<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
Date of Report (Date of earliest event reported) July 2, 1998
------------------------------
Just For Feet, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 000-23570 63-0734234
- --------------------------------------------------------------------------------
(State or other (Commission File Number) (IRS Employer
jurisdiction Identification No.)
of incorporation)
7400 Cahaba Valley Road, Birmingham, Alabama 35242
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (205) 408-3000
--------------------------
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Businesses Acquired:
Filed as a part of this report are the required financial statements for
Sneaker Stadium, Inc.
(b) Pro Forma Financial Information:
Filed as a part of this report is the required pro forma financial
information relative to the acquisition of Sneaker Stadium, Inc.
(c) Exhibits:
<TABLE>
<C> <S>
2.4 Agreement and Plan of Merger dated as of July 2, 1998 among Just For
Feet, Inc., a Delaware corporation, as Purchaser, JFF Merger Corp., a
Delaware corporation and wholly-owned subsidiary of Purchaser, and
Sneaker Stadium, Inc., a Delaware corporation*
10.17 Contingent Payment Agreement dated as of July 2, 1998 among Just For
Feet, Inc., a Delaware corporation, for the benefit of Banque Nationale
de Paris, for itself and as agent for itself and for Merrill Lynch
Senior Floating Rate Fund, Inc., Merrill Lynch Prime Rate Portfolio and
Merrill Lynch Debt Strategies Portfolio, and subject to the limitations
provided therein, for the benefit of the persons or entities listed on
Schedule I thereto*
10.18 Common Stock and Warrant Purchase Agreement dated as of July 2, 1998
between Just For Feet, Inc. and Sneaker Guarantee LLC*
23.1 Consent of Arthur Andersen LLP
</TABLE>
- --------
* previously filed
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
JUST FOR FEET, INC.
By: /s/ Eric L. Tyra
-----------------------------------
Name: Eric L. Tyra
Title: Executive Vice President &
Chief Financial Officer
Dated: July 27, 1998
3
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
SNEAKER STADIUM, INC. AND SUBSIDIARY:
Consolidated Financial Statements as of February 1, 1998 and February 2,
1997 and for the years ended February 1, 1998, February 2, 1997 and
January 28, 1996, together with the Auditors' Report................... 5
Consolidated Unaudited Interim Financial Statements as of May 3, 1998
and for the thirteen weeks ended May 3, 1998 and May 4, 1997........... 24
JUST FOR FEET, INC. AND SUBSIDIARIES:
Unaudited Pro Forma Combined Financial Statements as of April 30, 1998
and for the three months ended April 30, 1998 and the year ended
January 31, 1998....................................................... 28
</TABLE>
4
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sneaker Stadium, Inc.:
We have audited the accompanying consolidated balance sheets of Sneaker
Stadium, Inc. (a Delaware corporation) and subsidiary as of February 1, 1998
and February 2, 1997, and the related consolidated statements of operations,
redeemable preferred stock and shareholders' deficit and cash flows for the
years ended February 1, 1998, February 2, 1997 and January 28, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sneaker
Stadium, Inc. and subsidiary as of February 1, 1998 and February 2, 1997, and
the results of their operations and their cash flows for the years ended
February 1, 1998, February 2, 1997 and January 28, 1996 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred significant operating losses
from inception and incurred a loss of $19,771,000 for the year ended February
1, 1998. Significant losses continue to be incurred subsequent to February 1,
1998. In addition, due to expected events of default, certain debt obligations
have been classified as current liabilities. These factors raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 1. The financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
May 21, 1998
5
<PAGE>
SNEAKER STADIUM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 2,
1998 1997
------------ ------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 918,298 $ 949,847
Accounts receivable.............................. 878,957 998,589
Inventories, net................................. 48,980,329 35,965,782
Prepaid expenses and other....................... 1,456,513 1,349,375
------------ ------------
Total current assets........................... 52,234,097 39,263,593
Property and equipment, net........................ 14,522,075 11,815,368
Debt issuance costs, net........................... 1,454,236 1,750,000
Other assets....................................... 1,767,512 1,818,083
------------ ------------
$ 69,977,920 $ 54,647,044
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable................................. $ 11,807,290 $ 11,841,056
Accrued expenses and other....................... 6,031,666 3,801,600
Current portion of capitalized lease
obligations..................................... 674,449 436,076
Line of credit................................... 34,516,636 --
Term loan payable................................ 21,988,634 --
New store facility note.......................... 5,000,000 --
------------ ------------
Total current liabilities...................... 80,018,675 16,078,732
------------ ------------
Line of credit..................................... -- 13,657,256
------------ ------------
Term loan payable.................................. -- 21,376,166
------------ ------------
Deferred rent...................................... 2,700,970 1,443,837
------------ ------------
Capitalized lease obligations...................... 574,760 920,814
------------ ------------
Subordinated indemnification notes................. 7,500,000 7,500,000
------------ ------------
Subordinated convertible promissory notes.......... 5,266,667 --
------------ ------------
Series A perpetual preferred stock................. 41,699,795 41,531,900
------------ ------------
Commitments and contingencies (Note 11)
Shareholders' deficit:
Common stock, $.01 par value, 55,000,000 shares
authorized, 17,101,752 and 17,060,752 shares
issued and outstanding.......................... 171,018 170,608
Additional paid-in capital....................... (24,723,004) (24,740,494)
Accumulated deficit.............................. (43,230,961) (23,291,775)
------------ ------------
Total shareholders' deficit.................... (67,782,947) (47,861,661)
------------ ------------
$ 69,977,920 $ 54,647,044
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
SNEAKER STADIUM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
---------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Net sales............................ $132,843,602 $ 68,270,455 $20,410,800
Cost of goods sold................... 87,952,434 42,899,923 13,080,953
------------ ------------ -----------
Gross profit....................... 44,891,168 25,370,532 7,329,847
------------ ------------ -----------
Selling, general and administrative
expenses............................ 58,240,045 32,201,431 12,778,126
Recapitalization costs and other re-
lated expenses...................... -- 3,861,638 --
------------ ------------ -----------
58,240,045 36,063,069 12,778,126
------------ ------------ -----------
Operating loss..................... (13,348,877) (10,692,537) (5,448,279)
Interest expense..................... (6,439,293) (608,724) (63,900)
Interest income...................... 16,879 142,721 155,578
------------ ------------ -----------
Net loss............................. $(19,771,291) $(11,158,540) $(5,356,601)
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
SNEAKER STADIUM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
SHAREHOLDERS' DEFICIT
REDEEMABLE SERIES A ----------------------------------------------------------------
CONVERTIBLE PERPETUAL ADDITIONAL STOCK
PREFERRED PREFERRED COMMON PAID-IN ACCUMULATED SUBSCRIPTIONS
STOCK STOCK STOCK CAPITAL DEFICIT RECEIVABLE TOTAL
------------ ----------- -------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 29,
1995................... $ 8,707,631 $ -- $ 41,500 $ 166,000 $ (2,278,864) $(171,398) $ (2,242,762)
Sale of Common Stock... -- -- 2,400 9,600 -- (9,600) 2,400
Sale of Redeemable
Convertible Preferred
Stock, net of
expenses.............. 25,696,663 -- -- -- (56,648) -- (56,648)
Accretion of Redeemable
Convertible Preferred
Stock redemption
value................. 1,441,897 -- -- -- (1,441,897) -- (1,441,897)
Payment of stock
subscriptions......... -- -- -- -- -- 5,398 5,398
Net loss............... -- -- -- -- (5,356,601) -- (5,356,601)
------------ ----------- -------- ------------ ------------ --------- ------------
Balance, January 28,
1996................... 35,846,191 -- 43,900 175,600 (9,134,010) (175,600) (9,090,110)
Sale of Common and
Series A Perpetual
Preferred Stock....... -- 11,739,591 23,606 3,814,309 -- -- 3,837,915
Accretion of Redeemable
Convertible Preferred
Stock redemption
value................. 2,999,225 -- -- -- (2,999,225) -- (2,999,225)
Dividend paid and
conversion of
Redeemable Convertible
Preferred Stock into
Common and Series A
Perpetual Preferred
Stock................. (38,845,416) 25,975,292 109,976 (29,006,497) -- -- (28,896,521)
Redemption of Common
Stock with Series A
Perpetual Preferred
Stock................. -- 2,285,113 (14,056) (2,271,057) -- -- (2,285,113)
Exercise of stock
options............... -- -- 5,928 146,649 -- -- 152,577
Payment of stock
subscriptions......... -- -- -- -- -- 175,600 175,600
Issuance of Common and
Series A Perpetual
Preferred Stock as
payment for services.. -- 296,100 1,254 202,646 -- -- 203,900
Issuance of Common and
Series A Perpetual
Preferred Stock
warrants to bank...... -- 1,237,100 -- 2,386,734 -- -- 2,386,734
Grant of Common Stock
options to a
consultant............ -- -- -- 204,700 -- -- 204,700
Repurchase of
fractional shares..... -- (1,296) -- 1,296 -- -- 1,296
Payment to extinguish
warrants.............. -- -- -- (394,874) -- -- (394,874)
Net loss............... -- -- -- -- (11,158,540) -- (11,158,540)
------------ ----------- -------- ------------ ------------ --------- ------------
Balance, February 2,
1997................... -- 41,531,900 170,608 (24,740,494) (23,291,775) -- (47,861,661)
Exercise of stock
options............... -- -- 410 2,490 -- -- 2,900
Issuance of non-voting
Common Stock warrants
to noteholders........ -- -- -- 15,000 -- -- 15,000
Accretion of Series A
Perpetual Preferred
Stock redemption
value................. -- 167,895 -- -- (167,895) -- (167,895)
Net loss............... -- -- -- -- (19,771,291) -- (19,771,291)
------------ ----------- -------- ------------ ------------ --------- ------------
Balance, February 1,
1998................... $ -- $41,699,795 $171,018 $(24,723,004) $(43,230,961) $ -- $(67,782,947)
============ =========== ======== ============ ============ ========= ============
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE>
SNEAKER STADIUM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
----------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................... $(19,771,291) $(11,158,540) $ (5,356,601)
Adjustments to reconcile net loss
to net cash used in operating
activities--
Imputed interest on debt......... 612,468 -- --
Depreciation and amortization.... 3,373,253 1,602,174 646,240
Amortization of debt issuance
costs........................... 295,764 -- --
Noncash interest expense......... 181,667 -- --
Noncash financing expense........ 100,000 -- --
Loss on disposal of property and
equipment....................... -- 59,547 --
Loss on store closings........... 1,924,507 -- --
Provision for deferred rent...... 1,512,749 1,052,923 323,374
Common and Preferred Stock and
options issued for services..... -- 704,700 --
Changes in operating assets and
liabilities--
(Increase) decrease in--
Accounts receivable............ 119,632 (351,715) (608,251)
Inventories.................... (13,014,547) (23,642,101) (9,776,874)
Prepaid expenses and other..... (107,138) (990,457) (348,419)
Other assets................... 239,571 (1,313,140) (280,955)
Increase (decrease) in--
Accounts payable............... (1,040,867) 7,387,562 1,067,691
Accrued expenses and other..... 1,570,285 2,705,220 839,008
------------ ------------ ------------
Net cash used in operating
activities.................. (24,003,947) (23,943,827) (13,494,787)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and
equipment......................... (7,226,246) (7,712,626) (1,821,019)
------------ ------------ ------------
Cash flows from financing activities:
Increase in bank overdrafts........ 1,007,101 1,203,908 --
Payments on capitalized lease
obligations....................... (481,737) (507,569) (253,999)
Payment of debt issuance costs..... -- (1,750,000) --
Proceeds from issuance of term
loan.............................. -- 25,000,000 --
Proceeds from subordinated
indemnification notes............. -- 7,500,000 --
Net proceeds from line of credit... 20,859,380 13,657,256 --
Proceeds from new store facility
note.............................. 5,000,000 -- --
Proceeds from subordinated
convertible promissory notes...... 4,811,000 -- --
Net proceeds from sales of Common
Stock............................. -- 3,837,915 2,400
Net proceeds from sales of
Redeemable Convertible Preferred
Stock............................. -- 10,249,992 18,390,023
Net proceeds from sale of Series A
Perpetual Preferred Stock......... -- 11,739,591 --
Dividends paid on Redeemable
Convertible Preferred Stock....... -- (41,766,645) --
Proceeds from subscriptions
receivable........................ -- 175,600 5,398
Net proceeds from exercise of
options........................... 2,900 152,577 --
Net payment to extinguish warrant.. -- (394,874) --
------------ ------------ ------------
Net cash provided by
financing activities........ 31,198,644 29,097,751 18,143,822
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents.................... (31,549) (2,558,702) 2,828,016
Cash and cash equivalents, beginning
of year............................. 949,847 3,508,549 680,533
------------ ------------ ------------
Cash and cash equivalents, end of
year................................ $ 918,298 $ 949,847 $ 3,508,549
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
9
<PAGE>
SNEAKER STADIUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND:
Sneaker Stadium, Inc. (the Company) was incorporated in Delaware on February
23, 1994, and sells athletic footwear, activewear and related accessories
through Company-owned stores. The first store opened in November 1994, and the
Company operated 38 stores as of February 1, 1998 in New York, New Jersey,
Pennsylvania, Connecticut, North Carolina and Virginia.
The Company has incurred losses since its inception and expects to incur a
loss for the year ending January 31, 1999. There can be no assurance that the
Company will achieve and maintain profitability, or that its historical
revenue growth will be sustained. The financial statements do not include any
adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
comply with the terms of its financing agreements and ultimately to attain
profitability. Management continues to work with its lenders to waive expected
events of default (see Notes 5 and 6) and will seek equity investments as
required. See Note 13 regarding the sale of the Company, which may result in
significant adjustments to the carrying value of the Company's assets and
liabilities.
The Company operates in a highly competitive sector of the retail industry
and is subject to changing merchandise trends and consumer demands. All of the
Company's stores are located in the Northeast and Mid-Atlantic regions of the
United States. In addition, the Company's business relies significantly on
certain vendors (see Note 2).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Sneaker
Stadium, Inc. and its wholly-owned subsidiary, SNKR Holding Corp. All
significant intercompany transactions and accounts have been eliminated in
consolidation.
FISCAL YEAR-END
The Company operates under a 52-53-week fiscal year ending the Sunday
nearest January 31. The year ended February 1, 1998 (fiscal 1997) includes 52
weeks of operations, the year ended February 2, 1997 (fiscal 1996) includes 53
weeks of operations and the year ended January 28, 1996 (fiscal 1995) includes
52 weeks of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RELIANCE ON KEY VENDORS
The Company's business is dependent to a significant degree upon its ability
to purchase brand-name merchandise at competitive prices. For fiscal 1997,
1996 and 1995, approximately 68%, 66% and 57%, respectively, of the Company's
merchandise was purchased from five vendors, including approximately 33%,
10
<PAGE>
SNEAKER STADIUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
34% and 28%, respectively, purchased from a single vendor. The loss of certain
key vendors could have a material adverse effect on the Company's business.
REVENUE RECOGNITION
Revenues for retail sales are recognized at the time of sale. The Company
maintains an incentive program for frequent buyers of footwear. Estimated
future costs associated with providing incentives under this program were
$1,746,376 and $1,197,867 as of February 1, 1998 and February 2, 1997,
respectively, and are included in accrued expenses and other.
STATEMENTS OF CASH FLOWS INFORMATION
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents for the
purpose of determining cash flows. The Company paid $5,867,165, $489,375 and
$78,628 of interest expense in fiscal 1997, 1996 and 1995, respectively.
Capitalized lease obligations of $374,056, $669,503 and $1,448,955 were
incurred on equipment leases entered into in fiscal 1997, 1996 and 1995,
respectively.
RESTRICTED CASH
The Company has pledged $575,000 of certificates of deposit as security
deposits on certain leases as of February 1, 1998. All certificates are
subject to renewal and, therefore, are included in other assets.
INVENTORIES
Inventories consist of athletic and outdoor footwear and clothing and are
valued at the lower of cost (weighted average that approximates first-in,
first-out) or market. Costs associated with certain purchasing and merchandise
handling activities are included in inventories. Such costs were $3,820,690,
$1,884,652 and $549,195 in fiscal 1997, 1996 and 1995, respectively. Costs
included in inventories were $1,873,647 and $1,050,903 at February 1, 1998 and
February 2, 1997, respectively. The amounts shown on the balance sheets are
net of reserves of $1,031,822 and $460,399 at February 1, 1998 and February 2,
1997, respectively.
STORE PREOPENING COSTS
Certain costs incurred prior to the opening of new stores are charged to
expense during the first month that the stores are open for business. In April
1998, the Financial Accounting Standards Board (FASB) issued Statement of
Position (SOP) No. 98-5 which requires that costs of start-up activities and
organization costs be expensed as incurred. The SOP is effective for fiscal
years beginning after December 15, 1998. At February 1, 1998, there were no
amounts capitalized for the opening of new stores.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Additions and improvements are
capitalized, while repairs and maintenance are charged to expense.
Depreciation is provided over the estimated useful lives of the assets using
the straight-line method. The estimated lives are three to ten years for
furniture, fixtures and equipment and the shorter of the estimated useful life
or lease term for leasehold improvements.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense for
fiscal 1997, 1996 and 1995 was $8,657,513, $6,197,731 and $2,112,584,
respectively.
11
<PAGE>
SNEAKER STADIUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DEFERRED RENT
Rent expense on leases is recorded on a straight-line basis over the lease
period. The excess of rent expense over the actual cash paid has been recorded
as deferred rent.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
LONG-LIVED ASSETS
In March 1995, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." SFAS No. 121 established accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill. The Company continually evaluates whether later
events and circumstances have occurred that indicate the remaining estimated
useful lives of long-lived assets may warrant revision or that the remaining
balance of long-lived assets may not be recoverable. Management believes that
there has been no impairment of long-lived assets as of February 1, 1998,
other than for stores identified for closure (see Note 12).
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation under Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and
the related interpretations. In 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 established new
financial accounting and reporting standards for stock-based employee
compensation plans. This statement also applies to transactions in which an
entity issues its equity instruments to acquire goods or services from non-
employees. The Company has adopted the disclosure requirements of this
statement (see Note 10).
STOCK SPLIT
In connection with the January 17, 1997 recapitalization of the Company (see
Note 4), the Board of Directors authorized a two-for-one split of the
Company's Common Stock. All Common share amounts included in the accompanying
consolidated financial statements and notes have been adjusted retroactively
to give effect to this stock split.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform with the current year presentation.
NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement requires companies to classify items of other
comprehensive income by their nature in the financial statements and display
the accumulated balance of other comprehensive income separately from retained
earnings and
12
<PAGE>
SNEAKER STADIUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
additional paid-in capital in the equity section of a statement of financial
position. SFAS No. 130 is effective for financial statements issued for fiscal
years beginning after December 15, 1997. Management believes that SFAS No. 130
will not have a material effect on the Company's financial statements.
3. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 2,
1998 1997
----------- -----------
<S> <C> <C>
Furniture and fixtures and equipment............... $12,546,294 $ 8,423,845
Leasehold improvements............................. 7,352,890 5,675,973
Construction in progress........................... 41,957 --
----------- -----------
19,941,141 14,099,818
Accumulated depreciation and amortization.......... (5,419,066) (2,284,450)
----------- -----------
$14,522,075 $11,815,368
=========== ===========
</TABLE>
Equipment under capital leases included in property and equipment is
$2,492,514 and $2,118,458, with accumulated amortization of $1,330,126 and
$754,400, as of February 1, 1998 and February 2, 1997, respectively.
4. RECAPITALIZATION:
The Company entered into a recapitalization agreement on January 17, 1997.
The specific transactions which occurred in connection with the
recapitalization were as follows:
a) The Company increased the number of authorized shares of Common Stock
to 55,000,000 and authorized 1,250,000 shares of Preferred Stock, of which
750,000 shares were designated as Series A Perpetual Preferred Stock.
b) The Company sold 2,360,608.85 shares of Common Stock for $3,837,915
and sold 117,395.91 shares of Series A Perpetual Preferred for $11,739,591
to new investors.
c) The Company declared a special dividend of $1.6623 and $2.5476 per
share to the Series A and Series B Preferred (collectively the "Redeemable
Convertible Preferred") shareholders, respectively. The aggregate dividend
of $41,766,645 was paid on January 17, 1997.
d) Upon payment of the special dividend, all outstanding Redeemable
Convertible Preferred was converted into 10,997,532.64 shares of Common
Stock and 259,752.92 shares of Series A Perpetual Preferred, and the
Redeemable Convertible Preferred was canceled.
e) Options to purchase 592,750 shares of Common Stock were exercised,
generating cash proceeds of $152,577.
f) Common Stock subscriptions receivable of $175,600 were paid, with
interest of $26,877.
g) 1,405,518.44 shares of outstanding Common Stock were exchanged for
22,851.13 shares of Series A Perpetual Preferred and the Common Stock
received by the Company was retired.
h) The Company issued 125,384 shares of Common Stock and 2,961 shares of
Series A Perpetual Preferred to a non-employee as payment for $500,000 of
services rendered in connection with the recapitalization.
i) The Company purchased the warrant issued in connection with the
capital lease facility for net consideration of $394,874 (see Note 11).
13
<PAGE>
SNEAKER STADIUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
j) The Company entered into a $7,500,000 subordinated indemnification
note due to certain shareholders and to a warrant holder and entered into
new bank credit facilities (see Notes 5, 6 and 7).
5. BANK DEBT:
On January 17, 1997, the Company entered into a $35,000,000 Credit Agreement
with a bank which provided the Company with a $25,000,000 term advance (Term
Loan) and $10,000,000 in new store advances (New Store Facility). On January
17, 1997, the Company borrowed $25,000,000 under the Term Loan and incurred
$1,400,000 in financing costs, which were deferred and are being amortized
over the term of the Credit Agreement. The borrowings were used to finance a
portion of the recapitalization transactions (see Note 4).
Borrowings under the Credit Agreement are collateralized by substantially
all of the Company's assets. The interest rate on the Term Loan and the New
Store Facility varies based on whether the borrowing is designated as a base
rate loan or Eurodollar loan. The interest rate on the base rate loans is the
higher of the prime rate plus 2.5% or 0.5% above the Federal Funds Rate plus
2.5%. All borrowings designated as Eurodollar loans utilize the Eurodollar
Rate plus 4.0%. Interest is due quarterly. The Credit Agreement requires an
annual commitment fee of .375% on the average unused portion of the New Store
Facility.
The Company is subject to certain covenants described in the Credit
Agreement. Such covenants, among other things, restrict the Company's ability
to incur debt, pay dividends, and make capital expenditures and acquisitions.
The Company is also subject to restrictive financial covenants, which include
ratios related to net worth, leverage, fixed charges and interest coverage.
The Credit Agreement was amended in September 1997 in connection with the
Subordinated Convertible Promissory Notes (see Note 7) and a restriction was
placed on the Company limiting new store openings to eight in fiscal 1998 and
eleven in fiscal 1999. Events of default under these covenants increase the
interest rate by 2.0%. Compliance with the terms of the covenants has been
waived through September 30, 1998. However, due to the Company's forecasted
non-compliance subsequent to that date, all amounts outstanding under the Term
Loan and New Store Facility have been classified as a current liability at
February 1, 1998 in the accompanying consolidated balance sheet.
In connection with the Credit Agreement, the lender received warrants to
purchase 1,472,641 shares of Common Stock for $.01 per share and warrants to
purchase 12,371 shares of Series A Perpetual Preferred Stock for $.01 per
share. The warrants expire on January 17, 2007 and are exercisable upon a sale
notice of the Company, as defined. For financial reporting purposes, the
warrants have been valued at $3,623,834 based on the estimated fair value of
the Common and Series A Perpetual Preferred Stock. This amount has been
recorded as original issue discount on the Term Loan.
At February 1, 1998, there was $25,000,000 outstanding under the Term Loan.
Interest on the Term Loan was 9.625% at February 1, 1998. The principal is
payable in quarterly installments from December 1999 through December 2002.
Scheduled maturity (assuming early payment not mandated by lender) is as
follows:
<TABLE>
<CAPTION>
FISCAL
------
<S> <C>
1999......................................................... $ 1,500,000
2000......................................................... 6,000,000
2001......................................................... 7,500,000
2002......................................................... 10,000,000
</TABLE>
Effective February 25, 1997, the Company entered into an Interest Rate
Collar Agreement as required by the Credit Agreement for $20,000,000 of
Eurodollar loans, which places a ceiling on the Eurodollar rate of 7.5% and
establishes a floor of 5.15% through February 25, 1999. This agreement
involves the exchange of fixed-rate and floating-rate interest payments
periodically over the life of the agreement without the exchange of the
14
<PAGE>
SNEAKER STADIUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
underlying principal amounts. The differential to be paid or received is
accrued as interest rates change and recognized over the life of the agreement
as an adjustment to interest expense. The fair value of this collar agreement,
which is not material at February 1, 1998, is not recognized in the
accompanying financial statements. The counter party to the collar agreement
is a major financial institution. Management believes the risk of incurring
losses related to credit risk is remote and any potential losses would be
immaterial.
At February 1, 1998, there was $5,000,000 outstanding under the New Store
Facility at an interest rate of 9.750%. The highest borrowing during fiscal
1997 was $5,000,000, average borrowings were $4,108,333, and the weighted
average interest rate was 9.17%. Principal is due beginning on March 31, 2000
in quarterly installments of 5% of the amount outstanding on June 30, 1999,
with the remaining balance due on December 31, 2002 (assuming early payment
not mandated by lender). Borrowings under the New Store Facility are subject
to limitations based on historical same store sales and average per store
borrowings, as defined. As of February 1, 1998, the Company was limited to
total borrowings of $5,000,000 on the New Store Facility.
6. LINE OF CREDIT:
In fiscal 1996, the Company entered into a three-year secured line of credit
with a bank. This line was terminated at no cost to the Company in connection
with the recapitalization. Fees of $120,005 were incurred under the line in
fiscal 1996.
On January 17, 1997, the Company entered into a $35,000,000 Revolving Loan
Agreement (Revolver) with a bank, which expires on December 31, 2002.
Borrowings on the Revolver are variable by month and are limited to 60% to 70%
of the book value of eligible inventories, less the lender's guarantee
reserve, as defined. Interest is variable based on whether the borrowing is
designated as a LIBOR Rate Loan or a Base Rate Loan and is payable monthly.
The Company is also subject to an unused line fee of .375%, payable quarterly.
Borrowings are collateralized by a first lien on the Company's inventories.
The Company incurred $350,000 in costs related to the Revolver, which were
deferred and are being amortized over the term of the Revolver.
The Revolver was amended in September 1997 in connection with the
Subordinated Convertible Promissory Notes (see Note 7), in December 1997 and
in May 1998 in connection with the Subordinated Secured Convertible Notes (see
Note 7). The Company incurred financing costs of $120,000 in connection with
these amendments.
The Revolver, as amended, provides for borrowings subject to a borrowing
base of the lesser of 65% of the eligible inventory or a percentage of the
inventory's net liquidation value, as defined. In addition, for the period May
20, 1998 through September 30, 1998 the Company can borrow an additional
$7,000,000 (Supplemental Overadvance) and for the period September 10, 1997
through December 31, 1999, the Company can borrow an additional $4,514,000
(Overadvance). For the period May 20, 1998 through September 30, 1998, total
borrowings are limited to $42,000,000 and after October 1, 1998 are limited to
$35,000,000. The Overadvance and Supplemental Overadvance are secured by
guarantees of certain shareholders of the Company. The Overadvance is
guaranteed through December 31, 1999 and the Supplemental Overadvance is
guaranteed through September 30, 1998. On September 30, 1998, the borrowings
outstanding under the Supplemental Overadvance will be repaid with the
proceeds from the sale of Subordinated Secured Convertible Notes to certain
shareholders (see Note 7).
At February 1, 1998, there was $34,516,636 outstanding under the Revolver at
an interest rate of 8.375%. The highest borrowing during the year was
$35,378,300. Average borrowings were $26,841,916, and the weighted average
interest rate was 8.63%.
15
<PAGE>
SNEAKER STADIUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Upon prepayment in full of the Credit Agreement, the Company is required to
prepay the Revolver in an amount equal to 75% of excess cash flow, as defined.
The Company is subject to certain covenants described in the Revolver. Such
covenants, among other things, restrict the Company's ability to incur debt,
pay dividends, and make capital expenditures and acquisitions. The Company is
also subject to restrictive financial covenants, which include ratios related
to interest coverage, working capital and tangible capital. The Revolver
includes cross default provisions with the Credit Agreement (see Note 5). At
February 1, 1998, the Company was not in compliance with certain of these
covenants. The defaults of these covenants have been waived by the bank
through December 31, 1999. However, due to the anticipated non-compliance of
the covenants under the Credit Agreement and the cross default provisions, the
Revolver has been classified as a current liability at February 1, 1998 in the
accompanying consolidated balance sheet.
7. SUBORDINATED DEBT:
SUBORDINATED INDEMNIFICATION NOTES
On January 17, 1997, the Company issued $7,500,000 in Subordinated
Indemnification Notes (the Indemnification Notes) to certain shareholders and
a warrant holder as an escrow amount for the benefit of the Company and
certain new investors. The Indemnification Notes were initially non-interest
bearing and had an initial maturity date of February 1, 1998 and a final
maturity date of April 2, 2006. The Indemnification Notes are subordinate to
the Term Loan, New Store Facility and Revolver and payment of the
Indemnification Notes is limited by the terms of such agreements.
Beginning February 2, 1998, interest accrues at 12% per year on the
principal outstanding and is due upon payment of the Indemnification Notes.
After April 2, 1998, the principal and interest are convertible at the option
of the holders into Common and Series A Perpetual Preferred at a conversion
price of $1.6258 per share of Common Stock and $100 per share of Series A
Perpetual Preferred, subject to adjustment, allocated .4077 to the Common and
.5923 to the Series A Perpetual Preferred.
SUBORDINATED CONVERTIBLE PROMISSORY NOTES
On September 10, 1997, the Company issued $5,100,000 of Subordinated
Convertible Promissory Notes (the Promissory Notes), of which $100,000 was
issued for payment of certain fees and included in the fiscal 1997 statement
of operations. The Promissory Notes accrue interest at 12% per year, payable
in additional Promissory Notes. Principal and interest are due on April 2,
2006. At the option of the holders, the Promissory Notes are exchangeable for
shares of Series B Perpetual Preferred Stock at a conversion price of $100 per
share. The Promissory Notes are subordinate to the Term Loan, New Store
Facility and the Revolver. The Promissory Notes are pari passu with the
Indemnification Notes.
The Company received $4,811,000 in cash for the Promissory Notes plus
$189,000 in Secured Promissory Notes from certain management shareholders
which are included in other assets in the accompanying balance sheet.
Principal and interest at 6.3% per year on the Secured Promissory Notes are
due the earlier of (i) April 2, 2006, (ii) the date the Company repays the
Promissory Notes, (iii) the date the management shareholders exercise their
conversion rights under the Indemnification Notes or (iv) upon the
discontinuation of the Company's operations.
In connection with the sale of the Promissory Notes, the holders received
warrants to purchase 5,162,750 shares of Non-Voting Common Stock for $.10 per
share. The warrants expire on the earlier of September 10, 2007 or an initial
public offering. For financial reporting purposes, the warrants have been
valued
16
<PAGE>
SNEAKER STADIUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
at $15,000 based on the estimated fair value of the Non-Voting Common Stock.
This amount has been recorded as original issue discount on the Promissory
Notes.
SUBORDINATED SECURED CONVERTIBLE NOTES
On May 20, 1998, the Company entered into an agreement to issue $7,000,000
of Subordinated Secured Convertible Notes (the Secured Notes) on September 30,
1998. The proceeds from the Secured Notes must be used to repay any borrowing
on the Supplemental Overadvance provision on the Revolver (see Note 6). The
Secured Notes will accrue interest at 12% per year. Principal and interest on
the Secured Notes are due May 1, 2008. At the option of the holder, the
Secured Notes are exchangeable for shares of Series C Perpetual Preferred
Stock at a conversion price of $100 per share. The Secured Notes are
subordinate to the Term Loan, New Store Facility and the Revolver. The Secured
Notes are secured by substantially all of the assets of the Company and are
senior to the Promissory Notes and the Indemnification Notes.
8. INCOME TAXES:
Income taxes consist of the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
-------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal................................ $ -- $ -- $ --
State.................................. -- -- --
----------- ----------- -----------
-- -- --
----------- ----------- -----------
Deferred:
Federal................................ (6,653,624) (3,999,542) (1,834,108)
State.................................. (1,174,169) (705,802) (323,666)
----------- ----------- -----------
(7,827,793) (4,705,344) (2,157,774)
Increase in valuation allowance.......... 7,827,793 4,705,344 2,157,774
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
A reconciliation of the effective income tax rate with the statutory Federal
income tax rate is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
-----------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 28,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Statutory rate......................... (34)% (34)% (34)%
State income taxes, net of Federal
benefit............................... (6)% (6)% (6)%
Other.................................. -- (2)% --
Increase in valuation allowance........ 40 % 42 % 40 %
--- --- ---
-- -- --
=== === ===
</TABLE>
17
<PAGE>
SNEAKER STADIUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The major components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 2,
1998 1997
------------ -----------
<S> <C> <C>
Net operating loss carryforward................. $ 8,562,358 $ 3,181,076
Start-up costs.................................. 181,206 273,753
Deferred rent................................... 1,182,635 577,534
Non-deductible accruals......................... 1,879,851 619,394
Depreciation.................................... (219,272) (192,314)
Inventory reserves and other.................... 405,939 141,604
Preopening costs................................ 2,015,831 1,474,447
Recapitalization costs and other related ex-
penses......................................... 1,215,381 1,458,458
Cooperative advertising reserve................. 286,800 148,984
------------ -----------
15,510,729 7,682,936
Valuation allowance............................. (15,510,729) (7,682,936)
------------ -----------
$ -- $ --
============ ===========
</TABLE>
Management has established a full valuation allowance for the net deferred
tax asset due to the uncertainty of its realization. At February 1, 1998, the
Company had Federal net operating loss carryforwards of approximately $21
million for tax reporting purposes that begin to expire in 2010. The usage of
the net operating loss carryforwards will be limited on an annual basis due to
changes in ownership (see Notes 4 and 13).
9. PREFERRED STOCK:
REDEEMABLE CONVERTIBLE PREFERRED STOCK
Redeemable Convertible Preferred Stock consisted of Series A Preferred Stock
and Series B Preferred Stock. The Series A Preferred was convertible into
Common Stock based on a conversion rate, as defined. The Series A Preferred
had voting rights equal to the number of common shares into which it was
convertible. At January 28, 1996, there were 15,000,000 shares of $.01 par
value Series A Preferred authorized and 13,700,833 shares issued and
outstanding.
On December 31, 2000, 2001 and 2002, one-third, one-half and the remaining
shares of Series A Preferred, respectively, were required to be redeemed by
the Company (subject to certain provisions) at the original purchase price
plus accrued but unpaid dividends. Dividends accrued at an annual rate of $.10
per share. In connection with the recapitalization of the Company (see Note
4), all outstanding Series A Preferred was converted into Common Stock and
Series A Perpetual Preferred, and the Series A Preferred was canceled.
The Series B Preferred was convertible into Common Stock based on a
conversion rate, as defined. The Series B Preferred had voting rights equal to
the number of Common shares into which it was convertible. At January 28,
1996, there were 8,000,000 shares of $.01 par value Series B Preferred
authorized and 5,590,910 shares issued and outstanding.
On December 31, 2000, 2001 and 2002, one-third, one-half and the remaining
shares of Series B Preferred were required to be redeemed by the Company
(subject to certain provisions) at the original purchase price plus accrued
but unpaid dividends. Dividends accrued at an annual rate of $.275 per share.
In connection with the recapitalization of the Company (see Note 4), all
outstanding Series B Preferred was converted into Common Stock and Series A
Perpetual Preferred, and the Series B Preferred was canceled.
18
<PAGE>
SNEAKER STADIUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SERIES A PERPETUAL PREFERRED STOCK
The Series A Perpetual Preferred Stock has one vote per share and is
entitled to receive 5% cumulative dividends commencing January 1, 1998,
increasing to 7.5% on January 1, 1999 and to 10% on January 1, 2000. The
Series A Perpetual Preferred is senior to Common Stock in liquidation, and has
a liquidation value of $100 per share, plus all accrued and unpaid dividends.
The Series A Perpetual Preferred is mandatorily redeemable by the Company in
the event of a liquidation event, as defined. At February 2, 1997 and
February 1, 1998, there were 750,000 shares of $.01 par value Series A
Perpetual Preferred authorized and 402,948 shares issued and outstanding. At
February 1, 1998, the liquidation value was $40,462,695.
SERIES B PERPETUAL PREFERRED STOCK
The Series B Perpetual Preferred Stock has one vote for every 100 shares
held and is entitled to receive dividends equal to those accruing on the
Series A Perpetual Preferred. The Series B Perpetual Preferred is senior to
the Series A Perpetual Preferred and Common Stock in liquidation and has a
liquidation value of five times the stated value plus all accrued and unpaid
dividends. The Series B Perpetual Preferred is mandatorily redeemable by the
Company in the event of a liquidation event, as defined. At February 1, 1998,
there were 1,500,000 shares of $.01 par value Series B Perpetual Preferred
authorized and no shares issued or outstanding.
SERIES C PERPETUAL PREFERRED STOCK
The Series C Perpetual Preferred Stock has one vote for every 100 shares
held and is entitled to receive dividends equal to those accruing on the
Series A and Series B Perpetual Preferred. The Series C Perpetual Preferred is
senior to the Series A and Series B Perpetual Preferred and Common Stock in
liquidation and has a liquidation value of five times the stated value plus
all accrued and unpaid dividends. The Series C Perpetual Preferred is
mandatorily redeemable by the Company in the event of a liquidation event, as
defined. At February 1, 1998, there were 700,000 shares of $.01 par value
Series C Perpetual Preferred authorized and no shares issued or outstanding.
10. SHAREHOLDERS' DEFICIT:
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 2,
1998 1997
------------ ------------
<S> <C> <C>
Common Stock, $.01 par value, 55,000,000 shares
authorized, 17,101,752 and 17,060,752 shares
issued and outstanding......................... 171,018 170,608
Non-Voting Common Stock, $.01 par value,
5,162,750 shares authorized, none issued or
outstanding.................................... -- --
Additional paid-in capital...................... (24,723,004) (24,740,494)
Accumulated deficit............................. (43,230,961) (23,291,775)
------------ ------------
$(67,782,947) $(47,861,661)
============ ============
</TABLE>
COMMON STOCK
In the event of the closing of an initial public offering, the Non-Voting
Common stock of the Company is convertible into Common Stock.
19
<PAGE>
SNEAKER STADIUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
COMMON STOCK OPTIONS
In fiscal 1994, the Company established the 1994 Stock Plan (the Plan). The
Plan, as amended, provides for the granting of up to 5,000,000 shares of
Common Stock or options to purchase Common Stock to eligible employees and
consultants. Options granted may vest based on performance and/or time, as
defined.
The Company issued 1,150,000 and 240,000 shares of common stock under the
Plan to management in fiscal 1994 and 1995, respectively. Shares were issued
at $.05 per share and were paid for in cash and interest-bearing promissory
notes. Promissory notes of $175,600 were repaid to the Company as part of the
recapitalization of the Company in fiscal 1996 (see Note 4).
The exercise price of options granted may be at the fair market value of the
stock or at a price determined by a committee of the Board of Directors. The
stock options granted prior to the recapitalization of the Company became
fully-vested upon the recapitalization. Options granted subsequent to the
recapitalization will generally vest over a five-year period and will be
exercisable over a period determined by the committee, but not longer than ten
years.
Information with respect to options granted under the Plan is as follows:
<TABLE>
<CAPTION>
AGGREGATE OPTION PRICE
SHARES PRICE PER SHARE
---------- ---------- -------------
<S> <C> <C> <C>
Balance, January 29, 1995............. 154,000 $ 7,700 $0.05
Granted............................. 453,000 61,570 0.05 -0.50
Exercised........................... -- -- -
Expired............................. -- -- -
---------- ---------- -------------
Balance, January 28, 1996............. 607,000 69,270 0.05 -0.50
Granted............................. 1,533,010 2,220,958 0.135-1.6258
Exercised........................... (592,750) (152,577) 0.05 -0.80
Expired............................. (1,800) (424) 0.05 -0.80
---------- ---------- -------------
Balance, February 2, 1997............. 1,545,460 2,137,227 0.05 -1.6258
Granted............................. 183,500 18,350 0.10
Exercised........................... (41,000) (2,900) 0.05 -0.135
Expired............................. (34,050) (22,124) 0.05 -0.80
Change in exercise price:
Old price......................... (1,458,460) (2,112,795) 0.135-1.6258
New price......................... 1,458,460 145,846 0.10
---------- ---------- -------------
Balance, February 1, 1998............. 1,653,910 $ 163,604 $0.05 -$0.10
========== ========== =============
</TABLE>
During fiscal 1997, options outstanding under the Plan with exercise prices
ranging from $.135 to $1.6258 per share were revalued to $.10 per share.
The options outstanding at February 1, 1998 include options to purchase an
aggregate of 157,756 shares of Common Stock granted to certain executives at
an exercise price of $0.10 per share for which vesting is accelerated over a
five-year period if the Company achieves certain defined financial objectives.
The options will vest 100% if the executives are employed by the Company
through January 17, 2005. None of these options were vested at February 1,
1998.
At February 1, 1998, there were 464,442 exercisable options at prices
ranging from $0.05 to $0.10 per share. The aggregate exercise price of these
options was $44,657. At February 1, 1998, there were 1,288,290 shares of
common stock reserved for future grant.
20
<PAGE>
SNEAKER STADIUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Had compensation cost for the Company's plan been determined based upon the
fair value of the options at the date of grant, as prescribed under SFAS No.
123, the Company's net loss for fiscal 1997, 1996 and 1995 would have been
increased by $75,762, $66,490 and $2,253, respectively.
The effects of applying SFAS No. 123 in the pro forma disclosure are not
indicative of future amounts, as SFAS No. 123 has not been applied to options
granted prior to January 30, 1995. The weighted average fair value of the
options granted in fiscal 1997, 1996 and 1995 is estimated as $0.03, $0.38 and
$0.03 per share, respectively, on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions: zero
dividend yield and volatility, risk-free interest rate of 5.9%, 6.5% and 6.2%,
respectively, and an expected life of five years.
11. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases its office and retail stores under various noncancellable
operating leases. Certain of these leases have renewal options. Future minimum
lease payments, net of rent credits, including four stores for which the
Company has entered into lease agreements but has not yet commenced
operations, are as follows:
<TABLE>
<CAPTION>
FISCAL
------
<S> <C>
1998........................................................ $ 12,789,265
1999........................................................ 14,374,329
2000........................................................ 14,532,531
2001........................................................ 14,814,126
2002........................................................ 15,470,480
Thereafter.................................................. 121,019,816
------------
$193,000,547
============
</TABLE>
Rent expense, including percentage rent, was $12,618,764, $5,821,110 and
$1,909,119 in fiscal 1997, 1996 and 1995, respectively.
CAPITAL LEASES
The Company has entered into capital leases for certain equipment. The
present value of the future minimum lease payments as of February 1, 1998 are
as follows:
<TABLE>
<CAPTION>
FISCAL
------
<S> <C>
1998......................................................... $ 744,992
1999......................................................... 482,167
2000......................................................... 90,545
2001......................................................... 37,449
----------
1,355,153
Less imputed interest........................................ (105,944)
----------
$1,249,209
==========
</TABLE>
In April 1995, the Company entered into a $1,700,000 capital lease facility
for certain equipment. In connection with this facility, the Company issued
warrants to the lessor for the purchase of 178,500 shares of Series A
Preferred Stock for $1.00 per share. These warrants were repurchased in
connection with the recapitalization of the Company (see Note 4).
21
<PAGE>
SNEAKER STADIUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ADVERTISING
The Company has made commitments to place up to $1,500,000 in television
advertising in fiscal 1998.
EMPLOYMENT AGREEMENTS
On January 17, 1997, the Company entered into two-year employment agreements
with certain key employees providing for aggregate base salaries of $375,000
per year, performance bonuses of up to 100% of base salary, stock options,
benefits, severance in certain circumstances and a non-competition period
during the agreement and the two years thereafter.
CONSULTING AGREEMENT
On January 17, 1997, the Company entered into a consulting agreement with a
director requiring payments of $100,000 per year. The director was also
granted an option to purchase 457,712 shares of Common Stock at an exercise
price of $1.6258 per share. During fiscal 1997, these options were revalued to
$.10 per share (see Note 10). Consulting expense related to this option grant
was recorded in fiscal 1996. The options vest over a three-year period. The
agreement provides for a non-competition period during the agreement and the
two years thereafter. The agreement can be terminated by either party upon
notice, as defined.
MANAGEMENT AGREEMENT
On January 17, 1997, the Company entered into a five-year management
agreement with an affiliate of a new investor requiring payments of $150,000
per year. The agreement also provided for the payment of a fee in connection
with the recapitalization.
LITIGATION
The Company is involved in certain legal actions and claims arising in the
ordinary course of business. The Company believes that it has adequate
insurance coverage against possible liabilities that may be incurred in
connection with such claims. The Company could be materially and adversely
affected if it were required to pay damages or incur defense costs in
connection with a claim that is beyond the scope of insurance coverage or if
the claim exceeds the insurance policy limits. Management believes that the
outcome of litigation and claims pending as of February 1, 1998 will not have
a material adverse effect on the Company's financial position, results of
operations or liquidity.
12. LOSS ON STORE CLOSINGS:
In fiscal 1997, the Company recorded a loss of $1,924,507 related to
implementation of a plan to close three retail store locations. Under the
terms of the plan, the stores will be closed, subleased to third parties, and
the inventory shipped to other store locations. Management anticipates the
plan will be completed in fiscal 1998. The loss on store closings consists
primarily of abandoned property and leasehold improvements, rental commitments
to be paid prior to sublease, and deferred rent recapture. This loss has been
recorded in selling, general and administrative expenses in the accompanying
statement of operations.
13. SALE OF BUSINESS (UNAUDITED):
On June 6, 1998, the Company signed a letter of intent whereby its
shareholders will sell all of their shares to Just For Feet, Inc. for $.0001
per share. Pursuant to the terms of the letter of intent, the Company will be
merged into a wholly-owned subsidiary of Just For Feet and Just For Feet will
assume $43.0 million of the
22
<PAGE>
SNEAKER STADIUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
outstanding debt. The holders of the subordinated notes will forgive the
amounts due them. Should the acquired Sneaker Stadium stores attain certain
specified financial goals, an additional payment of up to $31.0 million may be
paid to the various lenders. The letter of intent has been approved by the
Boards of Directors of both companies. Closing on the transaction is subject
to satisfactory completion of due diligence, definitive documentation of the
merger and contingent payment agreements, the approval of the Company's
shareholders and various lenders and expiration of the Hart-Scott-Rodino
waiting period.
23
<PAGE>
SNEAKER STADIUM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MAY 3,
1998
------------
<S> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents...................................... $ 1,933,626
Accounts receivable............................................ 1,364,550
Inventories, net............................................... 53,565,505
Prepaid expenses and other..................................... 2,240,776
------------
Total current assets......................................... 59,104,457
PROPERTY AND EQUIPMENT, net...................................... 14,100,894
DEBT ISSUANCE COSTS, net......................................... 1,380,295
OTHER ASSETS..................................................... 1,598,766
------------
$ 76,184,412
============
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accounts payable............................................... $ 23,406,069
Accrued expenses and other..................................... 8,425,076
Current portion of capitalized lease obligations............... 612,042
Line of credit................................................. 30,327,731
Term loan payable.............................................. 22,141,751
New store facility note........................................ 5,000,000
------------
Total current liabilities.................................... 89,912,669
------------
DEFERRED RENT.................................................... 3,101,473
------------
CAPITALIZED LEASE OBLIGATIONS.................................... 466,434
------------
SUBORDINATED INDEMNIFICATION NOTES............................... 7,500,000
------------
SUBORDINATED CONVERTIBLE PROMISSORY NOTES........................ 5,266,667
------------
SERIES A PERPETUAL PREFERRED STOCK............................... 42,203,480
------------
COMMITMENTS AND CONTINGENCIES....................................
SHAREHOLDERS' DEFICIT:
Common stock, $.01 par value, 55,000,000 shares authorized,
17,101,752 shares issued and outstanding...................... 171,018
Additional paid-in capital..................................... (24,723,004)
Accumulated deficit............................................ (47,714,325)
------------
Total shareholders' deficit.................................. (72,266,311)
------------
$ 76,184,412
============
</TABLE>
The accompanying notes are an integral part of this statement.
24
<PAGE>
SNEAKER STADIUM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THIRTEEN WEEKS ENDED
------------------------------
MAY 3, MAY 4,
1998 1997
-------------- --------------
<S> <C> <C>
NET SALES...................................... $ 38,393,025 $ 29,210,109
COST OF GOODS SOLD............................. 24,736,624 18,203,023
-------------- --------------
Gross profit................................. 13,656,401 11,007,086
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES... 15,909,142 12,284,129
-------------- --------------
Operating loss............................... (2,252,741) (1,277,043)
INTEREST EXPENSE............................... (1,727,757) (1,356,364)
INTEREST INCOME................................ 819 1,883
-------------- --------------
NET LOSS....................................... $ (3,979,679) $ (2,631,524)
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE>
SNEAKER STADIUM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THIRTEEN WEEKS ENDED
-----------------------------
MAY 3, MAY 4,
1998 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................... $ (3,979,679) $ (2,631,524)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities--
Imputed interest on debt....................... 153,117 153,117
Depreciation and amortization.................. 934,783 694,695
Amortization of debt issuance costs............ 73,941 73,941
Provision for deferred rent.................... 400,503 380,386
Changes in operating assets and liabilities--
(Increase) decrease in--
Accounts receivable........................ (485,593) (787,999)
Inventories................................ (4,585,176) (16,132,159)
Prepaid expenses and other................. (784,263) (831,084)
Other assets............................... 168,746 181,115
Increase in--
Accounts payable........................... 13,809,798 10,505,376
Accrued expenses and other................. 2,093,410 1,617,412
------------- --------------
Net cash (used in) provided by operating
activities.............................. 7,799,587 (6,776,724)
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............ (213,602) (3,161,237)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in bank overdrafts.................... (2,211,019) (1,203,918)
Payments on capitalized lease obligations...... (170,733) (59,480)
Net proceeds from line of credit............... (4,188,905) 7,959,227
Proceeds from new store facility note.......... -- 4,000,000
------------- --------------
Net cash provided by financing activities.... (6,570,657) 10,695,829
------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS........ 1,015,328 757,868
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD... 918,298 949,847
------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD......... $ 1,933,626 $ 1,707,715
============= ==============
</TABLE>
The accompanying notes are an integral part of these statements.
26
<PAGE>
SNEAKER STADIUM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
applicable to a going concern, which principles assume that assets will be
realized and liabilities will be discharged in the normal course of business.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's audited financial
statements for the fiscal year ended February 1, 1998.
In the opinion of the management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting of
normal recurring accruals, necessary to present fairly the financial position
as of May 3, 1998 and the results of operations and cash flows for the
thirteen-week periods ended May 4, 1997 and May 3, 1998. The results of
operations for the period ended May 3, 1998 are not necessarily indicative of
the results to be expected for the full year.
The Company has incurred significant losses since its inception and incurred
a loss of $3,979,679 in the thirteen-week period ended May 3, 1998. Due to
expected events of default, certain debt obligations have been classified as
current liabilities. These factors, among others, raise substantial doubt
about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable
to continue as a going concern. The Company's continuation as a going concern
is dependent upon its ability to generate sufficient cash flow to meet its
obligations on a timely basis, to comply with the terms of its financing
agreements and ultimately to attain profitability. Management continues to
work with its lenders to waive expected events of default and will seek equity
investments as required. See Note 3 regarding the sale of the Company, which
may result in significant adjustments to the carrying value of the Company's
assets and liabilities.
NOTE 2. INCOME TAXES
Due to recurring losses, the Company has provided a full valuation allowance
reserve for the tax benefit associated with the losses incurred for the
thirteen week periods ended May 4, 1997 and May 3, 1998.
NOTE 3. SALE OF COMPANY
On July 2, 1998, Just For Feet, Inc. acquired all of the outstanding stock
of the Company for $1,750 cash and the assumption of approximately $43 million
of existing debt of the Company. Immediately prior to the acquisition, certain
of the Company's lenders forgave approximately $32 million of the Company's
indebtedness and the Company's shareholders were released from their
guarantees of Company debt. Just For Feet, Inc. is obligated to make certain
contingent payments on or after April 30, 2002 (up to a maximum of $33 million)
to specified lenders of the Company, if the acquired Sneaker Stadium stores
future earnings exceed specified targeted amounts.
27
<PAGE>
JUST FOR FEET, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
FOR THE ACQUISITION OF SNEAKER STADIUM, INC.
The following unaudited pro forma combined financial statements and
explanatory notes reflect the acquisition on July 2, 1998 of Sneaker Stadium,
Inc. (Sneaker) by Just For Feet, Inc. (JFF). JFF acquired all of the
outstanding stock of Sneaker for nominal cash consideration and assumed $43.0
million of existing Sneaker bank debt. Such debt was immediately paid off with
the proceeds of a term loan by JFF. The acquisition has been accounted for
under the purchase method. JFF will make additional payments of up to $33
million after April 2002 to certain specified former lenders of Sneaker, if the
acquired Sneaker Stadium stores attain certain financial targets. Such
additional payments, if required, will be accounted for as additional
consideration for the acquisition.
Concurrent with and as a condition of JFF's acquisition of Sneaker, an
affiliate of Thomas H. Lee Company (THL), a firm which owned a controlling
interest in Sneaker, purchased from JFF an aggregate of 926,355 units, each
unit consisting of one share of JFF common stock and a warrant to purchase
.997 of a share of JFF common stock at a purchase price of $21.59 per share.
The aggregate purchase price for the units was $20.0 million. The warrants'
estimated fair market value on July 2, 1998 was $6.7 million and, for
accounting purposes, were considered a part of the consideration paid by JFF
for Sneaker.
The pro forma combined balance sheet assumes that the acquisition was
consummated on April 30, 1998 and the pro forma combined statements of
income for the year ended January 31, 1998 and the three months ended
April 30, 1998 assume that the acquisition was consummated on February 1,
1997.
For purposes of these pro forma financial statements, the financial
statements of JFF as of and for the three months ended April 30, 1998 and for
the year ended January 31, 1998 have been combined with those of Sneaker as of
and for the thirteen weeks ended May 3, 1998 and the year ended February 1,
1998, respectively.
Certain pro forma adjustments are based on preliminary estimates. Final
allocations will be made on the basis of further evaluations and, therefore,
such allocations may differ from those reflected in the pro forma combined
financial statements.
JFF intends to convert the Sneaker superstores to the JFF name and format.
JFF may also close some of the acquired stores. JFF intends to close Sneaker's
existing corporate headquarters and consolidate all operations into JFF's
headquarters. Following the liquidation of existing inventory through
clearance or similar sales, Sneaker stores will be closed, remodeled,
restocked and the staff retrained prior to reopening under the JFF name. The
accompanying pro forma financial statements do not include any adjustments or
effects from such integration activities.
The pro forma statements of income are not necessarily indicative of the
results of operations of JFF had the Sneaker acquisition occurred at the
beginning of the periods presented, nor necessarily indicative of the results
of future operations. These statements should be read in conjunction with the
separate historical financial statements and notes thereto of JFF (included in
JFF's Annual Report on Form 10-K for the year ended January 31, 1998) and
Sneaker (included herein).
28
<PAGE>
JUST FOR FEET, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
APRIL 30, 1998 (IN THOUSANDS)
<TABLE>
<CAPTION>
JUST FOR FEET, INC. SNEAKER PRO FORMA PRO FORMA
AND SUBSIDIARIES STADIUM, INC. ADJUSTMENTS COMBINED
------------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash.................. $ 5,624 $ 1,934 $ 20,000 b $ 7,558
(20,000)c
Accounts receivable... 16,881 1,365 18,246
Merchandise
inventories.......... 211,972 53,566 (11,900)a 253,638
Other assets.......... 6,472 2,240 5,390 a 14,102
-------- -------- -------- --------
Total current
assets............. 240,949 59,105 (6,510) 293,544
PROPERTY AND EQUIPMENT,
NET.................... 104,135 14,101 (13,000)a 105,236
GOODWILL................ 35,857 27,857 a 63,714
OTHER ASSETS............ 6,926 2,978 2,727 a 12,631
-------- -------- -------- --------
$387,867 $ 76,184 $ 11,074 $475,125
======== ======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
---------------------
CURRENT LIABILITIES:
Short-term
borrowings........... $ 26,716 $ 57,470 $(17,430)a $ 46,756
(20,000)c
Accounts payable...... 42,021 23,406 65,427
Accrued expenses...... 10,498 8,365 5,173 a 24,036
Income taxes.......... 4,788 60 4,848
Current maturities of
long-term
obligations.......... 3,470 612 4,082
-------- -------- -------- --------
Total current
liabilities........ 87,493 89,913 (32,257) 145,149
LONG-TERM OBLIGATIONS... 17,283 13,233 (12,767)a 17,749
DEFERRED LEASE RENTALS.. 7,650 3,101 10,751
DEFERRED INCOME TAXES... 676 (676)a
-------- -------- -------- --------
Total liabilities... 113,102 106,247 (45,700) 173,649
-------- -------- -------- --------
REDEEMABLE PREFERRED
STOCK.................. 42,203 (42,203)a
-------- --------
SHAREHOLDERS' EQUITY:
Common stock.......... 3 171 (171)a 3
Paid-in-capital....... 219,481 (24,723) 31,434 a 246,192
20,000 b
Retained earnings..... 55,281 (47,714) 47,714 a 55,281
-------- -------- -------- --------
Total shareholders'
equity............. 274,765 (72,266) 98,977 301,476
-------- -------- -------- --------
$387,867 $ 76,184 $ 11,074 $475,125
======== ======== ======== ========
</TABLE>
See notes to pro forma combined financial statements.
29
<PAGE>
JUST FOR FEET, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
THREE MONTHS ENDED APRIL 30, 1998 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUST FOR FEET, INC. SNEAKER PRO FORMA PRO FORMA
AND SUBSIDIARIES STADIUM, INC. ADJUSTMENTS COMBINED
------------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
NET SALES............... $151,921 $ 38,393 $ $190,314
COST OF SALES........... 88,303 24,737 113,040
-------- -------- --------
GROSS PROFIT............ 63,618 13,656 77,274
-------- -------- --------
FRANCHISE FEES AND
ROYALTIES EARNED....... 308 308
-------- --------
OPERATING EXPENSES:
Store operating....... 44,756 14,488 59,244
Amortization of
intangibles.......... 360 232 b 592
Store-opening costs... 3,352 3,352
General and
administrative....... 5,399 1,421 6,820
-------- -------- ------- --------
Total operating
expenses........... 53,867 15,909 232 70,008
-------- -------- ------- --------
OPERATING INCOME
(LOSS)................. 10,059 (2,253) (232) 7,574
INTEREST EXPENSE, NET... 602 1,727 (1,727)a 1,012
410 c
-------- -------- ------- --------
INCOME (LOSS) BEFORE
INCOME TAXES........... 9,457 (3,980) 1,085 6,562
PROVISION (BENEFIT) FOR
INCOME TAXES........... 3,641 (1,039)d 2,602
-------- -------- ------- --------
NET INCOME (LOSS)....... $ 5,816 $ (3,980) $ 2,124 $ 3,960
======== ======== ======= ========
EARNINGS PER SHARE:
BASIC................. $ 0.19 $ 0.13
======== ========
DILUTED............... $ 0.19 $ 0.12
======== ========
WEIGHTED AVERAGE SHARES
OUTSTANDING:
BASIC................. 30,044 926 e 30,970
======== ======= ========
DILUTED............... 31,172 926 e 32,098
======== ======= ========
</TABLE>
See notes to pro forma combined financial statements.
30
<PAGE>
JUST FOR FEET, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED JANUARY 31, 1998 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
JUST FOR FEET, INC. SNEAKER ADJUSTMENTS COMBINED
AND SUBSIDIARIES STADIUM, INC. (UNAUDITED) (UNAUDITED)
------------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES............... $478,638 $132,844 $ $611,482
COST OF SALES........... 279,816 87,953 367,769
-------- -------- --------
GROSS PROFIT............ 198,822 44,891 243,713
-------- -------- --------
FRANCHISE FEES AND
ROYALTIES EARNED....... 1,101 1,101
-------- --------
OPERATING EXPENSES:
Store operating....... 139,659 49,928 189,587
Amortization of
intangibles.......... 1,200 928 b 2,128
Store-opening costs... 6,728 2,129 8,857
General and
administrative....... 18,040 6,183 24,223
-------- -------- ------- --------
Total operating
expenses........... 165,627 58,240 928 224,795
-------- -------- ------- --------
OPERATING INCOME
(LOSS)................. 34,296 (13,349) (928) 20,019
INTEREST EXPENSE, NET... 76 6,422 (6,422)a 1,706
1,630 c
-------- -------- ------- --------
INCOME (LOSS) BEFORE
INCOME TAXES........... 34,220 (19,771) 3,864 18,313
PROVISION (BENEFIT) FOR
INCOME TAXES........... 12,817 (5,839)d 6,978
-------- -------- ------- --------
NET INCOME (LOSS)....... $ 21,403 $(19,771) $ 9,703 $ 11,335
======== ======== ======= ========
EARNINGS PER SHARE:
BASIC................. $ 0.72 $ 0.37
======== ========
DILUTED............... $ 0.70 $ 0.36
======== ========
WEIGHTED AVERAGE SHARES
OUTSTANDING:
BASIC................. 29,615 926 e 30,541
======== ======= ========
DILUTED............... 30,410 926 e 31,336
======== ======= ========
</TABLE>
See notes to pro forma combined financial statements.
31
<PAGE>
JUST FOR FEET, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
PRO FORMA BALANCE SHEET ADJUSTMENTS
a) To record JFF's purchase of Sneaker. The Company paid nominal
consideration for Sneaker's outstanding stock. Warrants issued to an affiliate
of THL with an estimated fair value of $6.7 million and approximately $2.7
million of transaction costs are included as additional consideration. The
historical carrying value of Sneaker's tangible net assets is estimated to
approximate their fair value except for property and equipment and inventory.
Accordingly, the purchase price has been tentatively allocated as follows:
<TABLE>
<S> <C>
Consideration paid:
Warrants issued.............................................. $ 6,711
Estimated transaction costs.................................. 2,673
--------
9,384
--------
Historical net assets of Sneaker:
Historical net deficiency in assets.......................... (72,266)
Redeemable preferred stock acquired.......................... 42,203
Sneaker debt forgiven immediately prior to acquisition(1).... 32,419
Historical intangible and certain other assets of Sneaker
without continuing value.................................... (4,329)
--------
(1,973)
--------
Excess of purchase price over historical net assets
acquired.................................................... $ 11,357
========
Allocation of excess purchase price (including fair value
adjustments):
Property and equipment(2).................................... (13,000)
Merchandise inventories(2)................................... (11,900)
Accrued expenses(3).......................................... (2,500)
Deferred income taxes(4)..................................... 10,900
Goodwill..................................................... 27,857
--------
$ 11,357
========
</TABLE>
--------
(1) Lenders of Sneaker Stadium forgave certain indebtedness immediately
prior to the acquisition. For purposes of the pro forma balance
sheet, such forgiveness has been reflected as though it had
occurred at April 30, 1998.
(2) As JFF plans to close and renovate all existing Sneaker stores and
liquidate existing inventory, these assets have been reduced to
their estimated fair value.
(3) Severance costs for certain Sneaker employees who will not continue
with JFF.
(4) Deferred income taxes are primarily attributable to the difference
in the income tax and financial reporting basis of assets arising
from the fair market value adjustments.
b) To record the sale of 926,355 shares of JFF common stock to an affiliate
of THL.
c) To reduce short-term borrowings with the proceeds from the sale of common
stock to an affiliate of THL.
32
<PAGE>
PRO FORMA STATEMENT OF INCOME ADJUSTMENTS
a) To eliminate interest expense associated with Sneaker's debt.
b) To record amortization of goodwill on a straight-line method over its
estimated thirty-year life.
c) To record interest expense related to $43.0 million in JFF debt, reduced
by the effects of applying to short-term borrowings the $20 million of
proceeds from the sale of common stock to an affiliate of THL.
d) To record an income tax benefit on the historical loss of Sneaker and to
tax effect the pro forma adjustments described above, excluding goodwill
amortization.
e) To reflect shares of common stock sold to an affiliate of THL.
33
<PAGE>
Exhibit 23.1
[LETTERHEAD ARTHUR ANDERSEN LLP]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated May 21, 1998 included in the Just For Feet, Inc. Form 8-K/A, into
the Just For Feet, Inc.'s previously filed Registration Statements Nos. 333-
06531, 33-96584, 333-28041 and 333-42313 on Form S-8, and into the Just For
Feet, Inc.'s previously filed Registration Statements Nos. 333-26345 and 333-
28039 and Form S-3.
/s/ Arthur Andersen LLP
Philadelphia, PA
July 27, 1998
