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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended March 31, 2002

OR

For the transition period from ___________________ to _______________

Commission file number: 0-20736

Sport Chalet, Inc.

Registrant’s telephone number, including area code: (818) 790-2717

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 par value.
(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [   ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. [X]

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 10, 2002 was approximately $16.5 million based upon the closing price of the common stock on that date.

The number of shares of the registrant’s common stock outstanding as of June 10, 2002 was 6,606,334.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement relating to its 2002 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the close of the registrant’s last fiscal year are incorporated by reference into Part III of this Report.

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PART I

     This Annual Report on Form 10-K contains statements which constitute 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. Those statements include comments regarding the intent, belief or current expectations of the Company and its management. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That May Affect Future Results.”

ITEM 1. BUSINESS

General

     Sport Chalet, Inc. (the “Company”), founded in 1959, is a leading operator of 26 full service, specialty sporting goods superstores in Southern California and Nevada. The Company has 25 locations in California consisting of eleven located in Los Angeles County, six in Orange County, three in each of San Diego and San Bernardino Counties, and one in each of Riverside and Ventura Counties; the Nevada location is in Clark County. These stores average 38,600 square feet in size. In addition, the Company operates a retail e-commerce store through GSI Commerce, Inc. at www.sportchalet.com. The Company’s executive offices are located at 920 Foothill Boulevard, La Canada, California 91011, and its telephone number is (818) 790-2717.

Operating History and Growth Plan

     The Company’s growth strategy has focused on Southern California, but now contemplates opening new stores in California and Nevada as suitable locations are found over the next several fiscal years. Over the past three years the Company has opened seven new stores and relocated two. The Company currently plans to open at least two stores during the next 12 months, of which one will be in Riverside, California and the second will be the Company’s second store in the Las Vegas, Nevada market. Future store openings are subject to availability of satisfactory store locations based on local competitive conditions, site availability and cost and the Company’s ability to provide and maintain high service levels and quality brand merchandising at competitive prices.

     Store openings are expected to have a favorable impact on sales volume, but will negatively affect profit in the short term. New stores tend to have higher costs in the early years of operation; due primarily to extra labor used to open new stores, reduced sales on a per employee basis until the store matures and increased promotional costs. As the store matures, sales tend to level off and expenses decline as a percentage of sales. The Company’s stores generally require three years to attract a stable, mature customer base. The Company estimates the cost of opening an average new store to be approximately $2.0 million consisting primarily of the investment in inventory (net of average vendor payables), the cost of furniture, fixtures and equipment and pre-opening expenses, such as the costs associated with training employees and stocking the store. Opening costs for each new store can vary significantly depending on the amount of negotiated landlord contribution to the Company’s required improvements.

     The Company’s sales are dependent to some degree on the economic environment and level of consumer spending in Southern California and Nevada. The retail industry historically has been subject to substantial cyclical variation, and a recession in the general economy or uncertainties regarding future economic prospects that affect consumer spending habits have had, and may in the future have, a materially adverse effect on the Company’s results of operations. For fiscal 2002, average sales per store for stores opened the entire year were $9.3 million.

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     In February 2002, the Company moved to a new 326,000 square foot distribution center located in Ontario, California. This facility replaces the Company’s 150,000 square foot warehouse and a 30,000 square foot satellite facility, and has been designed to support growth plans for the foreseeable future. Labor savings from operating efficiency provided by the new facility are expected to offset increases in occupancy costs in the short term and installation of warehouse management software will further improve warehousing and logistical cost management.

     The Company’s corporate offices are spread over seven nearby buildings in La Canada, California neighboring the store where the Company was founded. To facilitate growth related to the expansion plans, in the fall of 2002, the Company intends to consolidate these locations into a new corporate office. The Principal Stockholder is building the 27,500 square foot facility in La Canada for this purpose and the Company expects this new corporate headquarters to support its growth plans for the foreseeable future.

     The Company has developed an information technology strategic plan calling for: (i) the replacement of all point of sale software and equipment, (ii) store systems to handle rental equipment, customer repairs, special orders and team sales, (iii) installation of inventory replenishment software, and (iv) the general upgrading of back office systems. During fiscal 2002, 2001 and 2000, the Company incurred $993,000, $3.7 million and $800,000 respectively, of capital expenditures in implementing this plan. To date, all point of sale equipment has been replaced including a customized rental system, replenishment software has been installed, and back office systems are being upgraded. The Company expects to spend $3.4 million in fiscal 2003 for, among other things, a warehouse management system to complement its new distribution center and upgrades to credit/debit authorization processing to speed customer check-out and reduce costs.

Operating Strategies

     The Company’s stores feature a number of distinct, specialty sporting goods divisions, offering a large assortment of quality brand name merchandise at competitive prices. The stores include traditional sporting goods merchandise (e.g., footwear, apparel and other general athletic products) and nontraditional merchandise such as downhill skiing, mountaineering and SCUBA. The merchandise appeals to both experts and beginners. In addition, the Company’s stores offer over 35 services for the serious sports enthusiast, including custom golf club fitting and repair, ski/snowboard rental and repair, full dive training and certification programs, SCUBA charters, team sales, racquet stringing, and bicycle tune up and repair. 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.

     The Company purchases merchandise from over 1,300 vendors. The Company’s largest vendor, Nike, Inc., accounted for approximately 7.3% and 9.0% of the Company’s total inventory purchases for fiscal 2002 and 2001, respectively. The following table sets forth the percentage of total net sales for each major category for each of the last three fiscal years:

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     The market for retail sporting goods is seasonal in nature. The Company’s highest sales levels and operating profit occur predominantly during the winter months of November, December and January, which overlap the third and fourth fiscal quarters ended December 31 and March 31. As with other retailers, the Company’s business is heavily affected by sales of merchandise during the Holiday season. In addition, the Company’s product mix has historically emphasized cold weather sporting goods merchandise, particularly ski-related products, thus boosting sales levels during the winter months and often increasing the seasonality of the Company’s business. Sales of winter-related products ranged from 17% to 19% of the Company’s net sales in recent years. In each of fiscal 2002, 2001 and 2000, 33%, 32% and 31%, respectively, of the Company’s sales were attributable to the months of November, December and January. Management anticipates that this seasonal trend in sales will continue. No assurance can be provided that any substantial decrease in sales for the winter months, which could be influenced by the amount and timing of snowfall at the resorts frequented by those living in Southern California, will not have a material adverse effect on the Company’s profitability. However, in order to be less dependent upon winter business, management continues to emphasize a broadened product mix that offers merchandise generally purchased by consumers in the spring, summer and fall seasons.

     Marketing campaigns are conveyed through newspaper, radio, magazine, direct mail and billboards. Magazine and billboards are funded primarily by marketing funds collected from the Company’s vendors. Through the Team Sales Division the Company reaches out to communities in which its stores do business contributing to local teams and leagues.

     The Company operates a 326,000 square foot distribution center in Ontario, California that serves as the primary receiving, distribution and warehousing facility. Common carriers are used to deliver merchandise to the Nevada store and the Company’s trucks deliver merchandise from the distribution center to the Southern California stores. A minimal amount of merchandise is shipped directly by vendors to the stores. Most of the product received at the distribution center is processed by unpacking and verifying the contents received and then sorting the contents by store for delivery. Some of the product received at the distribution center is pre-packaged and pre-ticketed by the vendor so it can be immediately cross-docked to trucks bound for the stores. Due to the efficiencies cross-docking creates, the Company encourages its vendors to pre-package and ticket their products to increase the percentage of merchandise that is cross-docked. Some of the merchandise is held at the distribution center for future allocation to the stores based on current sales trends as directed by our replenishment system to optimize inventory levels.

     The Company uses a “best of breed” approach to information systems. All new systems communicate with a legacy system that has become the centralized data repository and the primary financial system. Consistent with the stated direction to upgrade the legacy systems, those applications were migrated to a new Sun computer in May 2002 and an Oracle Database was successfully implemented. With those enhancements in place, the foundation has been established for future developments on the Oracle platform. In October 2000 store systems were upgraded to the Encore Retail Suite of applications from CRS Retail Systems, an open technology allowing flexibility for the future. A custom rental program was added to the store system in October 2001. Merchandise replenishment is controlled by E3 software from the JDA Software Group, Inc. running on an IBM AS 400. Future projects include: upgrading credit/debit authorization processing in the fall of 2002, a warehouse management system expected to be installed in the spring of 2003, continual on-going enhancements to the legacy system, and EDI software from SPS Commerce, among other projects.

     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, which has been successfully defended in the past against attack by third parties. The Company also retains common law rights to the name, which it has used since 1959. The lack of federal registration for certain purposes might 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.

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Industry and Competition

     The market for retail sporting goods is highly competitive, fragmented and segmented. The Company competes with many different types of retail stores, including full-line sporting goods chains (e.g., Gart Sports, The Sports Authority, Chick’s, Big 5), specialty stores (e.g., REI, Footaction, Turner’s, Foot Locker, West Marine), supplier owned stores (e.g., Nike, The North Face, adidas), discount and department stores (e.g., Wal-Mart, Nordstrom, Macy’s, Target, Sears), as well as catalog and internet based retailers. The Company’s industry is dominated by sporting goods superstore retailers, i.e. full-line sporting goods chains with stores typically larger than 30,000 square feet often located in freestanding locations. Superstore chains generally provide a greater selection of higher quality merchandise than other retailers, while remaining price competitive. Historically, the Company has provided a broader selection of higher-end specialty items that require higher levels of customer service and sales associate expertise than other superstore retailers in the Southern California area.

     The Company believes that its broad selection of high quality name brands and numerous specialty items at competitive prices, showcased by its well-trained sales associates, distinguish it from discount and department stores, traditional and specialty sporting goods stores and other superstore operations. Management believes the Company’s format takes advantage of several significant trends and conditions in the sporting goods industry. These trends include the size of the industry, fragmented competition, superstore dominance, limited assortments offered by many sporting goods retailers, consumer preference for one-stop shopping, and the importance of delivering value through selection, quality, service and price.

     The Company operates its online store through GSI Commerce, Inc. (“GSI”) at www.sportchalet.com. GSI creates and operates all aspects of the www.sportchalet.com shopping experience, including fulfillment and purchasing, while remaining transparent to the customer. The Company receives a license fee based on a percentage of sales generated by the website.

Employees

     As of March 31, 2002, the Company had 1,854 full and part-time employees, 1,692 of whom were employed in the Company’s stores and 225 of whom were employed in warehouse and delivery operations or in executive office positions. None of the employees are unionized. The Company believes that its employee relations are good. A typical store has approximately 75 employees, of whom 15 to 30 are in the store at any given time on a normal operating basis. Generally, each store employs a general manager, two to three assistant managers, who along with area managers and department heads supervise the sales associates in customer service, merchandising, and operations. Additional part-time employees are typically hired during the holiday and other peak seasons.

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ITEM 2. PROPERTIES

     At June 10, 2002, the Company had 26 store locations. The following table summarizes the key information on the Company’s retail properties:

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     All facilities are located on leased property. The initial terms of the retail leases expire in 2004 through 2020 and typically provide for multiple five-year renewal options. 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 of the leases, base rental amounts increase as the lease term progresses, although in some cases, the Company expects that percentage rent will more than offset the base rental amounts.

     The Company leases from corporations controlled by Norbert Olberz, the Chairman Emeritus and the Company’s principal stockholder (the “Principal Stockholder”), its corporate office space in La Canada and its stores in La Canada, Huntington Beach and Porter Ranch, California. The Company also leased its warehouse and distribution facility in Montclair, California and although the term of this lease ran to 2007, the Principal Stockholder agreed to cancel the lease when the Company moved to the new distribution center in February 2002. The new distribution center located in Ontario, California is leased from an unrelated third party. The Company has incurred rental expense to the Principal Stockholder of $2.4 million, $2.5 million and $2.1 million in fiscal 2002, 2001 and 2000, respectively.

     The Company’s current corporate offices are spread over seven nearby buildings in La Canada, California neighboring the store where the Company was founded. To facilitate growth related to the expansion plans, the Company is negotiating for a new corporate office with La Canada Properties, Inc., a corporation controlled by the Principal Stockholder. La Canada Properties, Inc. is building a 27,500 square foot facility in La Canada for this purpose that the Company could occupy in the fall of 2002. The Company expects to consolidate into one corporate headquarters and this building will support its growth plans for the foreseeable future.

     Management believes that the occupancy costs under the leases with corporations controlled by the Principal Stockholder described above are no higher than those which would be charged by unrelated third parties under similar circumstances.

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, 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

     No matters were submitted to the Company’s stockholders during the fourth quarter of fiscal 2002.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Price for Common Shares

     The Company’s Common Stock is traded on The Nasdaq Stock Market’s National Market under the symbol “SPCH.” The following table reflects the range of high and low sale prices of the Company’s Common Stock by quarter over the last two fiscal years as reported by Nasdaq:

     On June 10, 2002, the closing price of the Company’s Common Stock as reported by Nasdaq was $9.00. Stockholders are urged to obtain current market quotations for the Common Stock.

Approximate Number of Holders of Common Shares

     The approximate number of stockholders of record of the Company’s Common Stock as of June 10, 2002 was 300 (excluding individual participants in nominee security position listings) and as of that date, the Company estimates that there were approximately 1,000 beneficial owners holding stock in nominee or “street” name.

Dividend Policy

     The Company has not paid any dividends to stockholders since its initial public offering in November 1992. It is currently contemplated that the Company will retain earnings for use in the operation and potential expansion of its business and, therefore, does not anticipate declaring or paying any cash dividends in the foreseeable future. The declaration and payment of any such dividends in the future will depend upon the Company’s earnings, financial condition, capital needs and other factors deemed relevant by the Board of Directors.

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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.

(1)		Represents the fair market value of 293,625 unregistered common shares awarded to certain employees by the Principal Stockholder and his spouse, through their family trust.
(2)		A store’s sales are included in the comparable store sales calculation after its twelfth full month of operation.
(3)		EBITDA is earnings before income taxes, interest expense and depreciation and amortization. The Company believes that, in addition to cash flows from operations and net income, EBITDA is a useful financial performance measure for assessing operating performance as it provides an additional basis to evaluate the ability of the Company to incur and service debt and to fund capital expenditures. In evaluating EBITDA, consideration should be given, among other things, to the amount by which EBITDA exceeds interest costs for the period and how EBITDA compares to capital expenditures for the period. To evaluate EBITDA, the components of EBITDA such as revenue and operating expenses and the variability of such components over time should also be considered. EBITDA should not be construed, however, as an alternative to operating income (as determined in accordance with accounting principles generally accepted in the United States of America (“GAAP”)) as an indicator of the Company’s operating performance or to cash flows from operating activities (as determined in accordance with GAAP) as a measure of liquidity. The Company’s method of calculating EBITDA may differ from methods used by other companies, and as a result, EBITDA measures disclosed herein may not be comparable to other similarly titled measures used by other companies.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     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).

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     Fiscal 2002 Compared to Fiscal 2001. Sales increased from $214.8 million for the fiscal year ending March 31, 2001 to $227.3 million for the same period this year, a 5.8% increase. The increase is the result of opening three stores in fiscal 2002 and one in fiscal 2001, offset by a comparable store sales decrease of 1.1%. In addition to generally weak economic climate, the comparable store sales decrease reflects unseasonably warm and dry winter weather conditions experienced in the third and fourth quarters as compared to the same quarters of the prior year, along with a decline in consumer demand for in-line scooters, sales of which were significant in the prior year. Sales exclusive of winter-related merchandise and scooters would have increased 12.3%, and comparable store sales would have increased by 5.2%.

     Gross profit for the year decreased as a percent of sales from 30.8% to 28.7%. The decrease for fiscal 2002 as compared to fiscal 2001 was a result of higher markdowns taken to stimulate sales and turn inventory. Additionally, the decrease in comparable store sales caused occupancy costs to increase as a percent of sales in fiscal 2002 as compared to fiscal 2001.

     Selling, general and administrative expenses decreased as a percent of sales from 25.3% to 25.1%, as decreases in litigation and incentive-based labor were partially offset by costs related to the Company’s expansion plans. Expenses related to expansion include; the opening of three new stores, one of which is the Company’s first store outside Southern California, and costs related to opening a new larger distribution center, most of which related to the disposal of leasehold improvements from the old facility.

     Interest income decreased from $361,000 to an expense of $71,000 due to the use of the Company’s credit facility in fiscal 2002, as compared to fiscal 2001 when the credit facility was not utilized. Invested cash was used to fund expansion including new stores, a larger distribution center and computer upgrades. The Company borrowed up to $10 million during the third quarter for the seasonal build up of inventory.

     The effective tax rate as a percent of pretax income is 40.5% for fiscal 2002 and 40.3% for fiscal 2001. These rates differ from the statutory rate of 39.8% primarily as a result of permanent differences between financial reporting and tax-basis income.

     Net income decreased to $4.8 million or $0.69 per diluted share, from $7.3 million, or $1.07 per diluted share, in the prior year primarily due to decreased gross profit as markdowns were taken to drive consumer demand in the face of a difficult retail sales environment.

     Fourth Quarter 2002 Compared to Fourth Quarter 2001. Sales increased from $56.0 million for the quarter ended March 31, 2001 to $57.3 million for the same period in fiscal 2002, a 2.3% increase. The increase is the result of opening three stores in fiscal 2002, offset by a comparable store sales decrease of 6.0%. Comparable store sales decreased as unfavorable warm and dry winter weather conditions in Southern California resulted in significant decreases in sales of winter-related merchandise. Sales exclusive of winter-related merchandise would have increased 16.1% and comparable store sales would have increased by 6.2%.

     Gross profit for the period decreased as a percent of sales from 29.4% for the quarter ended March 31, 2001 to 26.3% for the same period this year. The decrease is as a result of increased markdowns taken on winter-related merchandise to stimulate sales and turn inventory. Additionally, the decrease in comparable store sales caused occupancy costs to increase as a percent of sales in the fourth quarter of fiscal 2002 as compared to the same period last year.

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     Selling, general and administrative expenses decreased from 26.5% to 26.1% as a percent of sales as decreases in litigation and incentive-based labor were partially offset by costs related to opening a new larger distribution center, most of which related to the disposal of leasehold improvements from the old facility.

     Interest income decreased from $156,000 to an expense of $41,000 due to the use of the Company’s credit facility in fiscal 2002, as compared to fiscal 2001 when the credit facility was not utilized. Invested cash was used to fund expansion including new stores, a larger distribution center and computer upgrades.

     The effective income tax rate as a percent of pretax income for the fourth quarter 2002 is 94.9% compared to 43.2% for the same period of fiscal 2001. Both differ from the statutory rate of 39.8% as a result of fourth quarter provision adjustments reconciling the estimated effective rate utilized in prior quarters, to the annual effective tax rate.

     Net income decreased to $2,000, or $0.0 per diluted share, from $1.0 million, or $0.15 per diluted share, in the prior year primarily due to decreased gross profit as markdowns were taken to drive consumer demand for winter-related merchandise in the face of a difficult retail sales environment and unfavorable winter weather conditions.

     Fiscal 2001 Compared to Fiscal 2000. Sales increased from $175.8 million to $214.8 million, a 22.2% increase, as a result of a comparable store sales increase of 14.5% and the opening of four new stores since May 1999. The comparable store sales increase reflects favorable winter weather conditions experienced in the third and fourth quarter as compared to the same quarters of the prior year, increased consumer demand for in-line scooters and continuing improvements in merchandising and customer service. Excluding sales of scooters and winter-related merchandise, comparable store sales were up 7.4% during fiscal 2001. Management believes that the scooter phenomenon has run its course and will be insignificant in the future.

     Gross profit for the year increased as a percent of sales from 29.8% to 30.8%, due to (i) reduced markdowns as a percent of sales due to early strong sales of winter-related merchandise in fiscal 2001 as compared with fiscal 2000 and (ii) increased comparable store sales which caused occupancy costs to decrease as a percent of sales.

     Selling, general and administrative expenses increased as a percent of sales from 24.8% to 25.3%, primarily the result of increased litigation costs over the prior year.

     Interest income increased from $284,000 to $361,000 due to cash reserves generated by increased sales.

     The effective tax rate as a percent of pretax income is 40.3% for fiscal 2001 and 39.8% for fiscal 2000. These rates differ from the statutory rate of 39.8% primarily as a result of permanent differences between financial reporting and tax-basis income.

     Net income increased to $7.3 million compared to $5.5 million in the prior year primarily due to increased sales slightly offset by increased selling, general and administrative expense. Diluted earnings per share increased 32.1% to $1.07 from $.81 due primarily to increased net income.

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Liquidity and Capital Resources

     The Company’s primary capital requirements are for inventory and store expansion, relocation and remodeling. Historically, cash from operations, credit terms from vendors and bank borrowing have met the Company’s liquidity needs. The Company believes that these sources will be sufficient to fund currently anticipated cash requirements for the foreseeable future.

     Net cash provided by operating activities of $7.3 million, $11.5 million and $1.0 million for fiscal 2002, 2001 and 2000, respectively, was primarily the result of net income, adjusted for depreciation and amortization, and increases in bank overdraft combined with accounts payable offset by inventory purchases.

     Inventory levels from year-to-year typically increase due to the addition of new stores. In fiscal 2002 and 2000, the addition of three stores in each year increased inventories $5.4 million and $7.0 million, respectively, while in fiscal 2001 the inventory increase of $5.6 million was a result of a significant increase in comparable store sales along with the purchase of John Wells Golf Shops and the addition of one new store. The Company evaluates its inventory on a per store basis. The average inventory per store was $1.8 million in fiscal 2002 and 2001 and $1.7 million in fiscal 2000.

     Bank overdraft represents the total of checks in transit in excess of cash on hand. For fiscal 2002, invested cash built-up in prior years was used to fund the Company’s expansion plan. The overdraft is expected to continue and fluctuate due to the timing of vendor payments. Accounts payable historically increases as inventory increases. For fiscal 2002, accounts payable combined with the bank overdraft increased by $6.0 million primarily due to increased inventory. During fiscal 2001, accounts payable increased only $371,000 as part of the inventory increase occurred early in the year due to a new store and the purchase of John Wells Golf Shops and vendors were paid before year end. For fiscal 2000, accounts payable decreased $69,000 due to changes in the timing of vendor payments.

     Net cash used in investing activities was $12.0 million, $8.0 million, and $6.6 million for fiscal 2002, 2001 and 2000, respectively. In fiscal 2002, three stores were opened and the distribution center was relocated, while in fiscal 2001 one store was opened, one was remodeled and one was relocated and during fiscal 2000 three stores were added and one was relocated. In fiscal 2002, 2001 and 2000, capital expenditures for information technology totaled $993,000, $3.7 million, and $800,000, respectively, while ongoing capital expenditures for the Company’s existing stores totaled $2.8 million, $3.0 million, and $2.8 million, respectively.

     As a result of the Company’s ongoing growth and strategic initiatives, forecasted capital expenditures for fiscal 2003 are expected to be approximately $10.7 million. Approximately $2.7 million of this amount will be used to open two new stores, and $800,000 is planned for a new corporate office. In addition, approximate expenditures on existing store improvements and information technology are $2.2 million and $3.4 million, respectively.

     In June 2002, the Company amended its credit facility with Bank of America National Trust and Savings Association, Inc. (the “Lender”) which, as modified, provides for advances up to $20 million, increasing to $30 million for the period October 1, 2002 through December 31, 2002, less the amount of any outstanding draws up to a $1.5 million maximum in authorized letters of credit. Interest accrues at the bank’s prime rate plus 1/4% or can be fixed for a period of time at the then current rate established under one of several indices, all at the Company’s option. This credit facility expires on September 30, 2003 and the Company expects to renegotiate and extend the term of this agreement or obtain another form of financing before that date.

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     The Company’s obligation to the Lender is presently secured by a first priority lien on substantially all of the Company’s non-real estate assets, and the Company is subject to several restrictive covenants. The principal operating covenants require the Company to maintain certain minimum cash flow coverage and debt to equity ratios and restrict the level of capital expenditures, calculated on a quarterly basis. The Company currently is in compliance with the amended covenants and expects to remain in compliance with the amended covenants during the term of the credit facility. The Company believes its credit line with the Lender is sufficient to fund capital expenditures for the foreseeable future and to meet seasonal fluctuations in cash flow requirements. However, unexpected conditions could cause the Company to request additional borrowing capacity from the Lender or alter its expansion plans or operations.

     The Company’s primary contractual obligations and commitments are its store leases with initial terms expiring from 2004 through 2020 and typically provide for multiple five-year renewal options:

     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 of the leases, base rental amounts increase as the lease term progresses, although in some cases, the Company expects that percentage rent will more than offset the base rental amounts.

     No cash dividends have been declared on common stock in fiscal 2002. 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.

Critical Accounting Policies and Use of Estimates

     The Company’s significant accounting policies are described in Note 2 to the Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. In preparing the financial statements, the Company is required to make estimates and judgments which affect the results of its operations and the reported value of assets and liabilities. Actual results may differ from these estimates. The Company believes that the following summarizes critical accounting policies which require significant judgments and estimates in the preparation of its consolidated financial statements.

     Inventory Valuation. Merchandise inventories are stated at the lower of cost (first-in, first-out determined by the retail method of accounting) or market. The Company considers cost to include direct cost of merchandise, plus internal costs associated with merchandise procurement, storage and handling. The Company regularly reviews aged and excess inventories to determine if the carrying value of such inventories exceeds market value, a reserve is recorded to reduce the carrying value to market value as necessary. A determination of market value requires estimates and judgment based on the Company’s historical markdown experience and anticipated markdowns based on future merchandising and advertising plans, seasonal considerations, expected business trends and other factors.

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Seasonality

     As noted previously, the months of November, December and January historically have accounted for the largest percentage of the Company’s net sales and a significant portion of its net income. As is typical with other sporting goods retailers, the Company’s sales volume increases significantly during the Holiday season and the peak ski and snowboard season generally corresponds to this three-month period.

     The Company’s operating results historically have been influenced by the amount and timing of snowfall at the resorts frequented by those living in Southern California. An early snowfall often has influenced sales because it generally extends the demand for winter apparel and equipment while a late snowfall may have the opposite effect.

     The third and fourth quarters of fiscal 2002 experienced weaker than expected sales of winter-related products as a result of warm winter weather conditions that provided snowfall well below average. Sales of winter-related products ranged from 17% to 19% of the total Company’s net sales in recent years. In each of fiscal 2002, 2001 and 2000, 33%, 32% and 31%, respectively, of the Company’s sales were attributable to the months of November, December and January.

     Suppliers in the ski and snowboard industry require that commitments be made for purchases of apparel and equipment by April for fall delivery, and only limited quantities of merchandise can be reordered during the fall. Consequently, the Company places its orders in the spring anticipating snowfall in the winter. If the snowfall does not at least provide an adequate base or occurs late in the season, or if sales do not meet projections, the Company may be required to mark down its winter apparel and equipment.

Factors That May Affect Future Results

     The statements which are not historical facts contained in this Annual Report on Form 10-K are “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties. These risks and uncertainties include, but are not limited to, those set forth below.

     Economic Conditions. The retail industry historically has been subject to substantial cyclical variation, and a recession in the general economy or uncertainties regarding future economic prospects that affect consumer spending habits have had, and may in the future have, a materially adverse effect on the Company’s results of operations.

     Competition. The sporting goods business and the retail environment are highly competitive, and the Company competes with national, regional and local full-line sporting goods chains, specialty stores, supplier owned stores, discount and department stores, and e-tailers. A number of the Company’s competitors are larger and have greater resources than the Company.

     Regional Market Concentration. Currently, all of the Company’s stores are located in Southern California and the Las Vegas area of Nevada. Accordingly, the Company is subject to regional risks, such as the economy, weather conditions, natural disasters and government regulations. If the region were to suffer an economic downturn or if other adverse events were to occur, there could be an adverse effect on the Company’s net sales and profitability and its ability to implement its planned growth. Several of the Company’s competitors operate stores across the United States and, thus, are not as vulnerable as the Company to such regional risks.

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     Single Distribution Center. The Company has a single distribution center and if there is a natural disaster or other serious disruption at the facility, merchandise may be lost or undeliverable to our stores, thereby, reducing sales and profitability.

     Expansion Plan. The Company’s continued growth is dependent to a significant degree upon its ability to open new stores on a profitable basis. The Company’s ability to expand will depend, in part, on business conditions and the availability of satisfactory store locations based on local competitive conditions, site availability and cost, and the Company’s ability to provide and maintain high service levels and quality brand merchandising at competitive prices. In addition, a decline in the Company’s overall financial performance, increased rents or any other adverse effects arising from the commercial real estate market in the Company’s markets may adversely effect the Company’s current growth plan. There can be no assurance that the Company will possess sufficient funds to finance the expenditures related to its planned growth, that new stores can be opened on a timely basis, that such new stores can be operated on a profitable basis, or that such growth will be manageable.

     Future Capital Requirements. The Company may not be able to fund its future growth or react to competitive pressures if it lacks sufficient funds. Unexpected conditions could cause the Company to be in violation of its Lender’s operating covenants. Currently, the Company feels it has sufficient cash available through its bank credit facilities and cash from operations to fund existing operations for the foreseeable future. The Company cannot be certain that additional financing will be available in the future if necessary.

     Management of Growth. Since its inception, the Company has experienced periods of rapid growth. No assurance can be given that the Company will be successful in maintaining or increasing its sales in the future. Any future growth in sales will require additional working capital and may place a significant strain on the Company’s management, management information systems, inventory management, distribution facilities and receivables management. Any failure to timely enhance the Company’s operating systems, or unexpected difficulties in implementing such enhancements, could have a material adverse effect on the Company’s results of operations.

     Dependence on Key Personnel. The Company depends on the continued service of its senior management. The loss of the services of any key employee could hurt the business. Also, the future success of the Company depends on its ability to identify, attract, hire, train and motivate other highly skilled personnel. Failure to do so may adversely affect future results.

     Seasonality. The Company’s business is seasonal in nature. As a result, the Company’s results of operations are likely to vary during its fiscal year. See “—Seasonality”

     Variability of Quarterly Results. The Company has experienced, and expects to continue to experience, a substantial variation in its net sales and operating results from quarter to quarter. The Company believes that the factors which influence this variability of quarterly results include general economic and industry conditions that affect consumer spending, changing consumer demands, the timing of the Company’s introduction of new products, the level of consumer acceptance of each new product, the seasonality of the markets in which the Company participates, the weather and actions of competitors. Accordingly, a comparison of the Company’s results of operations from period to period is not necessarily meaningful, and the Company’s results of operations for any period are not necessarily indicative of future performance.

     Closely Controlled Stock. At June 10, 2002, Norbert Olberz, the Company’s founder and Chairman of the Board of Directors, owned approximately 66% of the Company’s outstanding common stock. Mr. Olberz effectively has the ability to control the outcome on all matters requiring stockholder approval, including, but not limited to, the election and removal of directors, and any merger, consolidation or sale of all or substantially all of the Company’s assets, and to control the Company’s management and affairs.

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     Stock Price. The market price of the Company’s common stock is likely to be volatile and could be subject to significant fluctuations in response to factors such as quarterly variations in operating results, operating results which vary from the expectations of securities analyst and investors, changes in financial estimates, changes in market valuations of competitors, announcements by the Company or its competitors of a material nature, additions or departures of key personnel, future sales of common stock and stock volume fluctuations. Also, general political and economic conditions such as a recession or interest rate fluctuations may adversely affect the market price of the Company’s stock.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company’s exposure to interest rate risk consists primarily of borrowings under its credit facility that bears interest at floating rates (primarily LIBOR rates). The impact on earnings or cash flows during the next fiscal year from a change of 100 basis points in the interest rate would not be significant.

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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     None.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information concerning the directors and executive officers of the Company is incorporated by reference from the section entitled “Proposal 1 — Election of Directors” contained in the definitive Proxy Statement of the Company to be filed pursuant to Regulation 14A within 120 days after the end of the Company’s last fiscal year (the “Proxy Statement”).

ITEM 11. EXECUTIVE COMPENSATION

     The information concerning executive compensation is incorporated herein by reference from the section entitled “Proposal 1 — Election of Directors” contained in the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information concerning the security ownership of certain beneficial owners and management is incorporated herein by reference from the sections entitled “General Information—Security Ownership of Principal Stockholders and Management” and “Proposal 1-Election of Directors” contained in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information concerning certain relationships and related transactions is incorporated herein by reference from the section entitled “Proposal 1-Election of Directors-Certain Relationships and Related Transactions” contained in the Proxy Statement.

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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 Audited Financial Statements are filed as part of this report.

(2)

Schedules — Not applicable.

(b)		Reports on Form 8-K
		None.
(c)		Exhibits — See Index on Page E-1 hereof

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Sport Chalet, Inc.

Index to Audited Financial Statements

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Report of Independent Auditors

The Stockholders and Board of Directors
Sport Chalet, Inc.

We have audited the accompanying balance sheets of Sport Chalet, Inc. as of March 31, 2002 and 2001, and the related statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended March 31, 2002. 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 auditing standards generally accepted in the United States. 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, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2002, in conformity with accounting principles generally accepted in the United States.

/s/Ernst & Young LLP

Los Angeles, California
May 17, 2002
except for Note 3 as to which the date is
June 10, 2002

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Sport Chalet, Inc.

Statements of Income

See accompanying notes.

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Sport Chalet, Inc.

Balance Sheets

See accompanying notes.

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Sport Chalet, Inc.

Statements of Stockholders’ Equity

See accompanying notes.

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Sport Chalet, Inc.

Statements of Cash Flows