<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended Commission File Number:
May 1, 1999 0-23570
JUST FOR FEET, INC.
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 52-2098043
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7400 Cahaba Valley Road, Birmingham, Alabama 35242
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (205) 408-3000
----------------------
N/A
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No_____
-----
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Common Stock, par value $.0001 per share 31,210,980 shares
- ---------------------------------------- -------------------------------
Class Outstanding at June 4, 1999
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
JUST FOR FEET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
MAY 1, JANUARY 30,
1999 1999
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 17,629 $ 12,412
Accounts receivable 18,174 18,875
Merchandise inventories 458,069 399,901
Other 16,195 18,302
------------- -------------
Total current assets 510,067 449,490
PROPERTY AND EQUIPMENT, NET 176,082 160,592
GOODWILL, NET 70,477 71,084
OTHER ASSETS 14,559 8,230
------------- -------------
$ 771,185 $ 689,396
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 94,260 $ 100,322
Accrued expenses 39,757 25,731
Current maturities of long-term obligations 6,671 6,639
------------- -------------
Total current liabilities 140,688 132,692
LONG-TERM OBLIGATIONS 286,414 216,203
DEFERRED LEASE RENTALS 13,867 13,162
DEFERRED INCOME TAXES 1,628 1,633
------------- -------------
Total liabilities 442,597 363,690
------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock - par value $.0001; 5,000 shares authorized; none issued
Common stock - par value $.0001; 70,000 shares authorized; 31,205 (May 1,
1999) and 31,197 (January 30, 1999) shares issued and outstanding 3 3
Paid-in capital 249,673 249,590
Retained earnings 78,912 76,113
------------- -------------
Total stockholders' equity 328,588 325,706
------------- -------------
$ 771,185 $ 689,396
============= =============
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
1
<PAGE>
JUST FOR FEET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------
May 1, April 30,
1999 1998
<S> <C> <C>
NET SALES $ 220,985 $ 151,921
COST OF SALES 128,533 88,303
------------ -----------
GROSS PROFIT 92,452 63,618
------------ -----------
FRANCHISE FEES, ROYALTIES EARNED AND OTHER REVENUE 140 308
------------ -----------
OPERATING EXPENSES:
Store operating 67,879 44,756
Store opening 4,300 3,352
Amortization of intangibles 652 360
General and administrative 7,063 5,399
------------ -----------
Total operating expenses 79,894 53,867
------------ -----------
OPERATING INCOME 12,698 10,059
INTEREST EXPENSE, NET (5,144) (602)
------------ -----------
EARNINGS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 7,554 9,457
PROVISION FOR INCOME TAXES 2,908 3,641
------------ -----------
EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 4,646 5,816
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (1,847) -
------------ -----------
NET EARNINGS $ 2,799 $ 5,816
============ ===========
BASIC EARNINGS PER SHARE:
Before cumulative effect of change in accounting principle $ 0.15 $ 0.19
Cumulative effect of change in accounting principle (0.06) -
------------ -----------
Net earnings per share $ 0.09 $ 0.19
============ ===========
DILUTED EARNINGS PER SHARE:
Before cumulative effect of change in accounting principle $ 0.15 $ 0.19
Cumulative effect of change in accounting principle (0.06) -
------------ -----------
Net earnings per share $ 0.09 $ 0.19
============ ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 31,204 30,044
============ ===========
Diluted 31,695 31,172
============ ===========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
2
<PAGE>
JUST FOR FEET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------
MAY 1, APRIL 30,
1999 1998
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 2,799 $ 5,816
Adjustments to reconcile net earnings to net cash used by operating activities:
Cumulative effect of change in accounting principle 1,847
Depreciation and amortization 6,339 2,965
Deferred income taxes (6) (28)
Deferred lease rentals 706 439
Loss on disposal of property and equipment 247
Changes in assets and liabilities providing (using) cash:
Accounts receivable 701 (1,041)
Merchandise inventories (58,168) (5,844)
Other assets (6,113) (185)
Accounts payable (6,061) (9,141)
Accrued expenses 14,025 1,206
Income taxes 3,425
------------ ------------
Net cash used by operating activities (43,684) (2,388)
------------ ------------
INVESTING ACTIVITIES--
Purchases of property and equipment (21,061) (12,277)
------------ ------------
Net cash used for investing activities (21,061) (12,277)
------------ ------------
FINANCING ACTIVITIES:
Repayments of short-term borrowings, net (63,951)
Borrowings of long-term obligations 435,100 1,701
Principal payments on long-term obligations (365,221) (816)
Proceeds from exercise of options 83 865
------------ ------------
Net cash provided by (used for) financing activities 69,962 (62,201)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,217 (76,866)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,412 82,490
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 17,629 $ 5,624
============ ============
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
3
<PAGE>
JUST FOR FEET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------
NOTE 1 - GENERAL
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information, Regulation S-X and the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
These unaudited financial statements include all adjustments, consisting of
normal, recurring accruals, which Just For Feet, Inc. (the "Company") considers
necessary for a fair presentation of the financial position and the results of
operations for these periods.
The results of operations for the three months ended May 1, 1999 are not
necessarily indicative of the results to be expected for the full year ending
January 29, 2000. For further information, refer to the financial statements and
notes thereto for the fiscal year ended January 30, 1999 included in the
Company's Form 10-K as filed with the Securities and Exchange Commission.
FISCAL YEAR
In late 1998 the Company adopted the standard fiscal year of the retail industry
which is a 52/53 week period ending on the Saturday closest to January 31. As a
result, the most recent fiscal year ended on January 30, 1999 ("fiscal 1998")
and the current three month period ended on May 1, 1999. However, all quarters
during fiscal 1998 ended the last day of April, July and October and have not
been restated as a result of the change in fiscal year.
SEGMENT REPORTING
The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 131 Disclosures about Segments of an Enterprise and
Related Information. Under SFAS No. 131, segments are defined as components of
an enterprise about which separate financial information is available that is
evaluated by the chief operating decision maker in deciding how to allocate
operating resources and in assessing performance. Under SFAS No. 131, the
superstore and specialty store concepts represent two operating segments that
have been aggregated for financial reporting purposes.
Approximately 76% of the Company's sales were comprised of athletic and outdoor
footwear for fiscal 1998 and 1997. The remaining sales were principally apparel.
Management believes that this sales mix will not materially change for fiscal
1999. Sales and assets outside the United States are not material.
NOTE 2 - ACQUISITION
On July 2, 1998, the Company acquired all of the outstanding stock of Sneaker
Stadium, Inc. ("Sneaker") for nominal cash consideration and the assumption of
$43.0 million of existing bank debt. Such debt was immediately paid off with the
proceeds of a term loan by the Company. The Company may make additional payments
of up to $33.0 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. The acquisition has been accounted
for as a purchase and accordingly the purchase price has been allocated to
assets acquired and liabilities assumed based upon their estimated fair values
as of the acquisition date. The excess of the purchase price over the fair
market value of net assets acquired is being amortized over 30 years. The
estimated fair values of assets acquired and liabilities assumed were considered
to be the best estimates as of the acquisition date and may be adjusted as more
information is obtained.
4
<PAGE>
Concurrent with and as a condition of the Company's acquisition of Sneaker, an
affiliate of Thomas H. Lee Company ("THL"), a firm which owned a controlling
interest in Sneaker, purchased from the Company an aggregate of 926,355 units,
each consisting of one share of the Company's common stock and a warrant to
purchase 0.997 of a share of the Company's 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,
which, for accounting purposes, was considered a part of the consideration paid
by the Company for Sneaker.
NOTE 3 - CHANGE IN ACCOUNTING PRINCIPLE
Effective January 31, 1999, the Company adopted Statement of Position No. 98-5,
Reporting on the Cost of Start-Up Activities (the "SOP"), which requires that
costs of start-up activities and organization costs be expensed as incurred. The
Company previously expensed start-up costs for new stores in the month that the
new store opened. The cumulative effect of this change in accounting principle
resulted in a net charge to earnings of approximately $1.8 million ($0.06 per
basic and diluted share), net of applicable income taxes of approximately $1.2
million. The effect on the three month period ended May 1, 1999 was an increase
in store opening costs of approximately $1.3 million, and a decrease in net
income of approximately $774,000 ($0.02 per basic and diluted share), net of
applicable income taxes of approximately $484,000.
NOTE 4 - NEW ACCOUNTING STANDARD
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued. This Statement requires that all derivatives be
recognized in the statement of financial position as either assets or
liabilities and measured at fair value. In addition, all hedging relationships
must be designated, reassessed and documented pursuant to the provisions of SFAS
No. 133. This Statement will be effective for the Company in fiscal 2000
(although a delay in the effective date until 2001 is presently being
contemplated by the Financial Accounting Standards Board). The Company's
management has not determined the effect of SFAS No. 133 on its financial
statements.
NOTE 5 - LITIGATION
In July 1997, a lawsuit was filed by a shareholder (individually and on behalf
of others) against the Company and certain of its current and former officers, a
former director and two of the four managing underwriters in the Company's June
1996 public offering of common stock. The suit alleges that the Company's
registration statement and prospectus used in such offering contained certain
misleading financial information. The Company and its named officers and
directors deny liability on the claims (the dollar amount of which is currently
unspecified) and are vigorously defending the suit.
On April 20, 1999, the sole superstore franchisee of the Company, as Plaintiff,
filed a complaint seeking declaratory judgement, an accounting and monetary
damages against the Company. The complaint alleges that the Company has breached
its obligations under certain franchise agreements between it and the Plaintiff
and seeks actual damages in excess of $82.5 million, punitive damages in excess
of $25.0 million and the right to terminate the franchise agreements. The
Company denies all allegations contained in the complaint and will vigorously
defend these allegations.
The Company is a defendant in various lawsuits incident to the ordinary course
of business. It is not possible to determine with precision the probable outcome
or the amount of liability, if any, with respect to these lawsuits; however, in
the opinion of the Company, the disposition of these lawsuits will not adversely
affect the consolidated financial statements of the Company to a material
extent.
5
<PAGE>
NOTE 6 - LONG-TERM OBLIGATIONS
At May 1, 1999, the Company had $60.7 million outstanding under a $200.0 million
revolving senior credit facility (the "Facility") with a syndicate of banks. The
Facility terminates on December 10, 2001, bears interest at a floating rate
above either prime or LIBOR (the effective rate was 6.5% at May 1, 1999), is
guaranteed and secured by the stock of the Company's domestic subsidiaries and
66 2/3% of the Company's foreign subsidiary and is subject to certain
restrictive covenants. At May 1, 1999, the Company was in compliance with these
covenants. However, the Company anticipates that at the end of the second
quarter of fiscal 1999 it will not be in compliance with certain covenants under
this revolving credit facility. The Company is seeking an amendment to the
facility to revise such covenants so that it will remain in compliance.
On April 15, 1999, the Company completed the private placement of $200.0 million
of 11.0% senior subordinated notes (the "Notes"). Proceeds from this placement
were used to repay a $80.0 million term loan (which was initially borrowed in
February 1999) and approximately $113.0 million of the Facility. The Notes
mature in May 2009 and require interest payments semi-annually. The Notes are
redeemable after April 2004 without a make-whole premium. At any time prior to
May 2004, the Company may redeem all of the Notes at a redemption price equal to
100% of their principal amount plus a make-whole premium, together with accrued
interest through the redemption date. Before May 2002, the Company may redeem up
to 35% of the Notes with the net proceeds of certain sales of equity. The Notes
are general unsecured obligations, subordinate to all of the Company's senior
debt. Certain Note issuance costs have been classified in other non-current
assets on the accompanying balance sheet and are being amortized over the life
of the Notes.
All of the Company's wholly owned U.S. subsidiaries (the Company's non-guarantor
foreign subsidiary was formed in fiscal 1998) have guaranteed the Notes.
Accordingly, unaudited condensed consolidating financial statements are
presented below. The guarantees of the guarantor subsidiaries of the Notes are
full, unconditional, and joint and several. Separate financial statements of the
guarantor subsidiaries are not presented because management has determined that
they would not be material to investors. There are no significant restrictions
on the ability of Just For Feet, Inc. (the "Parent") to obtain funds from the
guarantor subsidiaries. The Parent and the guarantors have accounted for their
respective subsidiaries on the equity basis.
6
<PAGE>
Condensed Consolidating Balance Sheets (Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
May 1, 1999
--------------------------------------------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiary Eliminations Consolidated
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ (19) $ 17,436 $ 212 $ - $ 17,629
Accounts receivable - trade 15,463 2,711 - - 18,174
Accounts receivable - intercompany 305,011 - - (305,011) -
Merchandise Inventory 119,382 333,164 5,523 - 458,069
Other 10,079 5,901 215 - 16,195
--------------------------------------------------------------------------------
Total Current Assets 449,916 359,212 5,950 (305,011) 510,067
PROPERTY AND EQUIPMENT, NET 48,980 124,273 2,829 - 176,082
INVESTMENTS IN SUBSIDIARIES 195,795 - - (195,795) -
GOODWILL, NET - 70,477 - - 70,477
OTHER ASSETS 10,996 3,552 11 - 14,559
--------------------------------------------------------------------------------
$ 705,687 $ 557,514 $ 8,790 $ (500,806) $ 771,185
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 54,369 $ 39,899 $ (8) $ - $ 94,260
Accounts payable - intercompany - 296,163 8,848 (305,011) -
Accrued expenses 27,930 11,551 276 - 39,757
Current maturities of long-term obligations 6,671 - - - 6,671
--------------------------------------------------------------------------------
Total Current Liabilities 88,970 347,613 9,116 (305,011) 140,688
LONG-TERM OBLIGATIONS 286,384 30 - - 286,414
DEFERRED LEASE RENTALS 924 12,943 - - 13,867
DEFERRED INCOME TAXES 821 807 - - 1,628
--------------------------------------------------------------------------------
Total Liabilities 377,099 361,393 9,116 (305,011) 442,597
--------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common Stock 3 11 - (11) 3
Additional Paid-In Capital 249,673 115,376 - (115,376) 249,673
Retained Earnings 78,912 80,734 (326) (80,408) 78,912
--------------------------------------------------------------------------------
Total Stockholders' Equity 328,588 196,121 (326) (195,795) 328,588
--------------------------------------------------------------------------------
$ 705,687 $ 557,514 $ 8,790 $ (500,806) $ 771,185
================================================================================
<CAPTION>
January 30, 1999
--------------------------------------------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiary Eliminations Consolidated
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,856 $ 10,309 $ 247 $ - $ 12,412
Accounts receivable - trade 18,875 - - 18,875
Accounts receivable - intercompany 279,375 - - (279,375) -
Merchandise Inventory 97,030 297,247 5,624 399,901
Other 7,057 11,030 215 18,302
--------------------------------------------------------------------------------
Total Current Assets 404,193 318,586 6,086 (279,375) 449,490
PROPERTY AND EQUIPMENT, NET 45,097 112,693 2,802 160,592
INVESTMENTS IN SUBSIDIARIES 191,507 - - (191,507) -
GOODWILL, NET 71,084 71,084
OTHER ASSETS 1,287 6,932 11 8,230
--------------------------------------------------------------------------------
$ 642,084 $ 509,295 $ 8,899 $ (470,882) $ 689,396
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 81,341 $ 18,540 $ 441 $ 100,322
Accounts payable - intercompany - 270,767 8,608 (279,375) -
Accrued expenses 12,465 13,161 105 25,731
Current maturities of long-term obligations 6,108 531 - 6,639
--------------------------------------------------------------------------------
Total Current Liabilities 99,914 302,999 9,154 (279,375) 132,692
LONG-TERM OBLIGATIONS 215,186 1,017 216,203
DEFERRED LEASE RENTALS 457 12,705 - 13,162
DEFERRED INCOME TAXES 821 812 - 1,633
--------------------------------------------------------------------------------
Total Liabilities 316,378 317,533 9,154 (279,375) 363,690
--------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common Stock 3 11 - (11) 3
Additional Paid-In Capital 249,590 115,376 - (115,376) 249,590
Retained Earnings 76,113 76,375 (255) (76,120) 76,113
--------------------------------------------------------------------------------
Total Stockholders' Equity 325,706 191,762 (255) (191,507) 325,706
--------------------------------------------------------------------------------
$ 642,084 $ 509,295 $ 8,899 $ (470,882) $ 689,396
================================================================================
</TABLE>
7
<PAGE>
Condensed Consolidating Statements of Earnings (Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
------------------------------------------------------------------------
THREE MONTHS ENDED MAY 1, 1999
------------------------------------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiary Eliminations Consolidated
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET SALES $ 38,616 $ 178,958 $ 3,411 $ - $ 220,985
COST OF SALES 22,666 103,754 2,113 - 128,533
------------------------------------------------------------------------
GROSS PROFIT 15,950 75,204 1,298 - 92,452
------------------------------------------------------------------------
FRANCHISE FEES, ROYALTIES AND
OTHER REVENUE 260 50 (170) - 140
------------------------------------------------------------------------
OPERATING EXPENSES:
Store operating 11,152 55,583 1,144 - 67,879
Store opening costs 87 4,213 - - 4,300
Amortization of intangibles 45 607 - - 652
General and administrative 1,570 5,393 100 - 7,063
------------------------------------------------------------------------
Total operating expenses 12,854 65,796 1,244 - 79,894
------------------------------------------------------------------------
OPERATING INCOME (LOSS) 3,356 9,458 (116) - 12,698
INTEREST EXPENSE, NET (5,144) - - - (5,144)
------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE INCOME
TAXES, EQUITY IN EARNINGS OF SUBSIDIARIES
AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (1,788) 9,458 (116) - 7,554
PROVISION FOR INCOME TAXES (688) 3,641 (45) - 2,908
------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE EQUITY IN EARNINGS
OF SUBSIDIARIES AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (1,100) 5,817 (71) - 4,646
EQUITY IN EARNINGS OF SUBSIDIARIES 4,288 - - (4,288) -
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (389) (1,458) - - (1,847)
------------------------------------------------------------------------
NET EARNINGS (LOSS) $ 2,799 $ 4,359 $ (71) $ (4,288) $ 2,799
========================================================================
<CAPTION>
------------------------------------------------------------------------
THREE MONTHS ENDED APRIL 30, 1998
------------------------------------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiary Eliminations Consolidated
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET SALES $ 30,311 $ 119,175 $ 2,435 $ - $ 151,921
COST OF SALES 18,161 68,660 1,482 - 88,303
------------------------------------------------------------------------
GROSS PROFIT 12,150 50,515 953 - 63,618
------------------------------------------------------------------------
FRANCHISE FEES, ROYALTIES AND
OTHER REVENUE 792 (484) - - 308
------------------------------------------------------------------------
OPERATING EXPENSES:
Store operating 7,255 36,866 635 - 44,756
Store opening costs 735 2,014 603 - 3,352
Amortization of intangibles 45 315 - - 360
General and administrative 879 4,520 - - 5,399
------------------------------------------------------------------------
Total operating expenses 8,914 43,715 1,238 - 53,867
------------------------------------------------------------------------
OPERATING INCOME (LOSS) 4,028 6,316 (285) - 10,059
INTEREST EXPENSE, NET (602) - - - (602)
------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE INCOME
TAXES AND EQUITY IN EARNINGS OF SUBSIDIARIES 3,426 6,316 (285) - 9,457
PROVISION FOR INCOME TAXES 1,325 2,426 (110) - 3,641
------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE EQUITY IN EARNINGS
OF SUBSIDIARIES 2,101 3,890 (175) - 5,816
EQUITY IN EARNINGS OF SUBSIDIARIES 3,715 - - (3,715) -
------------------------------------------------------------------------
NET EARNINGS (LOSS) $ 5,816 $ 3,890 $ (175) $ (3,715) $ 5,816
========================================================================
</TABLE>
8
<PAGE>
Condensed Consolidating Statements of Cash Flows (Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
-----------------------------------------------------------------
THREE MONTHS ENDED MAY 1, 1999
-----------------------------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiary Eliminations Consolidated
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings (loss) $ 2,799 $ 4,359 $ (71) $ (4,288) $ 2,799
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Cumulative effect of change in accounting 389 1,458 - - 1,847
Depreciation and amortization 1,627 4,621 91 - 6,339
Deferred income taxes - (6) - - (6)
Deferred lease rentals 467 239 - - 706
Undistributed earnings of subsidiaries (4,288) - - 4,288 -
Loss on disposal of property and equipment 69 178 - - 247
Changes in assets and liabilities providing (using) cash:
Accounts receivable 3,412 (2,711) - - 701
Merchandise inventories (22,352) (35,917) 101 - (58,168)
Other assets (12,731) 6,618 - - (6,113)
Accounts payable (26,972) 21,360 (449) - (6,061)
Accrued expenses 15,465 (1,611) 171 - 14,025
Income taxes - - - - -
Advances to/from subsidiaries (25,636) 25,396 240 - -
-----------------------------------------------------------------
Net cash provided by (used in) operating activities (67,751) 23,984 83 - (43,684)
-----------------------------------------------------------------
INVESTING ACTIVITIES-
Purchases of property and equipment (5,605) (15,338) (118) - (21,061)
-----------------------------------------------------------------
Net cash used for investing activities (5,605) (15,338) (118) - (21,061)
-----------------------------------------------------------------
FINANCING ACTIVITIES:
Repayments of short-term obligations, net - - - - -
Borrowings (repayments) of long-term obligations, net 71,398 (1,519) - - 69,879
Proceeds from exercise of options 83 - - - 83
-----------------------------------------------------------------
Net cash provided by (used in) financing activities 71,481 (1,519) - - 69,962
-----------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,875) 7,127 (35) - 5,217
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 1,856 10,309 247 - 12,412
-----------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ (19) $ 17,436 $ 212 $ - $ 17,629
=================================================================
<CAPTION>
-------------------------------------------------------------------
THREE MONTHS ENDED APRIL 30, 1998
-------------------------------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiary Eliminations Consolidated
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings (loss) $ 5,816 $ 3,890 $ (175) $ (3,715) $ 5,816
Adjustments to reconcile net earnings to net cash (used in) -
provided by operating activities: -
Depreciation and amortization 1,082 1,818 65 - 2,965
Deferred income taxes 150 (178) - - (28)
Deferred lease rentals 38 401 - - 439
Undistributed earnings of subsidiaries (3,715) - - 3,715 -
Changes in assets and liabilities providing (using) cash:
Accounts receivable (1,102) 61 - - (1,041)
Merchandise inventories 8,989 (9,450) (5,383) - (5,844)
Other assets (657) 516 (44) - (185)
Accounts payable (18,867) 9,726 - - (9,141)
Accrued expenses (3,149) 4,355 - - 1,206
Income taxes 2,372 1,053 - - 3,425
Advances to/from subsidiaries (1,174) (7,349) 8,523 - -
------------------------------------------------------------------
Net cash (used in) provided by operating activities (10,217) 4,843 2,986 - (2,388)
------------------------------------------------------------------
INVESTING ACTIVITIES-
Purchases of property and equipment (858) (8,765) (2,654) - (12,277)
------------------------------------------------------------------
Net cash used for investing activities (858) (8,765) (2,654) - (12,277)
------------------------------------------------------------------
FINANCING ACTIVITIES:
Repayments of short-term obligations, net (63,951) - - - (63,951)
Borrowings (repayments) of long-term obligations, net 832 53 - - 885
Proceeds from exercise of options 865 - - - 865
------------------------------------------------------------------
Net cash provided by (used in) financing activities (62,254) 53 - - (62,201)
------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (73,329) (3,869) 332 - (76,866)
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 77,228 5,262 - - 82,490
------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 3,899 $ 1,393 $ 332 $ - $ 5,624
==================================================================
</TABLE>
9
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company operates retail stores in the brand-name athletic and outdoor
footwear and apparel market. The Company was founded in 1977 with the opening of
a small mall-based store and in 1988, Just For Feet opened its first superstore
in Birmingham, Alabama. At May 1, 1999, there were 152 Just For Feet superstores
operating in 28 states and Puerto Rico, including 12 stores operated by Just For
Feet's only superstore franchisee. Of the Company operated Just For Feet
superstores, five superstores were opened and 12 former Sneaker Stadium
superstores were remodeled and reopened in the first three months of fiscal
1999. The Company expects to open a total of approximately 25 new superstores
and 14 remodeled former Sneaker Stadium superstores during fiscal 1999. The
Company may change the rate of opening of new superstores in any one fiscal
quarter. At May 1, 1999, there were 167 Company-owned and 42 franchised
specialty stores in 22 states and Puerto Rico.
The Company has recently experienced some operational and market
difficulties in the specialty store division which had an adverse impact on the
Company's profitability in the first quarter of fiscal 1999 and are likely to
continue to impact profitability for the remainder of fiscal 1999. In the fourth
quarter of fiscal 1998, sales at the specialty stores suffered along with other
smaller format athletic footwear retailers. In the first quarter of fiscal 1999,
specialty store operations were adversely impacted by lower gross margins and
higher than anticipated store operating expenses as a percentage of net sales,
primarily as a result of lower than expected sales volumes in recently opened
specialty stores and higher than expected interest expense associated with
funding higher than planned inventory levels during the period. At May 1, 1999,
the specialty store division had excess inventory of over $50 million. The
buildup in inventory is attributable mainly to footwear orders placed at the
division level in excess of the division's current needs, as well as to the
lower than expected sales volumes in the specialty stores. The Company has
announced its intention to significantly reduce inventory levels. As the Company
attempts to lower inventory levels, Company-wide gross margins will continue to
decrease significantly, particularly in the second quarter of fiscal 1999. As a
result of the implementation of this plan to reduce inventory levels and higher
than planned interest costs, the Company anticipates reporting a net loss in the
second quarter of fiscal 1999 and that net earnings in fiscal 1999 will be lower
than in fiscal 1998. If the Company is unable to achieve significant inventory
reductions in the second quarter as planned, and higher than planned inventory
levels continue, the Company will experience significantly lower gross margins,
significantly higher store operating expenses and net interest expense,
decreased liquidity and significantly lower net earnings in fiscal 1999 than in
fiscal 1998.
As a result of these difficulties, the Company has reduced the number of
specialty stores it expects to open in fiscal 1999 from 60 to 45 (of which 37
already have been opened to date). The Company currently does not intend to
open any new specialty stores in fiscal 2000 unless the current conditions in
the athletic footwear industry and the results of the specialty store division
improve.
On July 2, 1998, the Company acquired Sneaker Stadium, Inc. ("Sneaker"), an
operator of 39 athletic footwear and apparel superstores located primarily in
the Northeast and Mid-Atlantic regions of the United States. The Company has
converted and re-opened as Just For Feet superstores 33 of these stores (12
during the first quarter) and permanently closed four. The corporate
headquarters of Sneaker Stadium has substantially closed and all its operations
have been consolidated into the Company's Birmingham, Alabama headquarters. In
connection with the acquisition, Just For Feet assumed $43.0 million of existing
Sneaker Stadium debt and, if the acquired Sneaker Stadium stores attain certain
future financial targets, the Company will make additional payments of up to
$33.0 million on or after April 30, 2002. The Sneaker acquisition has been
accounted for as a purchase and accordingly, the results of operations are
included in the have been consolidated statement of earnings as of the
acquisition date. Acquired stores that were remodeled and integrated into the
Company's operations were closed during the remodeling period. During such
remodeling period, the Company continued to incur rent and other store operating
expenses, including salaries and wages, without generating any sales. These
expenses, which would otherwise be recognized as store operating costs have
instead been classified as store opening costs in the accompanying statement of
earnings. These conditions may affect the Company's profitability for such
periods and the comparability of the Company's results of operations for the
first quarter of fiscal 1999 as compared to the first quarter of fiscal 1998.
10
<PAGE>
In recent years, the Company has achieved positive comparable store sales
growth on an annual basis. During the three month period ended May 1, 1999,
comparable store sales increased 2.4% as compared to 3.5% for the same period
last year. The Company does not expect comparable store sales to continue to
increase in the future at historical rates, nor can any assurance be given that
increases in comparable store sales will continue. The first quarter of fiscal
1998 was the first quarter that the Company included the specialty stores in the
comparable store sales base. The Company will not report the superstores
acquired from Sneaker Stadium in its comparable sales results until such stores
have been remodeled, reopened and operated as Just For Feet superstores for 13
months.
Effective with the beginning of the current fiscal year, January 31, 1999, the
Company changed its method of accounting for store opening costs as required by
Statement of Position No. 98-5, Reporting on the Cost of Start-Up Activities,
(the "SOP"). The SOP requires that start-up costs be expensed as incurred. The
Company previously expensed these costs in the month that the store opened. The
cumulative effect of the change in accounting principle which resulted from
adopting the SOP was a net charge to earnings of approximately $1.8 million
($0.06 per basic and diluted share), net of applicable income taxes of
approximately $1.2 million. The effect on the three month period ended May 1,
1999 was an increase in store opening costs of approximately $1.3 million, and a
decrease in net income of approximately $774,000 ($0.02 per basic and diluted
share), net of applicable income taxes of approximately $484,000.
Effective in late fiscal 1998, the Company adopted the standard fiscal year
for the retail industry which is a 52/53-week period ending on the Saturday
closest to January 31. As a result, fiscal 1999 refers to the period beginning
January 30, 1999 and ending January 29, 2000 and fiscal 1998 refers to the
period from February 1, 1998 to January 30, 1999. However, all quarters during
fiscal 1998 ended the last day of April, July and October and have not been
restated as a result of the change in fiscal year.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, income statement data
expressed as a percentage of net sales:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
May 1, April 30,
1999 1998
---- ----
<S> <C> <C>
Net sales.......................................................... 100.0 % 100.0 %
Cost of sales...................................................... 58.2 58.1
-------- -------
Gross profit................................................... 41.8 41.9
Franchise fees, royalties and other revenue........................ 0.1 0.2
Operating expenses:
Store operating................................................ 30.7 29.5
Store opening costs............................................ 2.0 2.2
Amortization of intangibles.................................... 0.3 0.2
General and administrative..................................... 3.2 3.6
-------- -------
Operating income............................................ 5.7 6.6
Interest (expense) income, net..................................... (2.3) (0.4)
-------- -------
Earnings before income taxes and cumulative
effect of change in accounting................................. 3.4 6.2
Provision for income taxes......................................... 1.3 2.4
-------- -------
Earnings before cumulative effect of change in
accounting..................................................... 2.1 3.8
Cumulative effect of change in accounting.......................... (0.8) -
-------- -------
Net earnings................................................ 1.3 % 3.8 %
======== =======
</TABLE>
11
<PAGE>
THREE MONTHS ENDED MAY 1, 1999 COMPARED TO THREE MONTHS ENDED APRIL 30, 1998
Net Sales - Net sales increased $69.1 million, or 45.5%, to $221.0 million in
the first quarter of fiscal 1999 compared to net sales of $151.9 million for the
first quarter of fiscal 1998. This increase was primarily attributable to 53 new
superstores (including 33 remodeled and re-opened former Sneaker superstores)
and 66 new specialty stores opened since April 30, 1998 and an increase in
comparable store sales of 2.4%. The calculation of comparable store sales
included 68 superstores and 86 specialty stores at May 1, 1999. The acquisition
of Sneaker Stadium on July 2, 1998 has been accounted for as a purchase and
accordingly, the results of operations are included in the Company's
consolidated statement of earnings from the July 2, 1998 acquisition date.
Gross Profit - Gross profit for the first quarter of fiscal 1999 increased 45.3%
to $92.5 million from $63.6 million in the prior year comparable period,
primarily as a result of increased sales. As a percentage of net sales, gross
profit for the first quarters of fiscal 1999 and 1998 remained relatively
constant at 41.8% and 41.9%, respectively.
Franchise Fees, Royalties and Other Revenue. Franchise fees, royalties and other
revenue decreased 54.6% to $140,000 in the first quarter of fiscal 1999 from
$308,000 in the first quarter of fiscal 1998 primarily as a result of the
Company not recognizing any royalty income from its sole superstore franchisee
as a result of a lawsuit filed against the Company by the franchisee in April
1999.
Store Operating Expenses. Store operating expenses increased $23.1 million or
51.7% to $67.9 million in the first quarter of fiscal 1999 from $44.8 million in
the first quarter of fiscal 1998. The increase was primarily attributable to the
operating expenses of the 53 new superstores and 66 new specialty stores opened
since April 30, 1998. As a percentage of net sales, store operating expenses
increased to 30.7% for the three month period ended May 1, 1999 from 29.5% for
the three month period ended April 30, 1998. This increase was primarily a
result of higher store operating costs in the specialty store division as a
percentage of net sales, as sales at newer specialty stores opened primarily in
the latter part of fiscal 1998 and in 1999 have not achieved anticipated levels
which has resulted in a higher store operating expense structure than in the
prior year period.
Store Opening Costs. Effective with the beginning of the current fiscal year
(January 31, 1999) the Company changed its method of accounting for store
opening costs as required by Statement of Position No. 98-5, Reporting on the
Cost of Start-Up Activities, (the "SOP"). The SOP requires that start-up
activities and organization costs be expensed as incurred. The Company
previously expensed these costs for new stores in the month that the new store
opened. The effect on the three month period ended May 1, 1999 was an increase
in store opening costs of approximately $1.3 million, and a decrease in net
income of approximately $774,000 ($0.02 per basic and diluted share), net of
applicable income taxes of approximately $484,000. The Company opened five new
superstores, 12 converted former Sneaker superstores and 27 new specialty stores
in the first quarter of fiscal 1999 as compared to 11 new superstores and 10 new
specialty stores in the first quarter of fiscal 1998. As a percentage of net
sales, store operating costs declined to 2.0% for the current quarter from 2.2%
in the prior year first quarter as a result of this accounting change and the
increase in net sales noted above.
Amortization of Intangibles. Amortization of intangibles, which includes
amortization of goodwill and franchise rights, increased to approximately
$652,000 for the first quarter of fiscal 1999 from approximately $360,000 in the
first quarter of fiscal 1998. This increase is primarily attributable to the
amortization of goodwill resulting from the acquisition of Sneaker Stadium in
July of 1998.
12
<PAGE>
General and Administrative Expenses. General and administrative expenses
increased $1.7 million or 30.8%, to $7.1 million in the first quarter of fiscal
1999 from $5.4 million in the first quarter of fiscal 1998. This increase was
primarily attributable to the increase in corporate staff to support the
Company's planned growth. As a percentage of net sales, general and
administrative expenses decreased to 3.2% in the first quarter of fiscal 1999
from 3.6% in the first quarter of fiscal 1998, due primarily to the continued
leverage on higher sales at Just For Feet superstores and specialty stores and
continued focus on controlling such costs.
Operating Income. Operating income increased 26.2% to $12.7 million in the first
quarter of fiscal 1999 from $10.1 million in the first quarter of fiscal 1998.
Operating income, as a percentage of net sales, decreased to 5.7% in the first
quarter of fiscal 1999 from 6.6% in the first quarter of fiscal 1998 primarily
due to the increase in store operating expenses as a percentage of net sales, as
outlined above.
Net Interest Expense/Income. Net interest expense was $5.1 million in the first
quarter of fiscal 1999, compared to $602,000 in the first quarter of fiscal
1998. The increase in net interest expense was primarily due to the increase in
debt to fund the acquisition of Sneaker Stadium, to fund the cash requirements
for opening 20 new superstores, remodeling and re-opening 33 former Sneaker
Stadium superstores and 66 new specialty stores since April 30, 1998 and due to
the cash requirements of funding higher than planned inventory levels in the
first quarter of fiscal 1999.
Provision for Income Taxes. The Company's effective combined federal and state
income tax rate remained constant at 38.5% for the first quarter of fiscal 1999
and 1998.
Earnings Before the Cumulative Effect of the Change in Accounting. As a result
of the above factors, earnings before the cumulative effect of the change in
accounting principle decreased 20.1% to $4.6 million in the first quarter of
fiscal 1999 from $5.8 million in the first quarter of fiscal 1998.
Cumulative Effect of the Change in Accounting. The cumulative effect of the
change in accounting principle that resulted from adopting the SOP was a net
charge to earnings of $1.8 million, net of applicable income taxes of $1.2
million.
Net Earnings. As a result of the above factors, net income decreased 51.9% to
$2.8 million in the first quarter of fiscal 1999 from $5.8 million in the first
quarter of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
Just For Feet's primary sources of working capital have been cash flows from
operations, borrowings under its revolving credit facility and other credit
facilities and proceeds from public and private offerings of securities. The
Company had working capital of $369.4 million and $316.8 million at May 1, 1999
and January 30, 1999, respectively. The principal use of cash has been to fund
new store openings, acquisitions and store operations, to remodel the acquired
Sneaker Stadium superstores and to purchase inventory, equipment and fixtures.
During the three months ended May 1, 1999, the Company spent $21.6 million for
property and equipment, including $14.1 million to open new stores, $6.3 million
for improvements to existing stores, and $1.2 million for corporate additions
and improvements. The Company's short-term operational cash requirements are not
highly seasonal. The Company had $17.6 million in cash and cash equivalents as
of May 1, 1999.
On July 2, 1998, the Company consummated the private placement of 926,355
shares of common stock and warrants to purchase an additional 923,591 shares of
common stock to an affiliate of Thomas H. Lee Company, one of the former owners
of Sneaker Stadium. The warrants are exercisable at any time prior to July 2,
2003, at a price of $21.59 per share. The Company received $20.0 million from
such private placement.
13
<PAGE>
On December 10, 1998, the Company obtained a $200 million revolving senior
credit facility (the "Facility") from a syndicate of banks. The Facility
terminates on December 10, 2001 and bears interest at a floating rate above
either prime or LIBOR. The Facility is secured by the stock of the Company's
domestic subsidiaries and 66 2/3% of the Company's foreign subsidiary,
guaranteed by all of the domestic subsidiaries, and is subject to certain
restrictive covenants. Management anticipates that at the end of the second
quarter of fiscal 1999, the Company will not be in compliance with certain
covenants under the Facility. The Company is seeking an amendment to the
facility to revise such covenants so that the Company will remain in compliance.
The Company is also seeking additional support from its major vendors. Although
management is confident that the Company will obtain this vendor support and
this amendment, there can be no assurance that such will be obtained. If the
Company is unable to obtain an amendment to the Facility, the Company may be in
default which would permit its lenders under the Facility to accelerate the
maturity of the debt under the Facility and would cause defaults under the
Company's other indebtedness. In addition, if the Company is unable to obtain an
amendment to the Facility or vendor support, the Company will require additional
funds from other sources to fund the Company's operations. In such event, there
can be no assurance that the Company will be able to obtain such financing as
and when required or on acceptable terms.
Interest rates under the Facility are subject to increase depending on changes
in certain ratios under the financial covenants. The proposed amendment to the
credit agreement provides for further increases to the interest rate under the
Facility based upon changes in these ratios.
On April 15, 1999, the Company completed a $200.0 million private placement of
senior subordinated notes (see Note 6). Proceeds from this such private
placement were used to repay an $80.0 million term loan and $113.0 million of
the Facility discussed above.
At June 1, 1999, there was $153.7 million outstanding on the Facility. The
$93.0 million increase in the amount outstanding under this Facility since May
1, 1999 was used principally to fund the opening of new superstores, new
specialty stores and the remodeling and reopening of Sneaker Stadium
superstores, as well as to fund higher than planned inventory levels, during the
period.
The Company finances certain store fixtures, point-of-sale equipment and
management information systems through various financing arrangements which may
involve capital leases and/or senior term loans.
Just For Feet's future capital requirements are primarily for the opening of
new superstores and specialty stores. The Company estimates that the total cash
required to open a new 15,000 to 20,000 square foot prototype superstore,
including store fixtures and equipment, leasehold improvements, net working
capital and store opening costs, typically ranges from $1.5 to $2.5 million,
depending on the amount of vendor and landlord assistance. The Company estimates
that the total cash required to open a 4,000 to 6,000 square foot specialty
store ranges from $300,000 to $400,000.
The Company anticipates opening a total of approximately 25 new superstores,
14 remodeled former Sneaker Stadium superstores and approximately 45 new
specialty stores in fiscal 1999, and approximately 25 new superstores in fiscal
2000.
The Company plans to spend approximately $60.0 to $65.0 million on capital
expenditures in fiscal 1999. Included in this estimate is approximately $5.0
million for the construction of a second office building on the campus of its
existing Birmingham, Alabama headquarters, approximately $49.0 to $54.0 million
for the opening of new superstores (including two flagship superstores) and
specialty stores and approximately $6.0 million in connection with other capital
improvements to its business. Total capital expenditures for the construction of
its second office building are estimated to be $8.0 million over fiscal 1999 and
fiscal 2000. The Company estimates the cost of opening the two flagship
superstores planned for 1999, including capital expenditures with respect to
such superstores, will aggregate approximately $6.0 million. The Company is not
currently planning any material expenditures other than those mentioned above.
Management anticipates that at the end of the second quarter of fiscal 1999,
the Company will not be in compliance with certain covenants under the revolving
credit facility. The Company is seeking an amendment to the Facility to revise
such covenants so that the Company will remain in compliance. The Company is
also seeking additional support from its major vendors. The Company had $46.3
million available for additional borrowings under the Facility at June 1, 1999.
Future borrowings under the Facility are subject for the satisfaction of certain
conditions at the time of borrowing. The Company believes that internally
generated funds, cash on hand, vendor support and bank borrowings under the
facility will be adequate to fund its anticipated needs through at least the end
of fiscal 1999. Although management is confident that it will obtain the vendor
support and the amendment to the credit facility, there can be no assurance that
it will. If it is unable to obtain an amendment to the facility, the Company
would be in default, which would permit its lenders under that facility to
accelerate the maturity of the Company's debt under that facility and would
cause defaults under the Company's other indebtedness, including the senior
subordinated notes. In addition, if the Company is unable to obtain an amendment
to the credit facility or vendor support, it will require additional funds from
other financing sources to fund its operations. In such event, there can be no
assurance that it will be able to obtain such financing as and when required or
on acceptable terms.
New Accounting Standards Not Yet Adopted
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued. This Statement requires that all derivatives be
recognized in the statement of financial position as either assets or
liabilities and measured at fair value. In addition, all hedging relationships
must be designated, reassessed and documented pursuant to the provisions of SFAS
No. 133. This Statement will be effective for the Company in fiscal 2000
(although a delay in the effective date until 2001 is presently being
contemplated by the Financial Accounting Standards Board). Management has not
determined the likely effect of SFAS No. 133 on the Company's financial
statements.
14
<PAGE>
Seasonality
The Company does not experience significant seasonal fluctuations in its
business. However, the highest sales periods for the Company are the spring,
back-to-school and Christmas selling seasons. The Company also generally
experiences lower gross margins during January, February, September and October
due to retail markdowns taken to clear seasonal merchandise. Quarterly results
may fluctuate materially depending on the timing of new store openings and
related store opening expenses, net sales contributed by new stores and
increases or decreases in comparable store sales.
Impact Of Inflation
The Company does not believe that inflation has had a material, adverse
effect on net sales or results of operations. The Company has generally been
able to pass on increased costs through increases in selling prices.
Year 2000 Readiness Disclosure
As part of the Company's Compliance Validation Project, the Company has
assessed its hardware and software systems for Year 2000 compliance. The Company
also established policies and procedures to coordinate changes to computer
systems and applications necessary to achieve a Year 2000 date conversion with
no effect on customers or disruption to business operations. These actions are
necessary to ensure that the systems and applications will recognize and process
the Year 2000 and beyond. The critical business systems used by the Company are
segregated into five categories for the discussion of system compliance,
findings, certifications, and remediation of software. The categories include
the following:
. Merchandise control applications, related hardware, and operating
systems.
. Administration applications, related hardware, and operating
systems.
. Network hardware and software.
. System utilities and databases, related hardware, and operating
systems.
. Desktop office automation applications, related hardware, and
operating systems.
All known Year 2000 upgrade, replacement or remediation efforts for key
systems are complete with the following three exceptions:
. User files generated through desktop office automation applications
(estimated completion date August 1999).
. Specialty store division's cash register applications on IBM's
Retail Applications for DOS (estimated completion date August
1999).
. Ceridian payroll system interface (estimated completion date
September 1999).
The Company relies on two applications to manage inventory and monitor sales
activity. The two applications are Island Pacific's I3 Merchandising
Applications for Retail ("I3") and IBM's Retail Applications for DOS ("RADOS").
15
<PAGE>
Another application, Premenos, provides electronic data interchange ("EDI")
interface capabilities between the Company and vendors for I3 processing. I3 is
an inventory and distribution management system that the Company uses to analyze
sales and inventory, and to purchase, price and distribute product. The Company
also uses an integrated financial package from I3. The Company does not use any
other application for inventory item control or for recording financial
information. The I3 version 1.3, is the latest supported software release of
these applications and is certified Year 2000 compliant by the vendor. I3 runs
on the Company's IBM AS400 model 535 computer. The AS400 runs IBM OS400
operating system software, which IBM certifies is Year 2000 compliant. In
addition, as part of the AS400 upgrades, which took place in 1997 as part of a
normal maintenance routine, the Company ensured Year 2000 compliance of that
hardware. The Company also completed a conversion of all point of sale ("POS")
equipment in its superstores to address enhanced operational needs which also
ensured Year 2000 compliance of those terminals. The completion date of the
upgrade to the Year 2000 RADOS release for the specialty stores is estimated to
be August 1999. All superstore POS registers now operate on the latest version
of RADOS, which IBM certifies as being Year 2000 compliant. RADOS runs on IBM
4694 model 144 POS terminals. These terminals are upgraded to the latest version
of hardware BIOS. The oldest terminal in the Company inventory is approximately
two years old.
Premenos is the Company's EDI translation software. The application sends
electronic purchase orders to the Company's vendors and receives invoices from
them electronically. The application version the Company currently has installed
is certified to be Year 2000 compliant. This upgraded version has been tested
and certified and is operating and exchanging information with I3 on a daily
basis without significant incident.
The human resource application employed by the Company was internally
developed approximately two years ago. The system was developed using Delphi
development tools and is integrated with an Oracle database that contains
employee data. The application and the supporting database are currently
processing century dates. The Company does plan a major revision or replacement
of the system in the next two years.
The Family Plan application, the Company's "13th pair is free" customer
purchase tracking system, tracks customer's shoe purchases and after 12 pairs
are purchased, provides customers with a free pair of shoes (the 13th pair is
free) at a value equal to the average purchase price of the 12 purchased pairs
of shoes. The system was developed approximately three years ago using the
Delphi development tool kit and is Year 2000 compliant. The application has two
components; a corporate application for tracking and reporting and a store
component for inquiry and redemption. The corporate application runs on a
Solaris 3000 operating system, utilizing Solaris 2.6 and Oracle 7.3. The store
component runs on a Compaq, Windows 95B personal computer. All system hardware
and software for both components are Year 2000 compliant.
The Company's payroll system consists of the following three major components:
. Time clock application.
. The Company's employee information system.
. Ceridian payroll system interface.
The time clock application used by the Company was internally developed. The
application was developed along with the human resource and employee information
system using the Delphi development tool set and integrated with an Oracle
database containing the employee information including time and attendance
information.
16
<PAGE>
The corporate payroll applications run on a Sun 3000 computer, utilizing
Solaris 2.6 and accessing employee data in an Oracle, version 7.3, database.
The remaining component of the payroll system consists of an interface written
by the Company with the Ceridian system that calculates net pay and produces
paychecks for Company employees. The interface was written using the Delphi
development toolkit. Validation of Ceridian Year 2000 compliance is part of the
Company's Compliance Validation Project and is scheduled to be completed in
September 1999.
Novell Intranetware version 4.10 is the system software that provides
directory services and server management functions for all of the corporate and
store local area networks. Version 4.10 is Year 2000 compliant and is
functioning on a daily basis without significant incidents. The Company also
uses many utilities and management tools developed by Novell for network
management. All versions of Novell utilities used by the Company are Year 2000
compliant.
The Company's other applications which are not dependent on computers or
software such as security, fire, phone, audio and visual entertainment systems,
heating and air conditioning and other such systems have been evaluated and are
considered to be Year 2000 compliant. Vendor surveys and requests for
certifications of Year 2000 compliance have been received from all major vendors
considered critical to the Company's business continuity. The Company is in the
process of evaluating the responses from the vendors to determine if a
contingency plan is necessary. The estimated completion date for the evaluation
and implementation of a contingency plan, if one is deemed necessary, is
September 1999.
The Company has not incurred any significant historical costs related to the
Year 2000 issue as their systems have been upgraded as part of the Company's
normal maintenance routines and also due to their rapid growth. Management
currently estimates that the total remaining costs of achieving Year 2000
compliance and of assessing major vendor compliance will not exceed $500,000.
The most likely worst case scenario would be the interruption of inventory flow
due to our vendors experiencing Year 2000 problems. Any failure of the Company's
computer system or those of certain third parties to achieve Year 2000
compliance on a timely basis could have a material adverse effect on the
Company's business, financial condition and results of operations.
Item 3. Qualitative And Quantitative Disclosure About Market Risk
The Company's major "market risk" exposure is the effect of changing interest
rates. The Company manages its interest exposure by using a combination of fixed
and variable rate debt. At May 1, 1999, the Company's debt consisted of
approximately $231.4 million of fixed-rate debt with a weighted average interest
rate of 10.6% and $61.7 million of variable-rate debt with a weighted average
interest rate of 6.5%. If interest rates on such variable debt were to increase
by 65 basis points (one-tenth of the weighted average variable-rate at May 1,
1999), the net impact on the Company's results of operations and cash flows
would not be material.
17
<PAGE>
Cautionary Statement Concerning Forward-looking Statements
This filing contains statements that constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. These statements appear in a number of places in this filing and
the Company's other filings with the Securities and Exchange Commission ("SEC")
and include statements regarding the intent, belief or current expectations of
the Company, its directors or its officers with respect to, among other things:
(i) the timing, magnitude and costs of the Company's entry into the smaller
specialty store market of the industry; (ii) the Company's expansion plans;
(iii) the Company's ability to successfully convert Sneaker Stadium superstores
to Just For Feet superstores; (iv) potential acquisitions by the Company; (v)
trends affecting the Company's financial condition or results of operations; and
(vi) the Company's business and growth strategies. These include statements
regarding the effect of recent difficulties in our specialty store division on
our fiscal 1999 results and future expansion plans and our plans to seek vendor
support and amendments to our credit facilities. Investors are cautioned that
any such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ materially
from those projected in the forward-looking statements as a result of various
factors. The information contained in this filing and the Company's other
filings with the SEC, including without limitation the information set forth
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Risk Factors" identifies important factors that
could cause such differences.
PART II
Item 6. Exhibits And Reports On Form 8-K.
- ------- ---------------------------------
(a) Exhibits. No exhibits are required to be filed with this Report.
(b) Reports on Form 8-K. No Reports on Form 8-K were filed during the
three months ended May 1, 1999.
18
<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 thereunto duly authorized.
JUST FOR FEET, INC.
Dated: June 11, 1999 By: /s/ Harold Ruttenberg
----------------------------
Harold Ruttenberg
Chairman and Chief Executive Officer
Dated: June 11, 1999 By: /s/ Eric L. Tyra
-------------------------
Eric L. Tyra
Executive Vice President and Chief Financial
Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUST FRO
FEET INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JAN-29-2000 JAN-30-1999
<PERIOD-START> JAN-30-1999 FEB-01-1998
<PERIOD-END> MAY-01-1999 APR-30-1998
<CASH> 17,629 12,412
<SECURITIES> 0 0
<RECEIVABLES> 18,174 18,875
<ALLOWANCES> 0 0
<INVENTORY> 458,069 399,901
<CURRENT-ASSETS> 510,067 449,490
<PP&E> 210,155 188,606
<DEPRECIATION> 34,073 28,014
<TOTAL-ASSETS> 771,185 689,396
<CURRENT-LIABILITIES> 140,688 132,692
<BONDS> 0 0
0 0
0 0
<COMMON> 3 3
<OTHER-SE> 328,585 325,703
<TOTAL-LIABILITY-AND-EQUITY> 771,185 689,396
<SALES> 220,985 151,921
<TOTAL-REVENUES> 221,125<F1> 152,229<F1>
<CGS> 128,533 88,303
<TOTAL-COSTS> 200,712<F2> 136,411<F2>
<OTHER-EXPENSES> 7,715<F3> 5,759<F3>
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,144 602
<INCOME-PRETAX> 7,554 9,457
<INCOME-TAX> 2,908 3,641
<INCOME-CONTINUING> 4,646 5,816
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> (1,847) 0
<NET-INCOME> 2,799 5,816
<EPS-BASIC> 0.09 0.19
<EPS-DILUTED> 0.09 0.19
<FN>
<F1>Includes Sales, Franchise fees, royalties and other revenue and interest
income, net (if income).
<F2>Includes CGS, store operating and Store openings costs.
<F3>Includes amortization of intangibles and general and administrative.
</FN>
</TABLE>
