------------------------
Current Non-current Current Non-current
-------------------------------------------------------
Deferred tax liabilities:
Tax over book depreciation .......... $(268,502) $ $(401,058)
Other .................................. (42,774)
-------------------------------------------------------
Total deferred tax liabilities ......... (311,276) (401,058)
Deferred tax assets:
Uniform cost capitalization ......... 151,694 589,312
Markdown reserve .................... 247,676
Accrued vacation ....................... 279,153 265,301
Tax effect of NOL carryforward ...... 486,787
AMT carryforward .................... 266,870
Other ............................... 48,353
-------------------------------------------------------
Total deferred tax assets .............. 678,523 753,657 902,966
-------------------------------------------------------
Total deferred tax asset (liability) ... $678,523 $442,381 $902,966 $(401,058)
=======================================================
As of March 31, 1996, the Company had approximately $1,200,000 available in
operating loss carryforwards for federal income tax purposes which expire in
2011.
A reconciliation of the provision for income taxes for the years ended March 31,
1996, 1995 and 1994 with the amount computed using the federal statutory rate
follows:
1996 1995 1994
----------------------------------------
Statutory rate 34% applied to (loss) income before taxes $(762,000) $ 186,000 $ 4,000
State taxes, net of federal tax effect ................. (81,000) 40,000 5,000
Other, net ............................................. (37,000) 28,000 14,000
----------------------------------------
$(880,000) $ 254,000 $ 23,000
========================================
6. Stock Option and Award Plans
Stock Option Plan
The Company has an Incentive Award Plan (the 1992 Plan) under which stock
options to purchase up to 600,000 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
a five year period and if not exercised, expire ten years from the date of
grant.
At March 31, 1996, there were options outstanding to purchase 242,000 shares of
the Company's common stock at a purchase price ranging from $2.375 to $7.75 per
share.
The 1992 Plan also provides for issuance by the Company of stock appreciation
rights, restricted stock and performance awards (PAs).
27
Sport Chalet, Inc.
Notes to Financial Statements (continued)
6. Stock Option and Award Plans (continued)
Stock Appreciation Rights
In April 1990, the Company adopted a stock appreciation rights plan (the 1990
Plan) for key employees. The stock appreciation rights (SARs) entitle the holder
on exercise to receive cash in an amount equal to .11% (.0011) of three times
the increase in the aggregate book value of the Company from the grant date. The
value of a right is 10% of the book value of one share of common stock of the
Company as of the valuation date, based on 90 shares outstanding (the number of
shares of common stock outstanding immediately prior to the reincorporation).
During the years ended March 31, 1991 and 1992, 14 and 8 SARs were granted with
an aggregate value which was paid out during fiscal 1996 of $178,131 and
$82,578, respectively. Pursuant to the terms of the 1992 Plan, the SARs granted
under the 1990 Plan were converted into PAs with similar terms and conditions,
and the 1990 Plan was terminated.
7. Quarterly Results of Operations (Unaudited)
A summary of the unaudited quarterly results of operations follows (dollar
amounts in thousands, except per share amounts):
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------
Fiscal 1996
Net sales $ 27,328 $ 30,913 $ 39,344 $ 36,156
Gross profit 9,782 9,940 14,269 9,360
Income (loss) from operations (455) (1,000) 2,102 (1,663)
Net income (loss) (462) (779) 1,024 (1,143)
Earnings (loss) per share (.07) (.12) .16 (.18)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------
Fiscal 1995
Net sales $ 25,386 $ 29,559 $ 44,077 $ 35,713
Gross profit 9,133 10,564 16,839 9,424
Income (loss) from operations (424) 288 3,739 (2,163)
Net income (loss) (343) 51 2,066 (1,482)
Earnings (loss) per share (.05) .01 .32 (.24)
28
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 28, 1996.
SPORT CHALET, INC.
(Registrant)
By: /s/ NORBERT J. OLBERZ
----------------------------------------------
Norbert J. Olberz, Chairman, Interim President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated above.
Signature
PRINCIPAL EXECUTIVE OFFICER DIRECTORS
/s/ NORBERT J. OLBERZ /s/ ERIC S. OLBERZ
- ------------------------------ ------------------------------
Norbert J. Olberz Eric S. Olberz, Director
Chairman, Interim President
and Chief Executive Officer
/s/ JOHN R. ATTWOOD
------------------------------
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER John R. Attwood, Director
/S/ HOWARD K. KAMINSKY
- ------------------------------
Howard K. Kaminsky
Chief Financial Officer, /s/ KENNETH OLSEN
Treasurer and Secretary ------------------------------
Kenneth Olsen, Director
29
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------ ----------- ------
3.1 Certificate of Incorporation of Sport Chalet, Inc. (1)
3.2 Bylaws of Sport Chalet, Inc. (1)
4.1 Form of Certificate for the Common Stock (1)
10.1 Credit Agreement, dated August 1, 1992, between the Company and
Wells Fargo Bank. (2)
10.2 Letter dated October 8, 1992 by Wells Fargo Bank. (2)
10.3 1992 Incentive Award Plan of the Company. (2)
10.4 Form of Nonemployee Director Stock Option Incentive Award
Agreement. (2)
10.5 Form of Key Employee Stock Option Incentive Award Agreement. (2)
10.6 Tax Indemnity Agreement, dated October 8, 1992, between the
Company and Norbert J. Olberz (2)
10.7 Form of Director and Officer Indemnification Agreement. (2)
10.8 Form of Employee Stock Option Incentive Award Agreement. (3)
10.9 Credit Agreement Between the Company and Wells Fargo Bank dated
December 1, 1992.) (4)
10.10 Camp 7 Manufacturing Operations Lease dated March 1, 1993, between
the Company and Eric Steven Olberz. (5)
10.11 First through Fourth Amendment to Credit Agreement between the
Company and Wells Fargo Bank dated December 1, 1992. (6)
10.12 Credit Agreement between the Company and Wells Fargo Bank dated
June 1, 1994 (7)
10.13 Huntington Beach store lease, dated August 25, 1994 between the
Company and Huntington Beach Properties, Inc., a California
Corporation. (8)
10.14 Letter Regarding Resignation of Samuel G. Allen (9)
10.15 Letter Regarding Resignation of Joseph H. Coulombe (10)
10.16 Severance and General Release Agreement with Samuel G. Allen (10)
10.17 Employment Contract for Joseph H. Coulombe (10)
10.18 Employment Contract for Kim D. Robbins (10)
10.19 Agreement for sale of Sport Chalet Manufacturing, dated June 23,
1995 by and among the Company, Eric S. Olberz and Camp 7, a
California corporation. (10)
10.20 Security Agreement [Debtor in Possession] dated June 23,1995 and
executed by Camp 7, Inc., a California corporation, as Borrower,
on behalf of the Company, as Secured Party. (10)
10.21 Continuing Guaranty dated June 23, 1995 executed by Eric S.
Olberz, as Guarantor, on behalf of the Company, as lender. (10)
10.22 Promissory Note dated June 23, 1995 executed by Camp 7, Inc., a
California corporation, as Maker on behalf of the Company. (10)
E-1
10.23 Agreement of Assignment and Assumption of Lease and Consent of
Landlord, dated June 23, 1995, by and among the Company, as
Assignor, Camp 7, Inc., a California corporation, as Assignee and
Eric S. Olberz, as Landlord. (10)
10.24 Pledge Agreement dated June 23, 1995, by and between Eric S.
Olberz, as Pledgor, and the Company, as Pledgee. (10)
10.25 Licensing Agreement dated June 23, 1995, by and between the
Company as Licensee, and Camp 7, Inc., a California corporation,
as Licensor (10)
10.26 Indemnification Agreement dated June 23, 1995, by Eric S. Olberz,
as Indemnitor, on behalf of the Company, as Indemnity [if
required]. (10)
10.27 Severance and General Release Agreement with Eric S. Olberz. (10)
10.28 Pomona Warehouse lease, dated August 10, 1995, between the company
and Montclair Warehouse, Inc., a California Corporation. (11)
10.29 Waiver of Loan Covenant by Bank dated February 13, 1996. (12)
10.30 Loan and Security Agreement dated as of May 14, 1996, between the
Company and BankAmerica Business Credit, Inc., together with
schedules thereto. E-3 - E-71
10.31 Letter of Credit Financing Agreement Supplement to Loan and
Security Agreement dated as of May 14,1996 between the Company and
BankAmerica Business Credit, Inc. E-72 - E-74
10.32 Side Letter, dated as of May 14, 1996, between the Company and
BankAmerica Business Credit, Inc., respecting the Aggregate Rent
Reserve. E-75 - E-76
23 Consent of Independent Auditors E-77
27 Article 5 - Financial Data Schedule
(1) Incorporated by reference to the respective exhibit to the Company's
Registration Statement on Form S-1 (Registration Statement No. 33-53120).
(2) Incorporated by reference to Exhibits 10.17 through 10.23, inclusive, to
the Company's Registration Statement on Form S-1 (Registration statement
and No. 33-53120).
(3) Incorporated by reference to Exhibit 4.5 to the Company's Registration
Statement on Form S-8 (Registration Statement No. 33-61612.)
(4) Incorporated by reference to Exhibit 10.1 to the Company's quarterly
report, on Form 10-Q, for the quarter ending September 30, 1992.
(5) Incorporated by reference to Registrant's Report on Form 10-K filed with
the Securities and Exchange Commission on June 28, 1993.
(6) Incorporated by reference to Exhibit 10.1, 10.2, 10.3 and 10.4 to the
Company's quarterly report, on Form 10-Q, for the quarter ending December
31, 1993.
(7) Incorporated by reference to the Company's Form 10-K filed with the
Commission on June 28, 1994.
(8) Incorporated by reference to Exhibit 10.1 to the Company's quarterly
report, on Form 10-Q, for the quarter ending September 30, 1994.
(9) Incorporated by reference to Exhibit 10.1 to the Company's quarterly
report, on Form 10-Q, for the quarter ending December 31, 1994.
(10) Incorporated by reference to the Company's Form 10-K filed with the
Commission on June 28, 1995.
(11) Incorporated by reference to Exhibit 10.1 to the Company's quarterly
report, on Form 10-Q, for the quarter ending September 30, 1995.
(12) Incorporated by reference to Exhibit 10.1 to the Company's quarterly
report, on Form 10-Q, for the quarter ending December 31, 1995.
E-2