ITEM 1. BUSINESS.
DEVELOPMENT OF BUSINESS
Oshman's Sporting Goods, Inc. ("Oshman's" or the "Company"), which operates a chain of retail sporting goods specialty stores, was incorporated in Delaware in 1946 as the successor to a proprietorship founded by J.S. Oshman in 1931. Unless the context otherwise requires, the terms "Oshman's" and the "Company" as used herein include the Company and its subsidiaries, whether operating under the name "Oshman's" or "SuperSports USA".
On February 22, 2001, the Company announced that it had entered into an Agreement and Plan of Merger ("Merger Agreement"), dated as of February 21, 2001, with Gart Sports Company ("Gart Sports") and GSC Acquisition Corp., a wholly-owned subsidiary of Gart Sports ("Acquisition"), pursuant to which the Company will merge with and into Acquisition, with the result that the surviving corporation will be a wholly-owned subsidiary of Gart. Pursuant to the Merger Agreement and subject to certain adjustments set forth therein, the Company's shareholders will receive $7.00 cash and 0.55 shares of Gart Sports's common stock for each share of the Company's common stock. The transaction is subject to customary conditions, including the approval of the merger by the Company's shareholders, the approval of the issuance of Gart Sports common stock to the Company's shareholders by the shareholders of Gart Sports and the effectiveness of a registration statement for the shares of Gart Sports to be issued in the transaction. The Company and Gart Sports hopes to complete the merger late in the second calendar quarter or early in the third calendar quarter of 2001.
Since 1990, the Company has developed an innovative, interactive concept in sporting goods retailing that it is implementing through its SuperSports USA megastores. The Company has transformed its business by focusing its efforts on opening and operating SuperSports USA stores, which occupy, on average, approximately 53,500 square feet, while reducing its preexisting base of traditional stores, which currently average approximately 11,000 square feet. SuperSports USA megastores offer a dominant selection of sporting goods in an environment featuring a variety of "play areas" that provide customers with the opportunity to try out sporting goods merchandise. This "play-before-you- pay" approach encourages customers, with the assistance of qualified sales personnel, to purchase the equipment that best satisfies their particular needs and desires while also providing an entertaining shopping experience.
SuperSports USA megastores are organized as a collection of distinctive sporting goods specialty shops. The merchandising format and layout of each megastore is designed to lead customers along a path through the store, in and out of specialty shops that concentrate on specific sporting goods categories such as in-line skating and skateboarding; skiing and snowboarding; cycling; golf; tennis and other racquet sports; fitness and exercise equipment; hunting, fishing, hiking and camping; and team sports such as baseball, softball, football, basketball, hockey, soccer and volleyball. Each specialty area merchandises sporting equipment as well as the appropriate apparel in a department-store style.
At the end of fiscal 2000, the Company operated 43 SuperSports USA stores, including 38 SuperSports USA megastores ranging in size from approximately 36,000 to 80,000 square feet and five mini SuperSports USA stores, ranging in size from approximately 20,000 to 32,000 square feet. The mini SuperSports USA stores include certain "play areas" and merchandise assortments similar to the megastores, and operate under the name SuperSports USA. At the end of fiscal 2000, the Company also operated 15 traditional stores. Subsequent to the end of fiscal 2000, the Company closed a traditional store in Huntington Beach, California and opened a SuperSports USA store in Miami, Florida. The Company's stores are located primarily in medium to large metropolitan areas across the United States. In fiscal 2000, excluding results from stores closed, the 43 SuperSports USA stores produced 93% of the Company's retail sales and approximately 94% of direct store contributions. The Company operates stores in Texas and California as well as in Arizona, Florida, Kansas, Louisiana, Michigan, Minnesota, New Mexico, Oklahoma, South Carolina, Tennessee, Utah and Washington.
Oshman's offers a full line of sporting goods equipment, sportswear and athletic footwear focusing on middle- to high-end products. Nationally advertised brand name products are featured, along with the Company's own labels in certain categories. While certain of the Company's primary megastore competitors employ "every-day-low-price" strategies, the Company is a promotional retailer. As such, the Company seeks to attract customers into its stores through advertised price reductions on selected merchandise. The following table sets forth sales of sporting goods equipment, sports apparel and footwear as a percentage of net sales during the last three fiscal years.
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, specialty footwear stores, warehouse-format stores, specialty stores, discount and department stores and other stores with a megastore format. While its stores face competition in individual markets from a variety of retailers, the Company believes that its greatest competition is likely to come from other megastore operators and from warehouse-format operations. There can be no assurance that the Company will be able to maintain or increase its current level of pricing, sales or profitability in light of such competition, particularly as the Company expands into markets served by existing competitors or as new competitors enter into the Company's markets. Furthermore, there is substantial competition from large-format retailers for prime commercial locations and favorable lease terms that could adversely affect both the Company's ability to expand and its profitability.
The Company's ability to remain competitive is largely dependent upon its ability to provide a selection of merchandise that appeals to its customers' changing desires and that appropriately reflects geographical differences in seasonality, brands and sports preferences. A failure by the Company to accurately identify and respond to emerging trends in sports equipment or athletic footwear, apparel or accessories could have a material adverse effect on the Company's financial performance and results of operations.
Several sporting goods retailers currently operate stores with a megastore format, including some with significantly greater resources than the Company. In addition, there are other businesses, retailers and otherwise, with substantially greater resources than the Company that may decide to enter the sporting goods megastore or warehouse-format retail business. This competition could have a material adverse effect on the Company.
SITE SELECTION
The Company subjects each potential new store location to extensive analysis and evaluation, using its in-house staff to work with local real estate developers and brokers. Sites are selected primarily based on the Company's evaluation of the potential financial return on its investment, taking into account internally prepared sales projections, estimated gross margins and store operating expenses as compared to required capital expenditures and inventory investments. The Company also utilizes demographic, geographic and competitive analyses in arriving at its estimates for sales and gross margin. Oshman's seeks to locate stores in areas that are experiencing a growth in population and have high concentrations of white-collar workers with growing families and sufficient financial resources and disposable income to devote significant spending to leisure and sporting activities. Eleven of the Company's existing megastores serve as anchors for regional shopping malls and shopping centers. The Company intends to continue to pursue locations that offer this desirable marquee status and the associated benefits.
Although the Company realizes certain economies of scale in warehousing, distribution and advertising through the "clustering" of several stores in one market (most notably in the Dallas/Fort Worth and Houston areas), it has also taken advantage of opportunities to successfully open and profitably maintain single SuperSports USA megastores in certain markets and intends to continue to pursue this flexible strategy.
PURCHASING AND SUPPLIERS
The Company purchases its merchandise directly from a diverse group of leading domestic and international suppliers, and achieves significant efficiencies through large quantity purchases. The Company's largest supplier, Nike, accounted for 10.3%, 11.4% and 16.0% of the Company's total purchases in fiscal 2000, 1999 and 1998, respectively. No other supplier accounted for more than 10% of the Company's purchases in any of the last three years.
DISTRIBUTION AND WAREHOUSING
The Company utilizes a centralized distribution system operated through a distribution center located in Houston, Texas. Approximately 94% of the Company's inventory is shipped through this distribution center. However, for certain items that the Company believes require more rapid delivery to stores because of higher product turnover or other conditions, the Company uses direct delivery from vendors.
MANAGEMENT INFORMATION SYSTEMS
During fiscal 1996, the Company completed the installation of new financial accounting and reporting systems and payroll and human resources systems, and in fiscal 1997 the Company installed new sales audit software. The Company also installed a new IBM AS400 computer in fiscal 1997 to accommodate the new systems and those installed in 1998 and further upgraded all operating systems software in the last quarter of 1998. During fiscal 1998, the Company upgraded its personal computers making them year 2000 compliant. In addition, the Company implemented its new merchandising information and inventory management systems in March 1999.
In 2000, the Company established EDI communications capability with over 130 of the Company's vendor partners, and made other substantial improvements in the Company's logistics chain. The Company began to extensively use radio frequency scanning equipment in stores and warehouses.
The Company did not experience any material problems relating to the year 2000 issue.
SEASONAL FACTORS
Oshman's business is highly seasonal, with sales generally higher in the fourth quarter, peaking in December due to holiday shopping and the purchase of ski equipment. Any substantial decrease in sales during the fourth quarter could adversely affect the Company's results of operations. Weather conditions add to the seasonal nature of the business, particularly with respect to ski equipment and cold weather apparel. The Company's results of operations may also fluctuate on a quarterly basis as a result of seasonal variances and time and costs associated with selecting, constructing, staffing, stocking and opening new stores, as well as the timing of promotions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Seasonality and Quarterly Fluctuations."
TRADEMARKS AND SERVICE MARKS; OTHER BUSINESS
As of February 3, 2001, Oshman's owned approximately 31 trademarks and service marks that were employed in its advertising and operations. The Company has registered the "Oshman's" and "SuperSports USA" trademarks. The Company believes that its marks are, in the aggregate, materially important in its business and that the "Oshman's" and "SuperSports USA" marks are individually material. The Company
anticipates that it will continue to own each of its trademarks and service marks for as long as it finds it beneficial to use them in connection with its operations.
Since 1983 the Company has had a licensing agreement and consulting arrangement with a major Japanese retailer, Ito-Yokado Co., Ltd., that currently operates five stores in Japan under the Oshman's name. The Company also sells merchandise to this entity, which sales remained flat in 1999 while increasing in 2000.
Oshman's opened an online sporting goods store at www.oshmans.com during fiscal 2000. The Company entered into a long-term agreement with Global Sports Interactive, Inc. ("Global"), pursuant to which Global has developed and is operating the e-commerce web site for the Company.
MISCELLANEOUS
Oshman's typically satisfies its working capital needs out of internally generated funds from current operations and its credit facilities as addressed in "Management's Discussion and Analysis of Financial Condition and Results of Operations," below.
Inasmuch as Oshman's is a retailer, backlog is not relevant to its business. Oshman's does not have contracts subject to renegotiation or termination and does not conduct any material research and development activities.
Federal, state and local environmental regulations have not had, and are not expected to have, any material effect upon the expenditures, earnings or competitive position of the Company.
As of February 3, 2001, Oshman's employed 2,613 people including 1,229 part- time employees.
ITEM 2.
ITEM 2. PROPERTIES.
Oshman's 79,000 square foot general and executive offices are leased by the Company and located in Houston, Texas. A Houston warehouse and distribution center occupies approximately 257,000 square feet of leased space in the same building complex. Oshman's also owns one megastore location in Houston, Texas. In February 2000, the Company sold the traditional store it owned in Los Angeles, California and recorded a gain of $6.8 million on this transaction.
Substantially all of Oshman's retail stores occupy leased space in modern structures. As of February 3, 2001, these retail stores occupied an aggregate of approximately 2,399,000 square feet of floor space under leases expiring at various dates from 2001 to 2021 (exclusive of renewal options). Traditional stores on average are comprised of approximately 11,000 square feet, while the average SuperSports USA store occupies approximately 53,500 square feet. The megastore owned by Oshman's occupies approximately 69,000 square feet of floor space.
Aggregate rentals paid by the Company under all of its leases amounted to approximately $19.2 million during the 2000 fiscal year. Most store leases provide for rentals that are the greater of a fixed minimum amount or a specified percentage of sales. Oshman's owns the fixtures in its retail stores and considers all property owned or leased to be well maintained, adequately insured and suitable for its purposes.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to certain pending legal proceedings, most of which are ordinary and routine litigation incidental to its business. None of such legal proceedings, in the opinion of the Company, is material to its business or financial condition. The Company maintains liability insurance coverage that it believes to be customary in the sporting goods retailing industry.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Oshman's did not submit any matters to a vote of security holders during the fourth quarter of the fiscal year ended February 3, 2001.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company has been listed on the American Stock Exchange under the symbol "OSH" since June 21, 1995. Prior to that date, the Common Stock of the Company was quoted on The Nasdaq Stock Market. The following table sets forth the quarterly high and low reported sales prices per share for the Common Stock:
As of March 30, 2001, there were approximately 529 holders of record of the Common Stock. The last reported sale price for the Common Stock on the American Stock Exchange composite tape as of March 30, 2001, was $12.30.
The Board of Directors of the Company suspended the payment of dividends in March 1991 and does not anticipate paying dividends in the foreseeable future. The Company's credit agreement with CIT places certain limitations and restrictions on the Company's ability to pay dividends on the Common Stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following table provides selected consolidated financial information for the Company's last five fiscal years.
- -------- * Excludes loss of $1,299 from cumulative effect of change in accounting method for pre-opening expenses. **Excludes gain of $972 from cumulative effect of change in accounting for inventory.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
The Company has been in operation since 1931, having been incorporated in 1946 as the successor to a proprietorship founded by J.S. Oshman. After building a base in Texas where it is headquartered, the Company expanded into other states across the Sun Belt, growing from 11 stores in 1970 to 193 stores at the beginning of fiscal 1990. In fiscal 1990, the Company opened its first two SuperSports USA megastores. The changing nature of retailing and the new competitive challenges in the sporting goods sector had started to adversely affect the results of the Company's traditional stores. Starting in 1990, the Company has transformed its business by focusing on opening and operating SuperSports USA stores occupying, on average, approximately 53,500 square feet, while reducing its pre-existing base of traditional stores, which currently average approximately 11,000 square feet. In fiscal 2000, the Company opened megastores in Houston and New Orleans. At year-end the Company operated 43 SuperSports USA stores, including 38 SuperSports USA megastores, five mini SuperSports USA stores and 15 traditional stores. Subsequent to the end of fiscal 2000, the Company opened a megastore in Miami, Florida and closed a traditional store located in Huntington Beach, California. The Company's stores are located primarily in medium to large metropolitan areas in Texas and California as well as in Arizona, Florida, Kansas, Louisiana, Michigan, Minnesota, New Mexico, Oklahoma, South Carolina, Tennessee, Utah and Washington.
RESULTS OF OPERATIONS
The following table sets forth selected statements of operations data of the Company expressed as a percentage of net sales for the periods indicated:
FISCAL 2000 COMPARED TO FISCAL 1999
Net sales for fiscal 2000 increased by almost 8% to $330.5 million from $306.5 million in fiscal 1999. Comparable store sales increased over 9% from fiscal 1999 to fiscal 2000. Part of this increase was due to the fact that fiscal year 2000 had 53 weeks while fiscal year 1999 had the usual 52 weeks. If a 53-week period is used for both years, then comparable store sales increased by 7.4%. Gross profit on these sales increased to 34.7% in fiscal 2000 from 34.2% in fiscal 1999.
Selling and administrative expenses as a percentage of net sales were 30.4% in fiscal 2000 compared to 34.3% in fiscal 1999. This decrease is primarily due to increased sales along with planned reductions in store payroll and in advertising.
The Company had store pre-opening expenses of $571,000 in fiscal 2000, which related to the opening of three new megastores and the relocation of another store. Two of the new stores opened in fiscal 2000 while the third opened early in fiscal 2001. Store pre-opening expenses were $722,000 in fiscal 1999 resulting from the opening of two new stores during that fiscal year.
The Company recorded a store closing benefit of $751,000 in fiscal 2000. This is primarily due to the recognition of a rental allowance at the New Jersey megastore that was closed during the year. Rental allowances are normally amortized over the life of the lease, but when the store closed and the lease was settled, the remainder of rental allowance was recorded as income. No store closing provision or benefit was recorded in fiscal 1999.
The major components of miscellaneous income for fiscal 2000 and fiscal 1999 are set out in the table below:
Net interest expense for fiscal 2000 was $1.9 million, compared to $3.0 million in fiscal 1999. The decreased interest expense in fiscal 2000 was primarily related to lower average borrowings under the Company's credit facility, partially offset by an increase in interest rates.
The income tax benefit of $795,000 in fiscal 2000 was due to the elimination of the valuation allowance on the Company's deferred tax asset. This was partially offset by the recording of current year state taxes. No Federal Income tax benefit was recorded relative to the Company's loss before income taxes in fiscal 1999 due to the aforementioned valuation allowance.
In the first quarter of fiscal 2000, the Company converted from the retail method of accounting for inventory to the average cost method of accounting for inventory. The Company believes that the cost method is a preferable method for matching the cost of merchandise with the revenues generated. As part of the conversion process, the Company revalued it inventory. This resulted in an inventory write-up of $972,000 which is shown as a cumulative effect on the income statement. It is not possible to determine the effect of the change on income in any previously reported periods as no comparable average cost information was available.
In fiscal 2000, the Company had net income of $19.2 million before income taxes and accounting change compared to a loss of $3.6 million in fiscal 1999. The net income in fiscal 2000 includes gains of approximately
$6.8 million from the sale of owned property in Los Angeles and $700,000 from the sale of a leasehold, partially offset by a loss of $500,000 on the write- off of other fixed assets during the year. No unusual items of this type were included in the results for fiscal 1999.
FISCAL 1999 COMPARED TO FISCAL 1998
Net sales for fiscal 1999 decreased less than 1% to $306.5 million from $309.1 million in fiscal 1998. The net reduction in sales is due to stores closed in fiscal 1999 and fiscal 1998. Comparable store sales increased almost 1% between the two fiscal years. The conversion of some stores to the High Impact format in the shoe department aided in this comparable store sales increase. However, unusually warm weather in the fourth quarter hurt sales in the ski and apparel areas. Gross profit on these sales remained steady between the fiscal years.
Selling and administrative expenses as a percentage of net sales were 34.3% in fiscal 1999 compared to 34.4% in fiscal 1998. This decrease was primarily due to sales growth outpacing selling and administrative expense growth in on- going stores along with the closing of the more inefficient stores. Selling and administrative expenses in the overhead area also showed a decrease due to the capitalization of handling costs during the first few months of the fiscal year, but this decrease was offset by a corresponding decrease in the inventory cap reclassification.
The Company recorded an impairment loss of $3.0 million in fiscal 1998 related primarily to megastores in the Los Angeles/Orange County, California area. No such impairment was recorded in fiscal 1999.
The Company incurred store pre-opening expenses of $722,000 in fiscal 1999 which amounted to 0.2% of sales. No store pre-opening expenses were recorded in fiscal 1998 because the company did not open any new stores and incur those costs in that fiscal year.
There was no benefit from the store closing provision in fiscal 1999; the Company recorded a benefit of $499,000 in fiscal 1998. At the end of fiscal 1999, management believed that its store closing reserve was adequate.
The major components of miscellaneous income for fiscal 1999 and fiscal 1998 are set out in the table below:
Net interest expense for fiscal 1999 was $3.0 million, compared to $3.2 million in fiscal 1998. The decreased interest expense in fiscal 1999 was primarily related to reduced interest rates and lower average borrowings under the Company's credit facility.
The income tax benefit in fiscal 1998 included a benefit related to the refund of prior year income taxes of $686,000. No Federal Income tax benefit was recorded relative to the Company's loss before income taxes in either fiscal 1999 or fiscal 1998 due to valuation allowances recorded against the deferred tax assets generated by the losses.
In fiscal 1999, the Company had a loss of $3.6 million before income taxes compared to a loss of $2.1 million in fiscal 1998. The net loss in fiscal 1999 included $722,000 in costs related to the opening of two new stores. No new stores were opened in fiscal 1998. In addition, in fiscal 1998, the Company received a
net benefit of $1.6 million from unusual items, including a $3.0 million charge for impairment of long-lived assets, a $3.9 million gain from the sale of real estate and leasehold interests, and a $686,000 benefit related to refund claims filed for prior year federal income taxes.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The following table sets forth certain unaudited financial information for the Company for each of the quarterly periods in fiscal 2000 and fiscal 1999:
During fiscal 2000, 1999 and 1998, 31.9%, 30.6% and 30.3%, respectively, of the Company's sales were generated during the fourth quarter. As a result of the increased sales, the Company's operating income for the fourth quarter generally exceeded the operating income for any other quarter during these fiscal years.
COMPARABLE STORE SALES
The following table sets forth for the fiscal years 2000, 1999 and 1998 certain information regarding the percentage increase (decrease) in comparable store sales for a comparable 53-week period for fiscal 2000 and 52-week periods for 1999 and 1998.
Management attributes the increase in comparable store sales to improved performance in most categories, especially hard-lines and shoes. Part of the increase was also due to sales of scooters during the year.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 2000, operating activities provided cash totaling $30.1 million. The primary source of cash was net income coupled with a reduction in inventory. Investing activities provided cash of $6.2 million due to proceeds from the sale of owned property in Los Angeles, California and the sale of a leasehold on the Company's California warehouse. This was offset by the purchase of $4.5 million of property, plant and equipment which was partially funded by developer provided funds of $1.9 million. Financing activities used $36.3 million mainly through reduced utilization of the Company's credit facility.
Merchandise inventories decreased 13.5% to $81.4 million at the end of fiscal 2000 from $94.2 million at the end of fiscal 1999. In fiscal 1999, the Company installed a new merchandising management system and during system implementation, inventories increased. Through more efficient utilization of the system, however, the Company has reduced inventory to a more appropriate level.
During fiscal 2000, the Company wrote off assets that were no longer in use. For the most part, these assets were fully depreciated and the net write-off only amounted to approximately $500,000. Net additions to property, plant and equipment of $4.5 million were primarily related to the renovation and refurbishment of existing locations along with expenditures for two new stores that opened during the fiscal year.
The Company has a $65.0 million revolving credit facility with The CIT Group/Business Credit, Inc. Advances under the facility are based on a borrowing base formula, and are subject to certain loan reserves. The facility is secured primarily by inventory, accounts receivable and real estate. The credit agreement includes various restrictions, requirements and financial covenants.
The Company's primary source of liquidity in fiscal 2000 was the Company's credit facility, under which average borrowings during the year were $18.8 million. Because of the seasonal nature of its business and the build up in inventory for the Christmas shopping season, the amount of outstanding borrowings and letters of credit under the Company's credit facility is typically highest in November. However, in fiscal 2000 the Company reduced inventory during the year and its highest borrowing level was $42.5 million in February 2000. At February 3, 2001, the Company had recorded debt with respect to its credit facility of $368,000 and had outstanding letters of credit (used primarily to purchase certain of the Company's imported inventory) of $1,518,000. The debt is shown as a current liability because the maturity date is August 31, 2001. Due to the pending merger with Gart Sports, the Company does not plan to extend the facility or to seek replacement financing.
The Company believes that its existing revolving credit facilities together with cash flow from operations will be adequate to meet anticipated capital needs, including seasonal financing needs for fiscal 2001. Capital expenditures in fiscal 2001 are not expected to be material.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In the normal course of business, the financial position of the Company is exposed to minimal market risk associated with interest rate movements on borrowings under the Company's credit facility with The CIT Group/Business Credit, Inc. A one percent increase or decrease in the levels of interest rates on variable rate debt with all other variables held constant would not result in a material change to the Company's result of operations.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
The information discussed herein includes "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. All statements other than statements of historical facts included herein regarding expected direct store profits, returns on investment, estimated operating costs, comparable store sales, planned capital expenditures, store openings and closings, the Company's financial position, business strategy and other plans and objectives for future operations (typically using words and phrases such as "expect," "plan," "forecast," "anticipate," "should approximate," "believe," "intend" or similar expressions), are forward-looking statements. Although the Company believes that the expectations reflected in such forward- looking statements are reasonable, they do involve certain assumptions, risks and uncertainties, and the Company can give no assurance that such expectations will prove to have been correct. The Company's actual results could differ materially from those anticipated by such forward-looking statements as a result of certain factors, including: the Company's ability to manage its expansion efforts in existing and new markets, availability of suitable new store locations at acceptable terms, levels of discretionary consumer spending, availability of merchandise to meet fluctuating consumer demands, customer response to the Company's merchandise offerings, fluctuating sales margins,
increasing competition in sporting goods and apparel retailing, the results of financing efforts and financial market conditions. Many of such factors are beyond the Company's ability to control or predict. Readers are cautioned not to put undue reliance on forward-looking statements. The Company disclaims any intent or obligations to update these forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary financial information required by this Item 8 and included in this report are listed in the Financial Statement index on page 22.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
DIRECTORS
The following table and information sets forth the names of directors, the year from which each individual has served as a director, the age of each director and the principal occupation or employment of each director.
-------- (1) Member of the Audit Committee and the Compensation Committee.
Mr. Aronowitz has served as a Director of the Company since 1962. He also served as President and Chief Operating Officer of the Company until June 1989, at which time he resigned as an officer and Mr. Lubetkin was elected President. Mr. Aronowitz remains an employee of the Company and was originally hired by the Company in 1945. He is a cousin of Ms. Oshman.
Ms. Desenberg has been a Director of the Company since June 1997. Prior to that time, she was a Divisional Vice President-Merchandising Manager at the Company from April 1991 until December 1997. She is the daughter of Ms. Oshman and Mr. Lubetkin. Ms. Desenberg is the niece, and Ms. Oshman is the sister, of Judy O. Margolis, a principal shareholder of the Company.
Ms. Gilliam has been a Director of the Company since September 1998. She has been President of Gilliam & Co., business advisors since April 1997. Prior to that time, she was Director, Equity Research at Credit Suisse First Boston, where she was employed since 1975. She is also a director of Mayor's Jewelers, Inc., a jeweler located in Sunrise, Florida, Horizon Property Group of Chicago, Illinois, a real estate company specializing in outlet malls, and Harold's Stores, of Norman Oklahoma, a retail chain selling better grade apparel for both men and women.
Mr. Lubetkin has been an officer of the Company since 1966 and a Director since 1962. Mr. Lubetkin has overall responsibility for the Company's operations. He was originally hired by the Company in 1961.
Ms. Oshman was elected Chairman of the Board in April 1993 and has been a Director of the Company since 1979. Prior to becoming an employee of the Company in 1990, Ms. Oshman was involved in civic and charitable activities and management of her personal investments.
Mr. Sanchez has served as a Director of the Company since 2000, and he also served as a Director of the Company from 1996 through 1998. He currently serves as President of the General Partner of each of Highland Distributing Company, Ltd. and HiPal Partners, Ltd., which are beer importation and distribution companies in Houston and Palestine, Texas.
Mr. Simon has served as a Director of the Company since 1987. He is currently engaged in the private practice of law. He served as Vice President and General Counsel of Zale Corporation, a jewelry retailer, from 1978 until 1995.
EXECUTIVE OFFICERS
The following table sets forth the name and age of each executive officer of the Company and all positions and offices with the Company held by each person named:
Ms. Oshman was elected Chairman of the Board in April 1993 and has been a Director of the Company since 1979. She has been employed by the Company since 1990.
Mr. Lubetkin has been an officer of the Company since 1966 and a Director since 1962. Mr. Lubetkin has overall responsibility for the Company's operations. He was originally hired by the Company in 1961.
Mr. Rath was elected as a Vice President of the Company in 1992, Executive Vice President in April 1998 and Secretary in August 2000. In addition to Mr. Rath's primary responsibilities for the real estate and construction functions, in 1999, he assumed oversight responsibility for the store operations, distribution and e-commerce functions of the Company. Prior to becoming Vice President of the Company, Mr. Rath served as a Divisional Vice President for Corporate Development (1990-1992), and Director of Corporate Development (1988-1989). Before joining the Company, Mr. Rath was Director of Research and Strategic Planning for the Foley's Division of Federated Department Stores, Inc.
Mr. Martin joined the Company and was elected Senior Vice President, Chief Financial Officer in November 1999. He is primarily responsible for overseeing finance, systems, planning and sales strategy for the Company. Prior to joining the Company, from mid-1997 to November 1999, Mr. Martin managed his own company, Martin Strategic Consulting in St. Charles, Illinois. Prior to that, he was Executive Vice President and Chief Financial Officer with Sun Television and Appliances, Inc. in Columbus, Ohio for one year. Before that, he was Vice President of Strategy and Business Development for Sears, Roebuck and Co. in Hoffman Estates, Illinois since early 1993. Mr. Martin has also held various other financial planning positions with Humana Inc. and BATUS, Incorporated in Louisville, Kentucky, as well as Armco, Inc. in Middletown, Ohio.
Mr. McVey was elected Vice President and Director of Stores of the Company in March 1996 and Senior Vice President in June 1997. He is primarily responsible for store operations, including visual, print shop, traffic, loss prevention and warehousing. Since 1994, Mr. McVey has served as divisional Senior Vice President and Regional Manager. Prior to that time, he was regional Vice President from 1989 to 1994.
Mr. Miller was elected Treasurer in July 1996, Assistant Secretary in January 1997 and Vice President in May 1997. He originally joined the Company in 1976, serving in various accounting and treasury positions. In June of 1990, Mr. Miller left the Company and joined Profit Recovery Group, a contingency audit firm, where he was employed until September of 1993, at which time he rejoined the Company.
Mr. Randall joined the Company and was elected Vice President, General Merchandise Manager in May of 1998. He is primarily responsible for the merchandising and advertising functions of the Company. Prior to joining the Company, Mr. Randall was Vice President of Merchandising for Hills Department Stores, where he was employed for approximately four years. Prior to that, Mr. Randall was employed by Pace Warehouse Clubs for approximately two years and B.J.'s Wholesale Clubs for approximately six years in a merchant vice president capacity.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's officers, directors and persons who own more than ten percent of a registered class of the Company's securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "SEC"). Based solely upon a review of copies of reports filed with the SEC and written representations from certain of the Company's directors and executive officers that no other reports were required, the Company notes that all forms required to be filed during fiscal 2000 under Section 16(c) were timely filed.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION
The following table sets forth the amount of remuneration paid by the Company for the three fiscal years ended February 3, 2001, to the Chief Executive Officer and the other executive officers for whom disclosure is required.
SUMMARY COMPENSATION TABLE
- -------- (1) Includes $19,157 in 2000, $21,767 in 1999 and $27,574 in 1998 as incremental cost to the Company for a $700,000 non-interest bearing ten- year loan made in October 1990 by the Company to Mr. Lubetkin. The loan is being repaid in bi-weekly installments. The loan is secured by certain stock option rights. At the commencement of the last fiscal year, Mr. Lubetkin owed the Company $254,658. As of February 3, 2001, $92,760 remained outstanding under the loan. (2) The Company has a Deferred Compensation Agreement with Mr. Lubetkin under which Mr. Lubetkin will receive annual lump-sum retirement benefits. This Agreement was amended in 1998 to fix the amount at ten equal payments of $151,515 each. The first payment was made in January 1999. In the event of Mr. Lubetkin's death, such payments will be made to his designated beneficiary. In connection with this amendment, the insurance policy that had originally been purchased to fund payments under the Deferred Compensation Agreement was cancelled and the cash value of the policy was paid to the Company. (3) This grant is a repricing of previously granted stock options made in 1995 under the 1994 Omnibus Plan. (4) Mr. Martin became employed by the Company on November 1, 1999.
OPTION GRANTS
The following table sets forth the stock option grants by the Company for the fiscal year ended February 3, 2001, to the Chief Executive Officer and the other executive officers for whom disclosure is required. Ms. Oshman did not receive an option grant.
OPTION GRANTS IN LAST FISCAL YEAR - -------- (1) Pursuant to the option agreements, each of the options vest and become exercisable in the following amounts and at the following times: 34% on the date in 2001 when the Company publicly issues its release of earnings for its fiscal year 2000, and 33% on each of the first and second anniversaries of such date. (See Item 12
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Based on the records of the Company as of March 30, 2001, the following persons were known by the Company to own beneficially more than 5% of the Common Stock of the Company then outstanding:
- -------- (1) The persons listed have the sole power to vote and to dispose of the shares beneficially owned by them except as otherwise indicated. Does not include 11,802 shares owned by the Oshman Foundation. Marilyn Oshman and Judy O. Margolis are two of six trustees of the Oshman Foundation. Such trustees are vested with the power to vote and dispose of all assets of the Foundation, including such shares. These persons disclaim all beneficial ownership of shares owned by the Foundation. (2) Gart Sports Company and GSC Acquisition Corp., both with an address of 1000 Broadway, Denver, Colorado 80203, reported beneficial ownership of these shares on a Schedule 13D filed March 5, 2001. Pursuant to the voting agreements discussed in "Item 12. Security Ownership of Certain Beneficial Owners and Management--Change in Control," shareholders holding over 50% of the Company's outstanding stock have entered into voting agreements with Gart Sports wherein they have agreed to vote their shares in favor of the merger discussed in "Item 1. Business--Development of Business" and have granted Gart Sports an irrevocable proxy to vote the shares in favor of the merger. Based on a Form 8-K filed by Gart Sports dated February 22, 2001, Green Equity Investors, L.P., with an address of 11111 Santa Monica Boulevard, Suite 2000, Los Angeles, California 90025, controls 64% of the outstanding stock of Gart Sports Company. By virtue of such ownership, Green Equity Investors, L.P. may be deemed to control Gart Sports and, therefore, may be deemed to have beneficial ownership of the Common Stock subject to the voting agreements pursuant to which Gart Sports has an irrevocable proxy to vote the shares in favor of the merger. (3) Includes 315,300 shares held by Ms. Oshman as trustee for the benefit of her children. Does not include 422,300 shares held in trust by Mr. Stanton as trustee for the benefit of Ms. Oshman and her children. (4) Includes 257,800 shares held by Ms. Margolis as trustee for the benefit of her children. Does not include 298,432 shares held in trust by Mr. Lewis as trustee for the benefit of Ms. Margolis and her children. (5) These shares are held by Mr. Stanton as trustee for the benefit of Ms. Oshman and her children. (6) These shares are held by Mr. Lewis as trustee for the benefit of Ms. Margolis and her children.
BENEFICIAL OWNERSHIP OF COMMON STOCK OF DIRECTORS AND EXECUTIVE OFFICERS
The following table shows, as of March 30, 2001, the number of shares of Common Stock beneficially owned by each of the directors and the executive officers named in the Summary Compensation Table, and all executive officers and directors as a group:
- -------- *Less than 1% (1) The persons listed have the sole power to vote and to dispose of the shares beneficially owned by them except as otherwise indicated. The 11,802 shares owned by the Oshman Foundation, of which Mr. Aronowitz, Ms. Oshman and Mr. Lubetkin are three of the six trustees, are not included. Such trustees are vested with the power to vote and dispose of all assets of the Foundation, including such shares. These persons disclaim all beneficial ownership of shares owned by the Foundation. The number of shares include all options and restricted stock held by the persons listed, which options have become vested, and restricted stock restrictions and conditions have been deemed satisfied, as a result of the "change in control" that has been deemed to occur under the option plans because Gart Sports has become a beneficial owner of 30% or more of the Company's voting securities. (2) Includes 315,300 shares held by Ms. Oshman as trustee for the benefit of her children. Does not include 422,300 shares held in trust for the benefit of Ms. Oshman and her children. (3) Includes 100,000 shares of restricted Common Stock that have vested. Includes vested options to purchase 330,000 shares of Common Stock pursuant to the Company's 1994 Omnibus Plan. (4) Includes vested options to purchase 10,000 shares of Common Stock pursuant to the Company's 1994 Omnibus Plan. (5) Does not include 157,650 shares of Common Stock held in trust for the benefit of Ms. Desenberg. Includes 26,000 shares held by Ms. Desenberg as trustee or custodian for her children and another person. Includes 3,550 shares that are also held by Ms. Desenberg's husband. Includes vested options to purchase 10,000 shares of Common Stock pursuant to the Company's 1993 Non-Employee Director Stock Option Plan. (6) Includes vested options to purchase 10,000 shares of Common Stock pursuant to the Company's 1993 Non-Employee Director Stock Option Plan. (7) Excludes 64,344 shares owned by the Company's 401(k) Plan of which Messrs. Randall, Rath, Martin, and McVey are four of the six trustees. Such trustees share voting and dispositive power over such shares. These persons disclaim beneficial ownership of shares owned by the 401(k) Plan, except to the extent of their respective interests as participants in the 401(k) plan. (8) Includes vested options to purchase 45,000 shares of Common Stock pursuant to the Company's 1994 Omnibus Plan. (9) Includes vested options to purchase 60,000 shares of Common Stock pursuant to the Company's 1994 Omnibus Plan. (10) Includes vested options to purchase 45,000 shares of Common Stock pursuant to the Company's 1994 Omnibus Plan.
(11) Includes vested options to purchase 34,000 shares of Common Stock pursuant to the Company's 1994 Omnibus Plan. Includes 4,000 shares held by Mr. Rath as custodian for his children. (12) Includes vested options to purchase 8,000 shares of Common Stock pursuant to the Company's 1993 Non-Employee Director Stock Option Plan. (13) Includes vested options to purchase 20,000 shares of Common Stock pursuant to the Company's 1993 Non-Employee Director Stock Option Plan. (14) Includes restricted stock and vested options to purchase 676,000 shares of Common Stock held by officers and directors pursuant to the Company's 1993 Non-Employee Director Stock Option Plan and 1994 Omnibus Plan.
CHANGES IN CONTROL
The Company has entered into the Merger Agreement described in "Item 1. Business--Development of Business." In connection with the Merger Agreement, the following shareholders of the Company have each entered into a voting agreement dated as of February 21, 2001 pursuant to which they have agreed to vote all of their shares of Common Stock of the Company in favor of the merger: Marilyn Oshman, Alvin Lubetkin, Judy Margolis, Karen and Douglas Desenberg, Edward C. Stanton, III, Trustee, and Barry M. Lewis, Trustee. The shareholders have agreed pursuant to the voting agreements to vote, and have appointed Gart Sports as their irrevocable proxy to vote, their shares in favor of the merger and of certain related agreements and actions and against certain other enumerated actions or agreements. Subject to the terms and conditions of the voting agreements, the shareholders have also agreed to refrain from soliciting certain inquiries or proposals regarding the Company, to restrictions on transfer of their shares, to waive any rights of appraisal available in the merger with respect to their shares and to take or refrain from taking certain other actions.
As an inducement for Ms. Margolis, Mr. Stanton, and Mr. Lewis to enter into the voting agreements, Gart Sports has agreed in Indemnification Agreements dated as of February 21, 2001 to indemnify each such shareholders for any and all claims relating to the subject matter of the indemnification agreement, the voting agreement or the Merger Agreement. The right of such shareholders to be indemnified exists whether or not such claims are based in whole or in part on the shareholders' negligent acts or omissions
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In numerous transactions since 1959, the Company has leased both land and buildings for its executive offices, warehouses and one store in Houston, Texas from two trusts (the "Warehouse Trusts") of which Marilyn Oshman and Judy O. Margolis are the respective beneficiaries. Many of these leases are in effect at the present time. The aggregate rental payments from the Company to the Warehouse Trusts were approximately $398,860 during the fiscal year ended February 3, 2001. The existing leases were amended as of February 8, 1998, to extend the term to expire on November 3, 2003, and the annual rental was increased to $398,860. The amendment also provides for an option period to extend the term for an additional five years, at an annual rental rate of $478,632. The Company believes that the terms of all of these leases with the Warehouse Trusts are as favorable to the Company as the terms under which it could lease comparable facilities from an unaffiliated lessor in arm's length transactions. If the Company needs to further expand its offices or warehouse facilities, it may enter into other leases with the Warehouse Trusts. However, no lease will be entered into unless its terms are as favorable to the Company as those which could be obtained in arm's length negotiations for comparable premises.
In March 1988, the Company entered into an agreement with Flagship Associates providing for the lease by the Company of the land and building in Union, New Jersey where one of the Company's stores was operated from March 1990 to September 1993. Charles Lubetkin, Alvin Lubetkin's brother, is a general partner of Flagship Associates and has a 19.75% interest in such partnership. The lease is for a term of twenty years, provides for annual rental payments of $600,000 and is otherwise on terms the Company believes to be no less favorable than could be obtained from an unrelated third party. This lease was amended and assigned to an
unrelated third party in September 1993, and the Company remains liable on the lease. This unrelated third party filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code on December 16, 1997. The lease was subsequently assumed and assigned to a different unrelated third party on February 5, 1998.
As of February 3, 2001, the Company had two loans outstanding with its Chief Executive Officer, Mr. Lubetkin. One is a $700,000 non-interest bearing ten- year loan made in October 1990 by the Company to Mr. Lubetkin. In conjunction with Mr. Lubetkin's voluntary salary reduction in 1991, the Company modified the loan so that at the scheduled maturity of the note in September 2000, a lump sum would be due and payable. In July 2000, the Company permitted the payment of the lump sum on an installment basis in 82 bi-weekly installments. The loan is secured by certain stock option rights. As of March 30, 2001, $81,142 remained outstanding on the loan. On January 21, 2001, the Company made a second loan to Mr. Lubetkin to allow for the exercise of stock options previously granted to him. The principal amount of the loan is $13,750 with an interest rate of 5.9% payable in bi-weekly installments. As of March 30, 2001, $7,454 remained outstanding on the second loan. After the end of fiscal year 2000, on February 20, 2001, the Company made a third loan to Mr. Lubetkin for the payment of taxes resulting from the exercise of stock options. The principal amount of the loan is $28,345.63 to be paid upon consummation of the merger with Gart Sports at an interest rate of 5.18%. As of March 30, 2001, $28,345.63 remained outstanding on the third loan. The largest aggregate amount of loans outstanding to Mr. Lubetkin at any time during fiscal year 2000 was $254,658.
Andrew Lubetkin, the son of Ms. Oshman and Mr. Lubetkin, is employed by the Company and was paid $67,107 during fiscal year 2000.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The Company filed no reports on Form 8-K during the last quarter of the fiscal year ended February 3, 2001.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders Oshman's Sporting Goods, Inc.
We have audited the accompanying consolidated balance sheets of Oshman's Sporting Goods, Inc. (a Delaware corporation) and Subsidiaries as of February 3, 2001 and January 29, 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended February 3, 2001. 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 of America. 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 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 consolidated financial position of Oshman's Sporting Goods, Inc. and Subsidiaries as of February 3, 2001 and January 29, 2000, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended February 3, 2001, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note A5, the Company changed its method of pricing inventory for the year ended February 3, 2001.
We have also audited Schedule II of Oshman's Sporting Goods, Inc. and Subsidiaries for each of the three years in the period ended February 3, 2001. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein.
GRANT THORNTON LLP
Houston, Texas March 19, 2001
OSHMAN'S SPORTING GOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS FEBRUARY 3, 2001 AND JANUARY 29, 2000 (DOLLARS IN THOUSANDS)
See notes to consolidated financial statements.
OSHMAN'S SPORTING GOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
See notes to consolidated financial statements.
OSHMAN'S SPORTING GOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JANUARY 30, 1999, JANUARY 29, 2000 AND FEBRUARY 3, 2001 (IN THOUSANDS)
See notes to consolidated financial statements.
OSHMAN'S SPORTING GOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999 (DOLLARS IN THOUSANDS)
See notes to consolidated financial statements.
OSHMAN'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999
NOTE A--BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
GENERAL BUSINESS
Oshman's Sporting Goods, Inc. (the Company) operates a chain of retail sporting goods specialty stores. As of February 3, 2001, the Company operated 43 Supersports USA stores, 38 of which are megastores and 5 of which are mini- SuperSports USA stores and 15 traditional stores. Sales in Texas and California in 2000 accounted for 57% and 13% of retail sales. The majority of the Company's sales are either cash or through major national credit cards.
1.Fiscal Year
The Company's fiscal year ends on the Saturday closest to the end of January. Fiscal years 2000, 1999, and 1998 ended on February 3, 2001, January 29, 2000, and January 30, 1999, respectively.
2.Principles of Consolidation
The consolidated financial statements include the accounts of Oshman's Sporting Goods, Inc. and its subsidiaries, all wholly-owned. In consolidation, all significant intercompany transactions have been eliminated.
3.Use of Estimates
In preparing the financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
4.Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
5.Merchandise Inventories
Effective January 30, 2000, the Company changed from the retail method of accounting for inventory to the average cost method. The Company believes the cost method is a preferable method for matching the cost of merchandise with the revenues generated. The cumulative effect of this change was an increase in the inventory value of $972,000. It is not possible to determine the effect of the change on income in any previously reported fiscal periods as no comparable average cost information was available.
6.Property, Plant and Equipment
The Company applies SFAS No. 121, Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of, which requires that long-lived assets that are held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When it is determined that an asset's estimated future net cash flows will not be sufficient to recover its carrying amount, an impairment charge must be recorded to reduce the carrying amount for the asset
OSHMAN'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999
to its estimated fair value. Impairment charges of $3,000,000 were taken in 1998 to reduce the carrying value of certain leasehold improvements and fixtures to their estimated realizable value.
Depreciation and amortization are provided principally by the straight-line method based upon estimated useful lives of 3 to 10 years for furniture, fixtures and equipment, 3 to 30 years for leasehold improvements and 20 to 40 years for buildings. Estimated useful lives of leasehold improvements represent the remaining term of the lease in effect at the time the improvements are made.
7.Amortization of Other Assets
Loan acquisition costs are being amortized over the term of the related debt using the straight-line method, which approximates the interest method.
8.Deferred Rental Allowances
The Company may receive payments from landlords as inducements to sign new store leases. The construction costs of real property improvements are offset by this landlord funding. Deferred rental allowances represent payments in excess of the costs of the real property improvements and are recognized as a reduction of rent expense over the life of each applicable lease.
9.Income Taxes
Provision has been made for deferred income taxes applicable to the temporary differences between earnings for financial reporting purposes and taxable income. Principal temporary differences include differences in accounting for depreciation and capitalization of certain inventory costs.
10.Pre-opening Expense
Expenses (other than property, plant and equipment) associated with the opening of new stores are charged to expense as incurred.
11.Advertising Costs
Advertising costs consist principally of newspaper and television advertisements and are recorded net of any advertising incentives earned from vendors. Advertising costs were $9,019,000, $9,990,000 and $11,376,000 in fiscal years 2000, 1999 and 1998.
12.Store Closing Provision
The Company provides a provision for store closings when the decision to close a store is made. The provision consists of the incremental costs which are expected to be incurred, including future net lease obligations, employee costs and other direct store closing costs. Inventory valuation adjustments, as necessary, are recorded as additional cost of goods sold and as a direct reduction to inventory. If the Company determines that the provision is no longer necessary, it is recognized as income at that time.
13.Earnings Per Share
Basic earnings per share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Dilutive earnings per share is calculated by dividing
OSHMAN'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999 net income available for common stockholders by the weighted average number of common shares and potential dilutive common shares outstanding. Stock options may be potential dilutive common shares and are therefore considered in the earnings per share calculations, if dilutive. The number of potential dilutive common shares is determined using the treasury stock method.
14. Revenue Recognition
Revenue from merchandise sales is recognized when merchandise is sold. Revenue from service sales is recognized when the services are performed. In consideration of guidance issued by the Securities and Exchange Commission under Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), the Company changed its method of accounting for layaway sales during the first quarter of fiscal 2000. The accounting change did not have a material impact on annual or quarterly results of operations or financial position.
15. Reclassifications
Certain amounts in prior financial statements have been reclassified to conform to the fiscal year 2000 financial statement presentation.
NOTE B--PROPERTY, PLANT AND EQUIPMENT
The cost of property, plant and equipment at the end of the year consists of the following:
NOTE C--NOTE RECEIVABLE
The Company has a non-interest bearing note receivable from the Company's Chief Executive Officer. At the end of fiscal years 2000 and 1999, the balance of the note was $93,000 and $255,000, respectively. The note is payable in bi- weekly installments of approximately $2,905. The note is collateralized by Company stock options.
NOTE D--LONG-TERM OBLIGATIONS
Long-term obligations at the end of the year consist of the following:
OSHMAN'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999
Following are maturities of long-term obligations for each of the next five years and thereafter:
The Company has an agreement providing for a $65,000,000 revolving credit facility with The CIT Group/Business Credit, Inc. (CIT). Advances under the facility are based on a borrowing base formula and subject to certain loan restrictions, and the facility is secured primarily by inventory, accounts receivable and real estate. The credit agreement includes various requirements, financial covenants and restrictions, including a restriction on the payment of dividends.
At the end of fiscal 2000, advances under the credit facility bore interest at the prime rate (9.5% at February 3, 2001) plus 0.375% and any unused borrowing capacity is subject to a line of credit fee of .25%. The Company could, under certain circumstances, elect to have interest computed at a rate of the London Interbank Offered Rate (LIBOR, 5.42% to 5.57% at February 3, 2001) plus 2.5%. The credit facility expires August 31, 2001.
At the end of fiscal years 2000 and 1999, outstanding letters of credit were $1,518,000 and $582,000, respectively.
NOTE E--INCOME TAXES
The Company's tax expense (benefit) consisted of the following:
OSHMAN'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999
A reconciliation of income tax benefits on net earnings (losses) before income taxes computed at the statutory Federal income tax rate and income taxes reported in the consolidated statements of operations is as follows:
Deferred tax assets and liabilities consist of the following:
In fiscal 1998, the Company recorded Federal income tax refunds of $686,000, of which $219,000 plus interest of $3,000 was received by year-end, resulting from the application of net operating loss carrybacks. Approximately $179,000 of the tax refunds in 1998 relate to the benefit of carrying back net operating losses to periods for which the tax rates exceeded the current 34% Federal income tax rate.
OSHMAN'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999
Deferred tax assets were reduced by valuation allowances of $-0- and $9,307,000 at February 3, 2001 and January 29, 2000, respectively. In 2000, the Company reduced its valuation allowance by $9,307,000 as a result of current year operations, the reduction in deferred tax assets and the reversal of the remaining valuation allowance due to the fact that management now believes that more likely than not, the deferred tax assets will be realized in the future. In 1999, the Company increased its valuation allowance by $1,256,000 due to net deferred tax assets generated during the year.
The Company has net operating loss carryforwards of approximately $7,100,000. The carryforwards expire as follows:
Additionally, the Company has job tax credit carryforwards of $770,000 expiring from 2008 to 2011 and alternative minimum tax credit carryforwards of approximately $440,000.
NOTE F--COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company conducts certain of its operations in owned facilities with its remaining operations being conducted in facilities leased under noncancelable operating leases. Rentals of the retail locations are based on minimum required rentals and/or, in certain instances, contingent rentals based on a percentage of sales. Some leases contain renewal options with provision for increased rentals during the renewal term.
Future minimum rental payments under operating leases at the end of 2000 are as follows:
Minimum payments have not been reduced by minimum sublease rental income of $9,463,000 due in the future under noncancelable subleases.
OSHMAN'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999
Total rental expense entering into the determination of net earnings (loss) is as follows:
Certain leases between the Company and two trusts, which are for the benefit of two shareholders, provide for total minimum annual rentals of $399,000 through November, 2003.
PROFIT SHARING PLAN
The Company and its subsidiaries participate in a discretionary employee profit sharing plan. The Plan is a 401(k) Retirement Savings Plan covering substantially all employees. Under the Plan, participating employees can allocate up to 15% of their salary. The Company may make discretionary contributions to the Plan. The Company made no contributions to the Plan in 2000, 1999 or 1998.
SEVERANCE PAY BONUS AGREEMENTS
The Company has adopted severence pay bonus programs for certain executive officers that become operative only upon a change in control of the Company. Compensation which may be payable under these agreements has not been accrued in the consolidated financial statements as a Change in Control, as defined in the programs, had not occurred as of the end of fiscal 2000. See Note K--Sale of Company to Gart Sports.
DEFERRED COMPENSATION AGREEMENT
The Company has a deferred compensation agreement with an executive officer under which the officer will receive an estimated annual retirement benefit of $151,515 after he attains age 65. Payments began in 1998 and will continue for an additional seven years. This agreement amended a previous deferred compensation agreement between the Company and the executive officer, which was funded by a purchased life insurance policy on the life of the executive. As part of the revised agreement, the Company cancelled the life insurance policy for the full cash value at the time of cancellation. If the executive dies before all payments are made, the remaining payments will be made to his designated beneficiary under the same payment schedule.
LITIGATION
Various legal claims have arisen in the normal course of business, which, in the opinion of management, will not have a material adverse effect on the Company's financial statements.
NOTE G--STOCKHOLDERS' EQUITY
CAPITAL STOCK
Authorized capital stock consists of 500,000 shares of $1 par value preferred stock and 15,000,000 shares of $1 par value common stock. No preferred stock has been issued. Common stock shares issued were 5,913,000 at the end of fiscal 2000 and 5,830,000 at the end of fiscal 1999 and 1998. Shares outstanding were 5,825,000 at the end of fiscal 2000 and 5,827,000 at the end of fiscal 1999 and 1998.
OSHMAN'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999
COMMON STOCK OPTION PLANS
The Company's 1994 Omnibus Plan authorizes the grant of Incentive Awards for up to 1,050,000 shares of common stock to key employees of the Company. Awards may be in the form of stock options, stock appreciation rights, restricted stock, performance units, performance shares or other stock based awards and certain additional payments in the amount of Federal income taxes payable by a grantee and relating to an award, and are to be determined by a committee of the Board of Directors.
Stock options granted may be either nonqualified options or incentive stock options and may include reload options. Exercise price will be determined by the committee; however, in the case of incentive stock options, the exercise price shall not be less than 100% of the market value of the shares at the time the options are granted. No option is exercisable after the expiration of ten years from the date of grant.
Additionally, the Company's 1993 Non-Employee Director Stock Option Plan provides for the issuance of options to non-employee directors of the Company at an option price equal to the average of the closing prices of the last five trading days preceding and including the date of grant. Unexercised options expire no later than ten years from date of grant or three months after the termination of the directorship, extended to one year if the termination of directorship is caused by death or disability.
The Company records an expense based on the difference between the option price and fair market value of the stock at date of grant, amortized over the vesting period of the option. Upon the exercise of options, the proceeds are credited to the common stock account to the extent of the par value of the shares issued, and the proceeds in excess of the par value are credited to additional capital.
RESTRICTED STOCK AWARD
The Company granted 100,000 restricted shares of the Company's common stock to the Company's current Chief Executive Officer in 1994 pursuant to the 1994 Omnibus Plan. As of the end of fiscal 2000, the grantee had no rights as a stockholder with respect to the restricted shares, including no right to transfer or receive dividends in most circumstances. Grantee is 100% vested in restricted shares. Restrictions on the stock end upon retirement or in the event of death or disability of the grantee, at the time of a Change in Control of the Company (as defined in the Plan), termination of grantee by the Company without cause and termination by grantee for good reason. Additionally, the grant provides that the Company will pay the grantee the Federal tax benefit (if any) realized by the Company from the tax deduction for compensation resulting from the restricted stock grant. Expense recorded for the grant was approximately $-0-, $-0- and $39,000 in 2000, 1999, and 1998, respectively.
OSHMAN'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999
FASB STATEMENT 123 DISCLOSURE
The Company applies APB 25 and related Interpretations in accounting for stock-based compensation. Had compensation costs been determined based on the fair value at the grant dates for awards consistent with the method of FASB Statement 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted- average assumptions used for the grants issued in 2000, 1999 and 1998:
A summary of the Company's stock options and warrants at the end of fiscal 2000, 1999 and 1998 and changes during those fiscal years is presented below:
The weighted-average fair value of compensatory options granted during fiscal 2000, 1999 and 1998 was $1.75, $1.45 and $4.02 per option, respectively.
OSHMAN'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999
The following table summarizes information about options and warrants outstanding at February 3, 2001:
NOTE H--EARNINGS (LOSS) PER SHARE
The following data show the amounts used in computing earnings per share (EPS) and the weighted average number of shares of dilutive potential common stock.
NOTE I--STORE CLOSING RESERVE
The Company has accrued store closing reserves to cover estimated lease costs and other incremental closing costs of stores closed or targeted to close. Management believes that these reserves are adequate.
NOTE J--MISCELLANEOUS INCOME (EXPENSE)
Miscellaneous income (expense) consist of the following:
OSHMAN'S SPORTING GOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999
Fees from foreign licenses represent annual royalties from license agreements which provide the licensee the ability to use the Company's name and to import and sell the Company's products. Revenue under the license agreements includes annual royalties based on the greater of a minimum or a percentage of sales in the licensee's stores and fees related to sales to the licensee.
NOTE K--SALE OF COMPANY TO GART SPORTS
On February 22, 2001, the Company announced that it had entered into an Agreement and Plan of Merger ("Merger Agreement"), dated as of February 21, 2001, with Gart Sports Company ("Gart Sports") and GSC Acquisition Corp., a wholly-owned subsidiary of Gart Sports ("Acquisition"), pursuant to which the Company will merge with and into Acquisition, with the result that the surviving corporation will be a wholly-owned subsidiary of Gart. Pursuant to the Merger Agreement and subject to certain adjustments set forth therein, the Company's shareholders will receive $7.00 cash and 0.55 shares of Gart Sports's common stock for each share of the Company's common stock. The transaction is subject to customary conditions, including the approval of the merger by the Company's shareholders, the approval of the issuance of Gart Sports common stock to the Company's shareholders by the shareholders of Gart Sports, and the effectiveness of a registration statement for the shares of Gart Sports to be issued in the transaction.
SUPPLEMENTAL INFORMATION
OSHMAN'S SPORTING GOODS, INC. AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) YEARS ENDED FEBRUARY 3, 2001 AND JANUARY 29, 2000 (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
SCHEDULE II
OSHMAN'S SPORTING GOODS, INC. AND SUBSIDIARIES
ALLOWANCE FOR DOUBTFUL RECEIVABLES YEARS ENDED FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999 (IN THOUSANDS)
- -------- (A) Receivables charged off, net of recoveries.
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.
OSHMAN'S SPORTING GOODS, INC.
By: /s/ Steven Martin ------------------------------- Name:Steven Martin Title: Senior Vice President, Chief Financial Officer
Date: April 4, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on April 4, 2001, by the following persons on behalf of the Registrant and in the capacities indicated.
/s/ Marilyn Oshman /s/ Alvin N. Lubetkin - ---------------------------------- ---------------------------------- Marilyn Oshman Alvin N. Lubetkin Chairman of the Board of Directors Vice Chairman of the Board of Directors, Chief Executive Officer, President (Principal Executive Officer) and Director
/s/ Marvin Aronowitz /s/ Margaret A. Gilliam - ---------------------------------- ---------------------------------- Marvin Aronowitz Margaret A. Gilliam Director Director
/s/ Dolph B.H. Simon /s/ Steven Martin - ---------------------------------- ---------------------------------- Dolph B.H. Simon Steven Martin Director Senior Vice President, Chief Financial Officer (Principal Accounting and Financial Officer)
/s/ Manuel A. Sanchez, III /s/ Karen Desenberg - ---------------------------------- ---------------------------------- Manuel A. Sanchez, III Karen Desenberg Director Director
INDEX TO EXHIBITS
- -------- *Management contract or compensatory plan or arrangement. +Filed herewith.