<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:
July 31, 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 September 15, 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)
JULY 31 JANUARY 30,
1999 1999
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................. $ 21,383 $ 12,412
Accounts receivable....................... 18,273 18,875
Merchandise inventories................... 463,424 399,901
Other..................................... 32,442 18,302
-------- --------
Total current assets.................... 535,522 449,490
PROPERTY AND EQUIPMENT,NET.................. 196,716 160,592
GOODWILL, NET............................... 69,866 71,084
OTHER ASSETS................................ 16,088 8,230
-------- --------
$818,192 $689,396
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................... $ 62,771 $100,322
Accrued advertising....................... 11,624 2,561
Accrued interest.......................... 8,002 1,532
Accrued other expenses.................... 37,943 21,638
Current maturities of long-term
obligations............................. 7,001 6,639
-------- --------
Total current liabilities............... 127,341 132,692
LONG-TERM OBLIGATIONS....................... 371,838 216,203
DEFERRED LEASE RENTALS...................... 14,706 13,162
DEFERRED INCOME RENTALS..................... 1,606 1,633
-------- --------
Total liabilities....................... 515,491 363,690
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock - par value $.0001;
5,000 shares authorized; none issued
Common stock - par value $.0001;
70,000 shares authorized; 31,211
(July 31, 1999) and 31,197 (January 30,
1999) shares issued and outstanding..... 3 3
Paid-in capital........................... 249,719 249,590
Retained earnings......................... 52,979 76,113
-------- --------
Total stockholders' equity............. 302,701 325,706
-------- --------
$818,192 $689,396
======== ========
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 OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- ----------------------
JULY 31, JULY 31, JULY 31, JULY 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
NET SALES................................................................ $ 225,768 $ 175,329 $ 446,753 $ 327,250
COST OF SALES............................................................ 157,902 99,813 286,435 188,116
--------- --------- --------- ---------
GROSS PROFIT............................................................. 67,866 75,516 160,318 139,134
========= ========= ========= =========
FRANCHISE FEES, ROYALTIES EARNED AND OTHER REVENUE....................... 144 288 284 596
--------- --------- --------- ---------
OPERATING EXPENSES:
Store operating........................................................ 88,618 53,004 156,497 97,760
Store opening.......................................................... 2,593 1,890 6,893 5,243
Amortization of intangibles............................................ 657 433 1,309 793
General and administrative............................................. 9,199 5,782 16,262 11,181
--------- --------- --------- ---------
Total operating expenses............................................. 101,067 61,109 180,961 114,977
-------- --------- --------- ---------
OPERATING (LOSS) INCOME.................................................. (33,057) 14,695 (20,359) 24,753
INTEREST EXPENSE NET..................................................... 9,107 1,726 14,251 2,328
--------- ---------- --------- ---------
(LOSS) EARNINGS BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............................... (42,164) 12,969 (34,610) 22,425
(BENEFIT) PROVISION FOR INCOME TAXES..................................... (16,231) 4,993 (13,323) 8,634
========= ========= ========= =========
(LOSS) EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE.............................................................. (25,933) 7,976 (21,287) 13,791
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE...................... - - (1,847) -
--------- --------- --------- ---------
NET (LOSS) EARNINGS...................................................... $ (25,933) $ 7,976 $ (23,134) $ 13,791
========= ========= ========= =========
BASIC (LOSS) EARNINGS PER SHARE:
Before cumulative effect of change in accounting principle............. $ (0.83) $ 0.26 $ (0.68) $ 0.46
Cumulative effect of change in accounting principle.................... - - (0.06) -
========= ========= ========= =========
Net (loss) earnings per share.......................................... $ (0.83) $ 0.26 $ (0.74) $ 0.46
--------- ---------- --------- ---------
DILUTED (LOSS) EARNINGS PER SHARE:
Before cumulative effect of change in accounting principle............. $ (0.83) $ 0.25 $ (0.68) $ 0.44
Cumulative effect of change in accounting principle.................... - - (0.06) -
--------- --------- --------- --------
Net (loss) earnings per share.......................................... $ (0.83) $ 0.25 $ (0.74) $ 0.44
========= ========= ========= ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic.................................................................. 31,211 30,532 31,207 30,288
========= ========= ========= ========
Diluted................................................................ 31,211 32,199 31,207 31,686
========= ========= ========= =========
</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>
Six Months Ended
July 31,
-------------------------
1999 1998
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) earnings.................................... $ (23,134) $ 13,791
Adjustments to reconcile net (loss) earnings to net
cash used by operating activities:
Cumulative effect of change in accounting principle.. 1,847
Depreciation and amortization........................ 14,425 6,420
Deferred income taxes................................ (28) (42)
Deferred lease rentals............................... 1,545 1,248
Loss on disposal of property and equipment........... 1,090
Changes in assets and liabilities providing (using)
cash, net of effects of acquisitions in 1998:
Accounts receivable.................................. 602 (1,252)
Merchandise inventories.............................. (63,523) (80,194)
Other assets......................................... (23,907) 4,986
Accounts payable..................................... (37,551) 35,015
Accrued advertising.................................. 9,063 1,771
Accrued interest..................................... 6,470 1,232
Accrued other expenses............................... 16,305 (455)
Income taxes......................................... (1,363)
--------- --------
Net cash used by operating activities.............. (96,796) (18,843)
--------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment.................... (50,253) (23,614)
Acquisitions, net of cash acquired..................... (199)
--------- --------
Net cash used for investing activities............. (50,253) (23,813)
--------- --------
FINANCING ACTIVITIES:
Repayments of short-term borrowings, net............... (49,369)
Borrowings of long-term obligations.................... 774,363 1,700
Principal payments on long-term obligations............ (618,472) (1,723)
Proceeds from exercise of options...................... 129 2,796
Proceeds from issuance of stock........................ 20,000
--------- --------
Net cash provided by (used for) financing
activities....................................... 156,020 (26,596)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... 8,971 (69,252)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........... 12,412 82,490
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD................. $ 21,383 $ 13,238
========= ========
</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 and six months ended July 31, 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 and six month periods ended on July 31, 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 was accounted
for as a purchase and accordingly the purchase price was 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.
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 July 31,
1999 was a decrease in store opening costs of approximately $805,000, and a
decrease in net loss of approximately $551,000 ($0.02 per basic and diluted
share), net of applicable income taxes of approximately $254,000. The effect on
the six month period ended July 31, 1999 was an increase in store opening costs
of approximately $453,000 and an increase in net loss of approximately $279,000
($0.01 per basic and diluted share), net of applicable income taxes of
approximately $174,000.
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, as amended, will be effective for the Company in
fiscal 2001. 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 initial complaint and will
vigorously defend these allegations. On June 29, 1999, the Company filed a
complaint against such franchisee and its principal shareholder claiming
trademark infringement, and seeking a preliminary and permanent injunction and
monetary damages in excess of $1.0 million. This complaint was filed in the
same court as the April 20, 1999 complaint against the Company set forth above.
The Court has consolidated the two complaints. After a hearing on the Company's
Motion for a preliminary injunction, the Court determined that the franchise
agreements had been terminated and granted the Company a preliminary injunction
and ordered the franchisee to cease using the Just For Feet name, trademark and
other elements of the Just For Feet system in the retail operation of the
franchisee's stores by September 2, 1999 and to perform all post termination
obligations specified in the franchise agreements by October 30, 1999.
5
<PAGE>
On March 1, 1999, Just For Feet, Inc. filed a complaint against Saatchi and
Saatchi Business Communications, Inc. ("Saatchi") and Fox Broadcasting Company
("Fox") in Alabama seeking recovery for damages allegedly incurred by Just For
Feet, Inc. in connection with the broadcast of a Super Bowl television
commercial created and produced for Just For Feet, Inc. by Saatchi and a related
Super Bowl promotional contest. The complaint alleges that Saatchi represented
to Just For Feet, Inc. that the commercial would be broadcast during the third
quarter of the 1999 Super Bowl and was responsible for purchasing air time
during the third quarter of the Super Bowl. The complaint also alleges that Fox
failed to broadcast the commercial during the designated time period. Just For
Feet, Inc. has asserted claims against Saatchi for breach of contractual
guarantees and warranties, misrepresentation, breach of contract and
professional negligence and malpractice and claims against Fox for breach of
contract. Just For Feet, Inc. is also claiming punitive damages against
Saatchi. Saatchi has filed a counterclaim against Just For Feet, Inc. for
breach of contract and quantum meruit in the amount of $1.9 million plus
interest. Just For Feet is vigorously pursuing its claims and its defenses of
the counterclaims.
On or about February 25, 1999, Saatchi filed a complaint in federal court
against Just For Feet, Inc. for breach of contract and for an account stated in
connection with allegedly unpaid invoices for advertising work Saatchi performed
for Just For Feet, Inc. and the cost of commercial air time for television
commercials and space for print advertisements purchased by Saatchi for Just For
Feet, Inc. Saatchi is claiming damages in the amount of $3.2 million. On April
19, 1999, Just For Feet, Inc. filed a motion to dismiss or, in the alternative,
to stay the federal action by reason of the pendency of the more comprehensive
action filed by Just For Feet, Inc. in Alabama (as described above). That
motion has not yet been addressed by the court.
The Company is a defendant in various lawsuits in the ordinary course of its
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.
NOTE 6 - LONG-TERM OBLIGATIONS
On September 24, 1999, the Company and all of its domestic subsidiaries entered
into a new two-year $175.0 million senior secured revolving credit facility with
a syndicate of banks and a revised senior credit facility of $40.0 million with
its existing bank group (collectively, the "Credit Facilities"). The $175.0
million revolving facility, which is secured by substantially all of the assets
of the Company and its domestic subsidiaries, permits borrowings of up to the
lesser of $175.0 million or a calculated borrowing base that is a percentage of
eligible inventory. This revolving facility bears interest at LIBOR plus 2.75%
and expires on September 24, 2001. The $40.0 million loan bears interest at
LIBOR plus 4.00%, is guaranteed by the Company's domestic subsidiaries and is
secured by a second lien on accounts receivable, inventory and all of the stock
of the Company's domestic subsidiaries and 66 2/3% of the stock of the Company's
foreign subsidiary and expires on September 25, 2001. The Company immediately
used $121.0 million from the $175.0 million revolving facility to repay $121.0
million outstanding under the Company's old $200.0 million senior credit
facility (the "Old Facility"), leaving a $40.0 million balance under the Old
Facility, which was then amended as set forth above. On September 24, 1999, the
Company had a total of $34.9 million of availability under the Credit
Facilities. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
At July 31, 1999, the Company had $148.0 million outstanding under the Old
Facility. The Old Facility was to terminate on December 10, 2001, bore interest
at a floating rate above either prime or LIBOR (the effective rate was 6.9% at
July 31, 1999), was guaranteed and secured by all of the stock of the Company's
domestic subsidiaries and 66 2/3% of the Company's foreign subsidiary and was
secured by a first lien on the accounts receivable and inventory of the Company
and its domestic subsidiaries, and was subject to certain covenants. During July
1999, the Company obtained an amendment that revised certain terms and covenants
of the Old Facility. At July 31, 1999, the Company was in compliance with the
amended covenants. In the quarter ending October 30, 1999, the Company will
write off debt issuance costs relating to the Old Facility.
6
<PAGE>
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 an $80.0 million term loan (which was initially borrowed in
February 1999) and approximately $113.0 million under the Old 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 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.
7
<PAGE>
Condensed Consolidating Balance Sheets (Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
July 31, 1999
----------------------------------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiary Eliminations Consolidated
----------------------------------------------------------------------
Assets
CURRENT ASSETS:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents...................... $ 4,000 $ 16,791 $ 592 $ - $ 21,383
Accounts receivable - trade.................... 23,739 (5,547) 81 - 18,273
Accounts receivable - intercompany............. 377,819 - - (377,819) -
Merchandise Inventory.......................... 125,850 332,126 5,448 - 463,424
Other.......................................... 23,562 8,665 215 - 32,442
--------------------------------------------------------------------
Total Current Assets......................... 554,970 352,035 6,336 (377,819) 535,522
PROPERTY AND EQUIPMENT, NET.................... 50,142 143,471 3,103 - 196,716
INVESTMENTS IN SUBSIDIARIES.................... 179,055 - - (179,055) -
GOODWILL, NET.................................. - 69,866 - - 69,866
OTHER ASSETS................................... 12,492 3,585 11 - 16,088
--------------------------------------------------------------------
Total Assets............................... $796,659 $568,957 $ 9,450 $(556,874) $818,192
--------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................... $ 66,033 $ (3,262) $ - $ - $ 62,771
Accounts payable - intercompany............... - 367,719 10,100 (377,819) -
Accrued expenses............................... 47,121 10,366 82 - 57,569
Current maturities of long-term obligations.... 7,000 1 - - 7,001
--------------------------------------------------------------------
Total Current Liabilities.................... 120,154 374,824 10,182 (377,819) 127,341
LONG-TERM OBLIGATIONS.......................... 371,838 - - - 371,838
DEFERRED LEASE RENTALS......................... 1,145 13,561 - - 14,706
DEFERRED INCOME TAXES.......................... 821 785 - - 1,606
--------------------------------------------------------------------
Total Liabilities............................ 493,958 389,170 10,182 (377,819) 515,491
--------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common Stock................................... 3 11 - (11) 3
Additional Paid-In Capital..................... 249,719 115,376 - (115,376) 249,719
Retained Earnings.............................. 52,979 64,400 (732) (63,668) 52,979
--------------------------------------------------------------------
Total Stockholders' Equity................... 302,701 179,787 (732) (179,055) 302,701
--------------------------------------------------------------------
Total Liabilities and Equity............... $796,659 $568,957 $ 9,450 $(556,874) $818,192
--------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
January 30, 1999
----------------------------------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiary Eliminations Consolidated
----------------------------------------------------------------------
Assets
Current Assets:
<S> <C> <C> <C> <C> <C>
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
--------------------------------------------------------------------
Total Assets............................... $642,084 $509,295 $ 8,899 $(470,882) $689,396
--------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................... $ 81,341 $ 18,540 $ 441 $ 100,322
Accounts payable - intercompany............... - 270,767 8,608 (279,375) -
Accrued expenses............................... 11,563 13,161 105 24,829
Income taxes................................... 902 - - 902
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
--------------------------------------------------------------------
Total Liabilities and Equity............... $642,084 $509,295 $ 8,899 $(470,882) $689,396
--------------------------------------------------------------------
</TABLE>
8
<PAGE>
Condensed Consolidating Statements of Operations (Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31, 1999
-----------------------------------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiary Eliminations Consolidated
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales............................................... $ 30,925 $191,002 $3,841 $ - $225,768
Cost of sales........................................... 24,200 131,115 2,587 - 157,902
-----------------------------------------------------------------------
Gross profit............................................ 6,725 59,887 1,254 - 67,866
-----------------------------------------------------------------------
Franchise fees, royalties and other revenue............. 261 75 (192) - 144
-----------------------------------------------------------------------
Operating expenses:
Store operating....................................... 10,708 76,365 1,545 - 88,618
Store opening costs................................... 231 2,362 - - 2,593
Amortization of intangibles........................... 647 10 - - 657
General and administrative............................ 1,238 7,785 176 - 9,199
-----------------------------------------------------------------------
Total operating expenses............................ 12,824 86,522 1,721 - 101,067
-----------------------------------------------------------------------
Operating loss.......................................... (5,838) (26,560) (659) - (33,057)
Interest expense, net................................... 9,107 - - - 9,107
-----------------------------------------------------------------------
Loss before income taxes................................ (14,945) (26,560) (659) - (42,164)
Benefit for income taxes................................ (5,752) (10,225) (254) - (16,231)
-----------------------------------------------------------------------
Loss before equity in loss of subsidiaries.............. (9,193) (16,335) (405) - (25,933)
Equity in loss of subsidiaries.......................... (16,740) - - 16,740 -
-----------------------------------------------------------------------
Net loss................................................ $(25,933) $(16,335) $ (405) $16,740 $(25,933)
-----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31, 1998
-----------------------------------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiary Eliminations Consolidated
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales.............................................. $24,227 $145,562 $5,540 $ - $175,329
Cost of sales.......................................... 13,741 82,323 3,749 - 99,813
-----------------------------------------------------------------------
Gross profit........................................... 10,486 63,239 1,791 - 75,516
-----------------------------------------------------------------------
Franchise fees, royalties and other revenue............ 653 (365) - - 288
-----------------------------------------------------------------------
Operating expenses:
Store operating...................................... 10,198 41,341 1,465 - 53,004
Store opening costs.................................. (364) 2,254 - - 1,890
Amortization of intangibles.......................... 45 388 - - 433
General and administrative........................... 2,145 3,637 - - 5,782
-----------------------------------------------------------------------
Total operating expenses............................. 12,024 47,620 1,465 - 61,109
-----------------------------------------------------------------------
Operating (loss) income................................ (885) 15,254 326 - 14,695
Interest expense, net.................................. 1,664 62 - - 1,726
-----------------------------------------------------------------------
(Loss) Earnings before income taxes.................... (2,549) 15,192 326 - 12,969
(Benefit) provision for income taxes................... (987) 5,855 125 - 4,993
-----------------------------------------------------------------------
(Loss) Earnings before equity in earnings of
subsidiaries......................................... (1,562) 9,337 201 - 7,976
Equity in earnings of subsidiaries..................... 9,538 - - (9,538) -
-----------------------------------------------------------------------
Net earnings........................................... $ 7,976 $ 9,337 $ 201 $(9,538) $ 7,976
-----------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JULY 31, 1999
-----------------------------------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiary Eliminations Consolidated
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 69,541 $369,960 $7,252 $ - $446,753
Cost of sales 46,866 234,869 4,700 - 286,435
-----------------------------------------------------------------------
Gross profit 22,675 135,091 2,552 - 160,318
-----------------------------------------------------------------------
Franchise fees, royalties and other revenue 521 125 (362) - 284
-----------------------------------------------------------------------
Operating expenses:
Store operating 21,860 131,948 2,689 - 156,497
Store opening costs 318 6,575 - - 6,893
Amortization of intangibles 692 617 - - 1,309
General and administrative 2,808 13,178 276 - 16,262
-----------------------------------------------------------------------
Total operating expenses 25,678 152,318 2,965 - 180,961
-----------------------------------------------------------------------
Operating loss (2,482) (17,102) (775) - (20,359)
Interest expense, net 14,251 - - - 14,251
-----------------------------------------------------------------------
Loss before income taxes and cumulative
effect of change in accounting principle (16,733) (17,102) (775) - (34,610)
Benefit for income taxes (6,440) (6,585) (298) - (13,323)
-----------------------------------------------------------------------
Loss before equity in loss
of subsidiaries and cumulative effect
of change in accounting principle (10,293) (10,517) (477) - (21,287)
Equity in loss of subsidiaries (12,452) - - 12,452 -
Cumulative effect of change in
accounting principle (389) (1,458) - - (1,847)
-----------------------------------------------------------------------
Net loss $(23,134) $(11,975) $ (477) $12,452 $(23,134)
-----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JULY 31, 1998
-----------------------------------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiary Eliminations Consolidated
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $54,538 $264,737 $7,975 $ - $327,250
Cost of sales 31,902 150,983 5,231 - 188,116
-----------------------------------------------------------------------
Gross profit 22,636 113,754 2,744 - 139,134
-----------------------------------------------------------------------
Franchise fees, royalties and other revenue 1,445 (849) - - 596
-----------------------------------------------------------------------
Operating expenses:
Store operating 17,453 78,207 2,100 - 97,760
Store opening costs 372 4,268 603 - 5,243
Amortization of intangibles 90 703 - - 793
General and administrative 3,024 8,157 - - 11,181
-----------------------------------------------------------------------
Total operating expenses 20,939 91,335 2,703 - 114,977
-----------------------------------------------------------------------
Operating income 3,142 21,570 41 - 24,753
Interest expense, net 2,266 62 - - 2,328
-----------------------------------------------------------------------
Earnings before income taxes 876 21,508 41 - 22,425
Provision for income taxes 338 8,281 15 - 8,634
-----------------------------------------------------------------------
Earnings before equity in earnings
of subsidiaries 538 13,227 26 - 13,791
Equity in earnings of subsidiaries 13,253 - - (13,253) -
-----------------------------------------------------------------------
Net earnings $13,791 $ 13,227 $ 26 $(13,253) $ 13,791
-----------------------------------------------------------------------
</TABLE>
9
<PAGE>
Condensed Consolidating Statements of Cash Flows (Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JULY 31, 1999
-----------------------------------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiary Eliminations Consolidated
-----------------------------------------------------------------------
OPERATING ACTIVITIES:
<S> <C> <C> <C> <C> <C>
Net loss................................................ $ (23,134) $ (11,975) $ (477) $ 12,452 $(23,134)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Cumulative effect of change in
accounting principle............................. 389 1,458 - - 1,847
Depreciation and amortization...................... 3,270 10,956 199 - 14,425
Deferred income taxes.............................. (902) 874 - - (28)
Deferred lease rentals............................. 688 857 - - 1,545
Undistributed earnings of subsidiaries............. 12,452 - - (12,452) -
Loss on disposal of property and equipment......... 102 953 35 - 1,090
Changes in assets and liabilities providing
(using) cash
Accounts receivable................................ (4,864) 5,547 (81) - 602
Merchandise inventories............................ (28,820) (34,879) 176 - (63,523)
Other assets....................................... (27,710) 3,803 - - (23,907)
Accounts payable................................... (15,308) (21,802) (441) - (37,551)
Accrued expenses................................... 35,558 (3,697) (23) - 31,838
Advances to/from subsidiaries...................... (98,200) 96,708 1,492 - -
---------------------------------------------------------------------
Net cash provided by (used in)
operating activities......................... (146,479) 48,803 880 - (96,796)
---------------------------------------------------------------------
INVESTING ACTIVITIES--
Purchases of property and equipment.................... (8,916) (40,802) (535) - (50,253)
---------------------------------------------------------------------
Net cash used for investing activities............. (8,916) (40,802) (535) - (50,253)
---------------------------------------------------------------------
FINANCING ACTIVITIES:
Borrowings (repayments) of long-term
obligations, net.................................... 157,410 (1,519) - - 155,891
Proceeds from exercise of options...................... 129 - - - 129
---------------------------------------------------------------------
Net cash provided by (used in)
financing activities......................... 157,539 (1,519) - - 156,020
---------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................ 2,144 6,482 345 - 8,971
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD....... 1,856 10,309 247 - 12,412
---------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD............. $ 4,000 $ 16,791 $ 592 $ - $ 21,383
---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JULY 31, 1998
-----------------------------------------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiary Eliminations Consolidated
-----------------------------------------------------------------------
OPERATING ACTIVITIES:
<S> <C> <C> <C> <C> <C>
Net earnings.......................................... $ 13,791 $ 13,227 $ 26 $(13,253) $ 13,791
Adjustments to reconcile net earnings
to net cash (used in) provided by
operating activities:
Depreciation and amortization...................... 2,086 4,208 126 - 6,420
Deferred income taxes.............................. (704) 662 - - (42)
Deferred lease rentals............................. 111 1,137 - - 1,248
Undistributed earnings of subsidiaries............. (13,253) - - 13,253 -
Changes in assets and liabilities providing
(using) cash, net of effects of acquisition:
Accounts receivable................................ (1,657) 405 - - (1,252)
Merchandise inventories............................ (9,880) (65,789) (4,525) - (80,194)
Other assets....................................... 479 4,566 (59) - 4,986
Accounts payable................................... 19,885 15,040 90 - 35,015
Accrued expenses................................... (3,504) 5,948 104 - 2,548
Income taxes....................................... (478) (885) - - (1,363)
Advances to/from subsidiaries...................... (50,034) 42,287 7,747 - -
---------------------------------------------------------------------
Net cash provided by (used in)
operating activities........................... (43,158) 20,806 3,509 - (18,843)
---------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment.................... (833) (19,864) (2,917) - (23,614)
Acquisitions, net of cash acquired..................... (199) - - - (199)
---------------------------------------------------------------------
Net cash used for investing activities............... (1,032) (19,864) (2,917) - (23,813)
---------------------------------------------------------------------
FINANCING ACTIVITIES:
Borrowings (repayments) under financing
agreements, net...................................... (49,369) - - - (49,369)
Borrowings (repayments) of long-term obligations, net.. (23) - - - (23)
Proceeds from issuance of common stock................. 20,000 - - - 20,000
Proceeds from exercise of options...................... 2,796 - - - 2,796
---------------------------------------------------------------------
Net cash used in financing activities................ (26,596) - - - (26,596)
---------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... (70,786) 942 592 - (69,252)
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD....... 77,228 5,262 - - 82,490
---------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD............. $ 6,442 $ 6,204 $ 592 $ - $ 13,238
---------------------------------------------------------------------
</TABLE>
10
<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 September 15, 1999 there were 151 Just
For Feet superstores operating in 26 states and Puerto Rico. The Company opened
17 new superstores and 14 former Sneaker Stadium superstores were remodeled and
reopened through September 15, 1999. The Company expects to open two more new
superstores during the remainder of fiscal 1999 and may open up to five new
superstores in fiscal 2000 (for which leases have already been signed),
depending upon market and other conditions. The Company may change the rate of
opening of new superstores in any one fiscal quarter. At September 15, 1999,
there were 172 Company-owned and 38 franchised specialty stores in 23 states and
Puerto Rico.
In late fiscal 1998 and continuing into fiscal 1999, the Company experienced
some operational and market difficulties and identified excess inventory of over
$50.0 million at May 1, 1999 at the specialty store division. These factors
had an adverse impact on the Company's profitability in the first quarter of
fiscal 1999. These continuing difficulties and the Company's efforts to
alleviate them have resulted in operational difficulties in its superstores as
well, which resulted in a net loss for the second quarter of fiscal 1999 and
will cause a net loss for fiscal 1999. The excess inventory at the specialty
store division was attributable mainly to footwear orders placed at the division
level which were in excess of the division's needs, as well as lower than
expected sales volumes in the specialty stores. Primarily as a result of these
lower than planned sales volumes and abnormally high inventory levels, the
Company has experienced, on a consolidated basis, lower gross margins, higher
store operating expenses and higher net interest expense than planned. The
Company began efforts to significantly reduce its inventory levels in June 1999.
During June and July, the Company returned $9.9 million in inventory to vendors,
liquidated $10.2 million in inventory through special promotions and transferred
$21.1 million in inventory from the specialty stores to the superstores. As the
Company executed vendor returns and moved merchandise from the specialty stores
into the superstores, its superstores experienced delays in the transfer of
merchandise from specialty stores and also in the receipt of shipments of new
merchandise from vendors. These delays resulted in some newer merchandise not
being available in the stores, which, combined with the Company's inventory
liquidation strategy in the competitive industry environment, caused the Company
to have an overly promotional sales mix. The result was an even greater
negative impact on sales, gross margins and store operating expenses than
anticipated. As a result, the Company had a net loss in the second quarter of
fiscal 1999. In addition to the excess inventory remaining at the specialty
store division at July 31 1999, the Company also identified approximately $20.0
million of additional inventory, which it would prefer to replace with fresh
goods, for a total of approximately $50.0 million in excess inventory on a
consolidated basis. The Company will continue to aggressively reduce inventory
during the third and fourth quarters, which will cause continued pressure on
sales and gross margins and will create a significant net loss for fiscal 1999.
As a result of these difficulties, the Company has instituted a moratorium on
the signing of new store leases for all divisions while it evaluates all of its
locations to determine whether they meet its current criteria for profitability.
The Company has reduced the number of new superstores it expects to open in
fiscal 1999 from 25 to 19 (of which 17 have been opened to date) and has reduced
the number of new specialty stores it expects to open in fiscal 1999 from 60 to
37 (of which 36 have been opened to date). The Company may open up to five new
superstores in fiscal 2000 (for which leases have already been signed),
depending on market and other conditions and currently does not intend to open
any new specialty stores in fiscal 2000 unless the current conditions in the
athletic footwear industry and the operating results of our specialty store
division improve.
11
<PAGE>
The Company is currently evaluating its capital structure and all phases of
operations. The Company has engaged Wasserstein, Perella & Co., Inc. as its
financial advisors to assist in this process and to provide advice concerning
strategic alternatives available to the Company. Such alternatives could include
the closure or sale of certain stores, the sale of one or more divisions of the
Company, the sale of certain of the Company's other assets or other strategic
alternatives. Due to the Company's excess inventory situation, the previous
large intra-company transfers and vendor returns of a portion of this excess
inventory and the highly promotional and competitive environment currently
existing in the athletic footwear and apparel industry, the evaluation will also
include a detailed analysis of the Company's inventory, including a physical
count at certain locations. Depending upon the results of this analysis, the
Company may record a significant write-down in the value of its inventory in the
third quarter of fiscal 1999. In addition, in order to expedite its inventory
reduction initiative, the Company may sell certain inventory in one or more
transactions at a significant loss. The Company has not completed its overall
evaluation and therefore cannot currently quantify the financial impact on
future operations. The Company anticipates completing this evaluation by October
30, 1999.
On September 24, 1999, the Company and all of its domestic subsidiaries
entered into a new two-year $175.0 million senior secured revolving credit
facility with a syndicate of banks and a revised senior credit facility of $40.0
million with its existing bank group (collectively, the "Credit Facilities").
The $175.0 million revolving facility, which is secured by substantially all of
the assets of the Company and its domestic subsidiaries, permits borrowings of
up to the lesser of $175.0 million or a calculated borrowing base that is a
percentage of eligible inventory. This revolving facility bears interest at
LIBOR plus 2.75% and expires on September 24, 2001. The $40.0 million loan bears
interest at LIBOR plus 4.00%, is guaranteed by all of the Company's domestic
subsidiaries and is secured by a second lien on accounts receivable, inventory
and all of the stock of the Company's domestic subsidiaries and 66 2/3% of the
stock of the Company's foreign subsidiary and expires on September 25, 2001. The
Company immediately used $121.0 million from the $175.0 million revolving
facility to repay $121.0 million outstanding under the Company's old $200.0
million senior credit facility (the "Old Facility"), leaving a $40.0 million
balance outstanding under the Old Facility, which was then amended as set forth
above. On September 24, 1999, the Company had a total of $34.9 million of
availability under the Credit Facilities. The Company believes that the Credit
Facilities provide it with greater flexibility than the Old Facility. See
"--Liquidity and Capital Resources." In the quarter ending October 30, 1999, the
Company will write off debt issuance costs relating to the Old Facility.
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 35 of these stores (14
during the six months ended July 31, 1999) and permanently closed four. 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 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 operations. These
conditions may affect the Company's profitability and the comparability of the
Company's results of operations for the three and six month periods ended July
31, 1999 as compared to the three and six month periods ended July 31, 1998.
In recent years, the Company has achieved positive comparable store sales
growth on an annual basis. During the three and six month periods ended July
31, 1999, comparable store sales increased 0.9% and 1.6% as compared to 2.2% and
2.8% for the same periods 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.
12
<PAGE>
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 July 31,
1999 was a decrease in store opening costs of approximately $805,000, and a
decrease in net loss of approximately $551,000 ($0.02 per basic and diluted
share), net of applicable income taxes of approximately $254,000. The effect on
the six month period ended July 31, 1999 was an increase in store opening costs
of approximately $453,000, and an increase in net loss of approximately $279,000
($0.01 per basic and diluted share), net of applicable income taxes of
approximately $174,000.
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 31, 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:
Three Months Ended Six Months Ended
July 31, July 31,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
Net sales...................... 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales.................. 69.9 56.9 64.1 57.5
----- ----- ----- -----
Gross profit................. 30.1 43.1 35.9 42.5
Franchise fees, royalties and
other revenue................ 0.1 0.2 0.1 0.2
Operating expenses:
Store operating.............. 39.3 30.2 35.0 29.9
Store opening costs.......... 1.2 1.1 1.6 1.6
Amortization of intangibles.. 0.3 0.3 0.3 0.2
General and administrative... 4.1 3.3 3.7 3.4
----- ----- ----- -----
Operating (loss) income.... (14.7) 8.4 (4.6) 7.6
Interest expense, net.......... (4.0) (1.0) (3.2) (0.7)
----- ----- ----- -----
Earnings (loss) before income
taxes and cumulative effect
of change in accounting....... (18.7) 7.4 (7.8) 6.9
(Benefit) provision for income
taxes......................... (7.2) 2.8 (3.0) 2.6
----- ----- ----- -----
Earnings (loss) before
cumulative effect of change
in accounting................. (11.5) 4.6 (4.8) 4.3
Cumulative effect of change in
accounting.................... - - (0.4) -
----- ----- ----- -----
Net earnings (loss)......... (11.5)% 4.6 % (5.2)% 4.3 %
===== ===== ===== =====
13
<PAGE>
THREE MONTHS ENDED JULY 31, 1999 COMPARED TO THREE MONTHS ENDED JULY 31, 1998
Net Sales - Net sales increased $50.4 million, or 28.8%, to $225.8 million in
the second quarter of fiscal 1999 compared to net sales of $175.3 million for
the second quarter of fiscal 1998. This increase was primarily attributable to
58 new superstores (including 35 remodeled and re-opened former Sneaker Stadium
superstores) and 68 new specialty stores opened since July 31, 1998 and an
increase in comparable store sales of 0.9%. Although sales increased for the
three months ended July 31, 1999, they were more promotional in nature due to
the Company's aggressive inventory reduction plan and the highly promotional
activity in the athletic footwear industry. Implementation of the Company's
inventory reduction initiative caused a delay in the receipt of new back to
school product which also negatively impacted sales during the quarter. The
calculation of comparable store sales included 81 superstores and 95 specialty
stores at July 31, 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 second quarter of fiscal 1999 decreased
10.1% to $67.9 million from $75.5 million in the comparable prior year period.
The Company's gross margins were negatively impacted during the quarter ended
July 31, 1999 by the aggressive inventory reduction plan (through promotional
pricing, reduced discounts and additional freight charges from the internal
movement of inventory from specialty stores to superstores) and other
promotional activities. As a percentage of net sales, gross profit for the
second quarter of fiscal 1999 decreased to 30.1% from 43.1% for the second
quarter of fiscal 1998.
Franchise fees, Royalties and Other Revenue. Franchise fees, royalties and other
revenue decreased 50.0% to $144,000 in the second quarter of fiscal 1999 from
$288,000 in the second 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. The franchise agreements with this franchisee were terminated during the
second quarter of fiscal 1999.
Store Operating Expenses. Store operating expenses increased $35.6 million or
67.2% to $88.6 million in the second quarter of fiscal 1999 from $53.0 million
in the second quarter of fiscal 1998. The increase was primarily attributable
to the operating expenses of the 23 new superstores, the 35 re-opened former
Sneaker Stadium superstores and 68 new specialty stores opened since July 31,
1998. As a percentage of net sales, store operating expenses increased to 39.3%
for the three month period ended July 31, 1999 from 30.2% for the three month
period ended July 31, 1998. This increase was primarily a result of lower than
planned sales and increased payroll and other costs associated with the internal
movement of inventory and to support the increased promotional sales activity in
the stores in connection with the Company's inventory reduction initiative.
Advertising costs were also higher than planned, as a result of the increased
promotional activity and lower vendor co-op. Additionally, the converted
Sneaker Stadium superstores and new specialty stores opened primarily in the
latter part of fiscal 1998 and in 1999 have not achieved anticipated sales
levels which has resulted in a higher store operating expense ratio.
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 July 31, 1999 was a
decrease in store opening costs of approximately $805,000, and a decrease in net
loss of approximately $551,000 ($0.02 per basic and diluted share), net of
applicable income taxes of approximately $254,000. Store opening costs
increased $703,000 from $1.9 million for the second quarter of fiscal 1998 to
$2.6 million for the second quarter of fiscal 1999. The Company opened 11 new
superstores including the final two converted former Sneaker Stadium superstores
and nine new specialty stores in the second quarter of fiscal 1999 as compared
to four new superstores and 13 new specialty stores in the second quarter of
fiscal 1998. As a percentage of net sales, store opening costs remained
relatively constant at 1.2% and 1.1% for the second quarters of fiscal 1999 and
1998, respectfully.
14
<PAGE>
Amortization of Intangibles. Amortization of intangibles, which includes
amortization of goodwill and franchise rights, increased to approximately
$657,000 for the second quarter of fiscal 1999 from approximately $433,000 in
the second 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.
General and Administrative Expenses. General and administrative expenses
increased $3.4 million or 59.1%, to $9.2 million in the second quarter of fiscal
1999 from $5.8 million in the second quarter of fiscal 1998. This increase was
primarily attributable to the increase in corporate staff and systems to support
the Company's planned growth and relocation of the Specialty Store Division
corporate headquarters from Flint, Michigan to Birmingham, Alabama, increased
levels of equipment lease expense, legal and professional fees and the write-off
of architectural fees incurred for stores the Company no longer anticipates
opening. As a percentage of net sales, general and administrative expenses
increased to 4.1% in the second quarter of fiscal 1999 from 3.3% in the second
quarter of fiscal 1998, due primarily to the lower than planned sales and the
increased costs as discussed above.
Operating Income (Loss). The combination of lower than anticipated sales,
significantly lower gross margins and higher expenses resulted in an operating
loss for the second quarter of fiscal 1999 of $33.1 million as compared to
operating income of $14.7 million in the second quarter of fiscal 1998, a
decrease of $47.8 million. Operating income (loss), as a percentage of net
sales, was (14.7)% in the second quarter of fiscal 1999 as compared to 8.4% in
the second quarter of fiscal 1998 primarily due to the factors outlined above.
Net Interest Expense. Net interest expense was $9.1 million in the second
quarter of fiscal 1999, compared to $1.7 million in the second quarter of fiscal
1998. The increase in net interest expense was primarily due to the increase in
debt to fund (i) the acquisition of Sneaker Stadium, (ii) the cash requirements
for opening 23 new superstores and 68 new specialty stores, and the remodeling
and re-opening of 35 former Sneaker Stadium superstores since July 31, 1998 and
(iii) the cash requirements of funding higher than planned inventory levels in
the second quarter of fiscal 1999. Interest expense was also impacted by the
higher interest rate on the $200.0 million 11% notes issued in April 1999 and
the higher rates charged under the revolving senior credit facility during the
second quarter of fiscal 1999.
Net Earnings (Loss). As a result of the above factors, the net loss for the
second quarter of fiscal 1999 was $25.9 million (($0.83) per diluted share) as
compared to net earnings of $8.0 million ($0.25 per diluted share) in the second
quarter of fiscal 1998, a decrease of $33.9 million.
SIX MONTHS ENDED JULY 31, 1999 COMPARED TO SIX MONTHS ENDED JULY 31, 1998
Net Sales - Net sales increased $119.5 million, or approximately 36.5%, to
$446.8 million in the first six months of fiscal 1999 compared to net sales of
$327.3 million for the first six months of fiscal 1998. This increase was
primarily attributable to 58 new superstores (including 35 remodeled and re-
opened former Sneaker Stadium superstores) and 68 new specialty stores opened
since July 31, 1998 and an increase in comparable store sales of 1.6%. Although
sales increased for the six months ended July 31, 1999, they were more
promotional in nature due to the Company's aggressive inventory reduction plan
and the highly promotional activity in the athletic footwear industry.
Implementation of the Company's inventory reduction initiative caused a delay in
the receipt of new back to school product which also negatively impacted sales
during the period. The calculation of comparable store sales included 81
superstores and 95 specialty stores at July 31, 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 increased 15.2% to $160.3 million for the first six
months in fiscal 1999 from $139.1 million for the first six months of fiscal
1998 primarily as a result of increased sales. The Company's gross margins were
negatively impacted during the six months ended July 31, 1999 by the aggressive
inventory reduction plan (through promotional pricing, reduced discounts and
additional freight charges from the internal movement of inventory from
specialty stores to superstores) and other promotional activities. As a
percentage of net sales, gross profit for the first six months of fiscal 1999
and 1998 was 35.9% and 42.5%, respectively.
15
<PAGE>
Franchise fees, Royalties and Other Revenue. Franchise fees, royalties and other
revenue decreased 52.3% to $284,000 for the first six months of fiscal 1999 from
$586,000 for the first six months 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. The franchise agreements with this franchisee were terminated during the
second quarter of fiscal 1999.
Store Operating Expenses. Store operating expenses increased approximately
60.1% to $156.5 million in the first six months of fiscal 1999 from $97.8
million in the first six months of fiscal 1998. The increase was primarily
attributable to the operating expenses of the 23 new superstores, the 35 re-
opened former Sneaker Stadium superstores and the 68 new specialty stores opened
since July 31, 1998. As a percentage of net sales, store operating expenses
increased to 35.0% for the six month period ended July 31, 1999 from 29.9% for
the first six months of fiscal 1998. This increase was primarily a result of
lower than planned sales and increased payroll and other costs associated with
the internal movement of inventory and to support the increased promotional
sales activity in the stores in connection with the Company's inventory
reduction initiative. Advertising costs were also higher than planned, as a
result of the increased promotional activity and lower vendor co-op.
Additionally, the converted Sneaker Stadium superstores and new specialty stores
opened primarily in the latter part of fiscal 1998 and in 1999 have not achieved
anticipated sales levels which have resulted in a higher store operating expense
ratio than in the comparable 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 six month period ended July 31, 1999 was an increase
in store opening costs of approximately $453,000, and an increase in net loss of
approximately $279,000 ($0.01 per basic and diluted share), net of applicable
income taxes of approximately $174,000. Store opening costs increased $1.7
million from $5.2 million for the six months ended July 31, 1998 to $6.9 million
for the six months ended July 31, 1999. The Company opened 28 new superstores
including the 14 converted former Sneaker Stadium superstores and 36 new
specialty stores in the six month period ended July 31, 1999 as compared to 17
new superstores and 19 new specialty stores in the six month period ended July
31, 1998. As a percentage of net sales, store opening costs remained constant at
1.6% for the first six months of fiscal 1999 and 1998.
Amortization of Intangibles. Amortization of intangibles, which includes
amortization of goodwill and franchise rights, increased 65.1% to approximately
$1.3 million for the first six months of fiscal 1999 from $793,000 for the first
six months of fiscal 1998. This increase was primarily attributable to the
amortization of goodwill resulting from the acquisitions of Athletic Attic,
Imperial Sports and Sneaker Stadium.
General and Administrative Expenses. General and administrative expenses
increased to $16.3 million, or approximately 45.4%, in the first six months of
fiscal 1999 from $11.2 million in the first six months of fiscal 1998. This
increase was primarily attributable to the increase in corporate staff and
systems to support the Company's planned growth and relocation of the Specialty
Store Division corporate headquarters from Flint, Michigan to Birmingham,
Alabama, increased levels of equipment lease expense, legal and professional
fees and the write-off of architectural fees incurred for stores the Company
no longer anticipates opening. As a percentage of net sales, general and
administrative expenses increased to 3.7% in the first six months of fiscal 1999
from 3.4% in the first six months of fiscal 1998, due primarily to the lower
than planned sales volume and the increased costs as discussed above.
Operating Income (Loss). The combination of lower than anticipated sales,
significantly lower gross margins and higher expenses resulted in an operating
loss in the first six months of fiscal 1999 of $20.4 million as compared to
operating income of $24.8 million in the comparable period of fiscal 1998.
Operating income (loss) as a percentage of net sales, was (4.6)% for the first
six months of fiscal 1999 as compared to 7.6% for the first six months of fiscal
1998.
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<PAGE>
Net Interest Expense. Net interest expense increased to approximately $14.3
million in the first six months of fiscal 1999 from $2.3 million for the first
six months of fiscal 1998. The increase in net interest expense was primarily
due to the increase in debt to fund (i) the acquisition of Sneaker Stadium, (ii)
the cash requirements for opening 23 new superstores and 68 new specialty
stores, and the remodeling and re-opening of 35 former Sneaker Stadium
superstores since July 31, 1998 and (iii) the cash requirements of funding
higher than planned inventory levels in the second quarter of fiscal 1999.
Interest expense was also impacted by the higher interest rate on the $200.0
million 11% notes issued in April 1999 and the higher rates charged under the
revolving senior credit facility during the second quarter of fiscal 1999.
Earnings (Loss) Before the Cumulative Effect of the Change in Accounting. As a
result of the above factors, the Company experienced a loss before the
cumulative effect of the change in accounting principle of $21.3 million for the
first six months of fiscal 1999 as compared to earnings of $13.8 million in the
first six months 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 Income (Loss). As a result of the above factors, the net loss for the first
six months of fiscal 1999 was $23.1 million (($0.74) per diluted share) as
compared to net income of $13.8 million ($0.44 per diluted share) for the first
six months of fiscal 1998, a decrease of $36.9 million.
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 $408.2 million and $316.8 million at July 31,
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 first six months ended July 31, 1999, the Company spent
$50.3 million for property and equipment, including $25.5 million to open new
stores, $21.3 million for improvements to existing stores, and $3.5 million for
corporate additions and improvements. The Company's short-term operational cash
requirements are not highly seasonal. The Company had $21.4 million and $24.6
million in cash and cash equivalents as of July 31, 1999 and September 24, 1999,
respectively. An additional need for liquidity going forward will arise from
interest payable on our 11% senior subordinated notes due 2009 and the revolving
credit facility.
Due to the Company's need for additional cash, on September 24, 1999, the
Company and all of its domestic subsidiaries entered into a new two-year $175.0
million senior secured revolving credit facility with a syndicate of banks and a
revised senior credit facility of $40.0 million with its existing bank group
(collectively, the "Credit Facilities"). The $175.0 million revolving facility,
which is secured by substantially all of the assets of the Company and its
domestic subsidiaries, permits borrowings of up to the lesser of $175.0 million
or a calculated borrowing base that is a percentage of eligible inventory. This
revolving facility bears interest at LIBOR plus 2.75% and expires on September
24, 2001. The $40.0 million loan bears interest at LIBOR plus 4.00%, is
guaranteed by all of the Company's domestic subsidiaries and is secured by a
second lien on accounts receivable, inventory and all of the stock of the
Company's domestic subsidiaries and 66 2/3% of the stock of the Company's
foreign subsidiary, and expires on September 25, 2001. The Company immediately
used $121.0 million from the $175.0 million revolving facility to repay $121.0
million outstanding under the Company's old $200.0 million senior credit
facility (the "Old Facility") leaving a $40.0 million balance under the Old
Facility, which was then amended as set forth above. At September 24, 1999, the
Company had a total of $34.9 million available for borrowing under the Credit
Facilities. Management currently believes that the funds available to it under
the Credit Facilities, along with cash on hand and internally generated funds,
will permit the Company to meet its cash needs through the end of the fiscal
year (January 29, 2000). However, if there is a material reduction of internally
generated funds in the interim, the Company may not be able to fund its working
capital needs without additional funds from outside sources. In such event, the
Company will need to negotiate revisions to its credit facilities or meet its
additional cash needs through additional borrowings or equity infusions, sales
of certain of its assets, or some combination of the foregoing. After the end of
the fiscal year, depending upon the Company's ability to generate additional
cash through its operations or through the various alternatives being explored
by management and its advisors, including Wasserstein Perella, the Company may
need to raise additional capital through debt or equity financing or otherwise.
There can be no assurance that the Company will be able to obtain such financing
as and when required or on acceptable terms.
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<PAGE>
In the quarter ending October 30, 1999, the Company will write off debt
issuance costs relating to the Old Facility. The Old Facility had been obtained
on December 10, 1998, from a syndicate of banks. At September 24, 1999, the
Company had $161.0 million outstanding under the Old Facility, of which $121.0
million was repaid from the $175.0 million revolving credit facility.
On April 15, 1999, the Company completed a $200.0 million private placement of
11% senior subordinated notes (see Note 6). Proceeds from such private
placement were used to repay an $80.0 million term loan and $113.0 million
outstanding under the Company's Old Facility.
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.
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 has opened 31 superstores, including 14 remodeled former Sneaker
Stadium superstores and 36 specialty stores through September 15, 1999. The
Company anticipates opening two new superstores and one new specialty store
during the remainder of fiscal 1999, and may open up to five new superstores in
fiscal 2000 (for which leases have already been signed), depending upon market
and other conditions.
Management intends to hold the Company's near-term capital expenditures to a
minimum operating level. The Company plans to spend a total of approximately
$65.0 to $70.0 million on capital expenditures in fiscal 1999. Included in this
estimate is approximately $33.0 to $38.0 million for the opening of new
superstores and new specialty stores (of which $25.5 million has been spent
through July 31, 1999) and approximately $32.0 million in connection with other
capital improvements to its business (of which $24.8 million has been spent
through July 31, 1999). The Company is not currently planning any material
capital expenditures other than those mentioned above.
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<PAGE>
The Company's ability to fund its working capital and capital expenditure
requirements, open new stores, make interest payments and meet its other cash
requirements depends primarily on current cash and cash equivalents, internally
generated funds and funds available under the Company's credit facilities.
Management currently believes that such sources will be sufficient to meet the
Company's capital requirements and operating needs for the remainder of the
fiscal year. However, if there is a material reduction of internally
generated funds in the interim, the Company may not be able to fund its working
capital needs without additional funds from outside sources. In such event, the
Company will need to negotiate revisions to its credit facilities or meet its
additional cash needs through additional borrowings or equity infusions, sales
of certain of its assets, or some combination of the foregoing. After the end
of the fiscal year, depending upon the Company's ability to generate additional
cash through its operations or through the various alternatives being explored
with Wasserstein Perella, the Company may need to raise additional capital
through debt or equity financing or otherwise. There can be no assurance that
the Company 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, as amended, will be effective for the Company in
fiscal 2001. The Company's management has not determined the effect of SFAS No.
133 on its financial statements.
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.
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All known Year 2000 upgrade, replacement or remediation efforts for key
systems are complete with the following two exceptions:
. Specialty store division's cash register applications on IBM's Retail
Applications for DOS (estimated completion date by the end of October
1999).
. Ceridian payroll system interface (estimated completion date by the end
of October 1999).
The Company relies on two applications to manage inventory and monitor sales
activity: Island Pacific's I3 Merchandising Applications for Retail ("I3") and
IBM's Retail Applications for DOS ("RADOS").
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 expected to
be completed by the end of October 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 customers' shoe purchases and after 12 pairs
are purchased, provides customers with a free pair of shoes 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 toolkit 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.
. Employee information system.
. Ceridian payroll system interface.
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<PAGE>
The time clock application was internally developed along with the human
resource and employee information system using the Delphi development toolkit
and integrated with an Oracle database containing the employee information
including time and attendance information.
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 by the
end of October 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. 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 by the end of October
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 July 31, 1999, the Company's debt consisted of
approximately $229.9 million of fixed-rate debt with a weighted average interest
rate of 10.6% and $148.9 million of variable-rate debt with a weighted average
interest rate of 7.0%. If interest rates on such variable debt were to increase
by 70 basis points (one-tenth of the weighted average variable-rate at July 31,
1999), the net impact on the Company's results of operations and cash flows
would not be material.
Cautionary Statement Concerning Forward-Looking Statements
This report 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 participation in
the smaller specialty store market of the industry; (ii) the Company's expansion
plans; (iii) the Company's ability to successfully integrate recent acquisitions
including its 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,
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<PAGE>
including changes in customer demand and merchandise trends; (vi) the Company's
business and growth strategies and (vii) the Company's ability to increase its
liquidity through debt or equity financing in the future and improve operating
performance. These include statements specifically relating to the effect of
recent difficulties in both our superstore and specialty store divisions on our
fiscal 1999 results and future expansion plans, our inventory reduction
initiative and its impact on sales and gross margins, our need for additional
liquidity, as well as the impact of actions taken as a result of the Company's
individual store profitability evaluation. Any such forward-looking statements
are not guarantees of future performance and involve risks and uncertainties,
and actual results may differ materially from those projected in the forward-
looking statements as a result of various factors. The information contained in
this report 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 1. Legal Proceedings.
- --------------------------
As previously reported, on April 20, 1999, MBA Marketing Corporation, the sole
superstore franchisee of the Company, filed a complaint in the United States
District Court for the Southern District of Ohio, Eastern Division, seeking
declaratory judgement, an accounting and monetary damages against the Company
and Casual Wear II, Inc. 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 initial complaint and will
vigorously defend these allegations.
On June 29, 1999, the Company filed a complaint against MBA Marketing
Corporation and its principal shareholder, Mathias A. Barouh, claiming trademark
infringement, and seeking a preliminary and permanent injunction and monetary
damages in excess of $1.0 million. This complaint was filed in the same court
as the April 20, 1999 complaint against the Company set forth above. The Court
has consolidated the two complaints. After a hearing on the Company's Motion
for a preliminary injunction, the Court determined that the franchise agreements
had been terminated and granted the Company a preliminary injunction and ordered
the franchisee to cease using the Just For Feet name, trademark and other
elements of the Just For Feet system in the retail operation of the franchisee's
stores by September 2, 1999 and to perform all post termination obligations
specified in the franchise agreements by October 30, 1999.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
On June 1, 1999, the Company held its 1999 Annual Meeting of Stockholders. At
the meeting, the following persons were elected to serve on the Company's Board
of Directors until the next annual meeting of stockholders and until their
successors are elected and have qualified: Harold Ruttenberg, Bart Starr, Sr.,
Michael P. Lazarus, Randall L. Haines, David F. Bellett, Edward S. Croft, III,
Warren C. Smith, Helen M. Rockey and John A. Berg. The number of votes cast for
and against the election of each nominee for director was as follows:
Against/Withhold
Director For Authority
-------- --- ---------
Harold Ruttenberg............... 27,715,064 553,713
Bart Starr, Sr. ................ 27,410,792 857,985
Michael P. Lazarus.............. 27,715,101 553,676
Randall L. Haines............... 27,715,101 553,676
David F. Bellett................ 27,715,101 553,676
Edward S. Croft, III. .......... 27,412,292 856,485
Warren C. Smith................. 27,715,101 553,676
Helen M. Rockey................. 27,714,401 554,376
John A. Berg.................... 27,714,401 554,376
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In addition, the Company's stockholders approved an amendment to the Company's
1997 Employee Incentive Plan to increase the number of shares available for
issuance pursuant to such plan from 2,900,000 to 4,000,000 shares. The number
of votes cast in favor of the amendment was 21,216,930 and the number of votes
cast against the amendment was 7,008,557. There were 43,290 abstentions and
broker non-votes.
In addition, the Company's stockholders ratified an amendment to the Company's
Non-Employee Director Stock Option Plan to increase the number of shares
available for issuance pursuant to such plan from 281,250 to 400,000 shares.
The number of votes cast in favor of the amendment was 23,871,152 and the number
of votes cast against the amendment was 4,349,819. There were 47,806
abstentions and broker non-votes.
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
(a) Exhibits. The following exhibits have been filed with this Report:
10.1.2 - Amendment No. 2 to the Company's Amended and Restated
1997 Employee Incentive Plan.
10.3.1 - First Amendment dated August 17, 1999 to Employment
Agreement between the Company and Eric L. Tyra dated
May 1, 1997.
10.12 - Just For Feet, Inc. Non-Employee Director Stock Option
Plan.
10.12.1 - Amendment No. 1 to the Company's Non-Employee Director
Stock Option Plan.
10.12.2 - Amendment No. 2 to the Company's Non-Employee Director
Stock Option Plan.
10.13 - Employment Agreement dated May 26, 1999 between the
Company and Robert E. Oyster.
(b) Reports on Form 8-K. No Reports on Form 8-K were filed during the
three months ended May 1, 1999.
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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: September 27, 1999 By: /s/ Helen M. Rockey
--------------------
Helen M. Rockey
President and Chief Executive Officer
Dated: September 27, 1999 By: /s/ Peter J. Berman
--------------------
Peter J. Berman
Vice President and Acting Chief Financial
Officer
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<PAGE>
Exhibit Index
Exhibit No. Description
----------- -----------
10.1.2 Amendment No. 2 to the Company's Amended and Restated
1997 Employee Incentive Plan.
10.3.1 First Amendment dated August 17, 1999 to Employment
Agreement between the Company and Eric L. Tyra dated
May 1, 1997.
10.12 Just For Feet, Inc. Non-Employee Director Stock Option
Plan.
10.12.1 Amendment No. 1 to the Company's Non-Employee Director
Stock Option Plan.
10.12.2 Amendment No. 2 to the Company's Non-Employee Director
Stock Option Plan.
10.13 Employment Agreement dated May 26, 1999 between the
Company and Robert E. Oyster.
27 Financial Data Schedule
<PAGE>
EXHIBIT 10.1.2
AMENDMENT NO. 2
TO
AMENDED AND RESTATED EMPLOYEE INCENTIVE STOCK OPTION PLAN
JUST FOR FEET, INC.
WHEREAS, the Board of Directors of Just For Feet, Inc. (the "Corporation")
has previously adopted, and the stockholders of the Corporation have approved,
the1997 Employee Incentive Plan, as amended (the "Plan") pursuant to which
various types of incentive awards may be issued to eligible directors, officers,
employees, consultants and advisors of the Corporation; and
WHEREAS, the Board of Directors of the Corporation deems it desirable to
amend the Plan so as to increase the number of shares available for issuance
pursuant to awards granted under the Plan;
NOW, THEREFORE, the Plan is amended upon the terms, and subject to the
conditions, set forth herein:
ARTICLE I
AMENDMENT TO PLAN
1.1 Section 3 of the Plan shall be amended by deleting the first sentence
of such section in its entirety and substituting therefor the following:
"The total number of shares of stock reserved and available for
distribution under the Plan shall be 4,000,000."
ARTICLE II
EFFECTIVE DATE OF AMENDMENT
2.1 The amendment effected hereby shall be effective for awards granted
under the Plan to eligible participants on or after the date this amendment is
approved by the Board of Directors of the Corporation, but subject to approval
of a majority of the shares of Common Stock of the Corporation entitled to vote
thereon represented in person and by proxy at a meeting of stockholders. In the
event stockholder approval of adoption of this amendment is not obtained within
twelve months of the date this amendment is approved by the Board of Directors
of the Corporation, then any option granted in the intervening period to
eligible participants shall be void.
<PAGE>
EXHIBIT 10.3.1
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment is made and entered into as this 17th day of August, 1999 by
and between Just For Feet, Inc. (this "Company") and Eric L. Tyra (the
"Executive").
W I T N E S S E T H:
Whereas, Company and Executive entered into that certain Employment
Agreement dated the 1st day of May, 1997 (the "Employment Agreement"); and
WHEREAS, Company and Executive wish to amend the Employment Agreement as
more fully set out herein;
NOW, THEREFORE, for and in consideration of the premises and the mutual
promises and covenants contained herein and for other good and valuable
consideration, the receipt, adequacy and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. The first sentence of Section 2 of the Employment Agreement is hereby
amended by deleting it in its entirety and substituting the following in lieu
thereof:
"Executive shall assume the responsibilities and perform the duties of
Executive Vice President and Chief Administrative Officer of the Company
and as Chief Administrative Officer shall report to the Chief Executive
Officer and be responsible for the following functions: (i) Legal and Human
Resources; (ii) Corporate Communication/Investor Relations including
liaison with outside investor relation consultants; (iii) acting general
manager of Consumer Direct business unit including Internet, special orders
and team sales; (iv) new business development; and (v) acquisitions and
divestitures."
2. Section 3.3(b) shall be amended by deleting it in its entirety and
substituting the following in lieu thereof:
"(b) On the date that Executive's employment hereunder is terminated,
if Executive's employment is terminated other than "for cause" (as defined
in Section 4.2 below), Company shall pay Executive a bonus equal to
$8,333.33 times the number of months beginning May 1, 1997 and ending on
the last day of the month previous to the date of Executive's termination."
3. Section 3.3 is amended by adding a new paragraph (c) as follows:
"(c) On October 31, 1999, if Executive is employed hereunder or if
Executive is not employed hereunder, if Executive's employment hereunder
has been terminated other than "for cause" (as defined in Section 4.2
below) or voluntarily by
<PAGE>
Executive, Company shall pay Executive a bonus of $50,000 if from the date
hereof through October 31, 1999 Executive has performed or fulfilled the
following tasks:
(i) Engaged, trained and was responsible for the corporate communications
and investor Relations functions including consultant and internal staff and
coordinated press releases and conference calls; (ii) assisted in recruiting and
training new Chief Financial Officer and assisted existing finance staff in
performing their functions; (iii) managed Consumer Direct Division (Internet,
special orders and team sales) and assisted in defining roles, recruiting and
developing strategic plans and budgets; (iv) assisted Chief Operating Officer
and Division Presidents in managing budgets and financial affairs of their
divisions and operations; and (iv) continued to act as key contact with
independent outside auditors and assisted in preparation of quarterly financial
statements and press releases.
4. Indemnification. The Company reaffirms its obligation to indemnify
Executive in accordance with the Company's Bylaws.
5. Except as specifically amended hereby, all of the terms and conditions
of the Employment Agreement shall remain in full force and effect.
In witness whereof, the undersigned have set their hands and seals all as
of the date here first above written:
Just For Feet, Inc.
/s/ Helen Rockey
-------------------------------------
Helen Rockey
President and Chief Executive Officer
Executive:
/s/ Eric L. Tyra (SEAL)
-------------------------------
Eric L. Tyra
<PAGE>
EXHIBIT 10.12
JUST FOR FEET, INC.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
---------------------------------------
ARTICLE 1
---------
1.1 Purpose. The purpose of the Plan is to promote the long-term
-------
success of JUST FOR FEET, INC. by providing financial incentives to non-employee
directors who are in positions to make significant contributions toward such
success. The Plan is designed to attract and retain individuals of outstanding
ability to serve as directors of JUST FOR FEET, INC. and to encourage such
directors to acquire a proprietary interest in JUST FOR FEET, INC., to continue
service as directors of JUST FOR FEET, INC., and to render superior performance
during such service.
1.2 Definitions. Unless the context clearly indicates otherwise, for
-----------
purposes of this Plan the following terms have the following meanings:
(a) "Board of Directors" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Committee" means the Compensation Committee of the Board of Directors
appointed by the Board from among its members.
(d) "Common Stock" means the Common Stock of the Company, par value $.0001
per share.
(e) "Company" means Just For Feet, Inc., an Alabama corporation.
(f) "Fair Market Value" of a share of Common Stock on any particular date
means: (1) if the Common Stock is then traded on a national stock
exchange, the closing price on such date of a share of the Common Stock
as traded on the largest stock exchange on which it is then traded; (2)
if the Common Stock is not then traded on a national stock exchange,
but the price per share is regularly quoted by Nasdaq, the mean between
the closing composite inter-dealer "bid" and "ask" prices for Common
Stock, as quoted by Nasdaq (i) on such date, or (ii) if no "bid" and
"ask" prices are quoted on such date, then on the next preceding date
on which such prices were quoted; or (3) if neither (1) nor (2) is
applicable, then the value established by the Committee in accordance
with Section 422(b)(4) of the Code and the regulations promulgated
thereunder.
(g) "Grant Date," as used with respect to a particular Option, means the
date as of which such Option is granted pursuant to the Plan.
(h) "Grantee" means the Non-Employee Director to whom an Option is granted
pursuant to the Plan.
<PAGE>
(i) "Non-Employee Director" means any duly elected member of the Board of
Directors of the Company that does not constitute an "employee" of the
Company for purposes of Section 422 of the Code.
(j) "Option" means an option granted under this Plan.
(k) "Option Agreement" means the agreement between the Company and a
Grantee under which the Grantee is granted an Option pursuant to the
Plan.
(l) "Plan" means the Just For Feet, Inc. Non-Employee Director Stock Option
Plan as set forth herein and as amended from time to time.
(m) "Total and Permanent Disability," as applied to a Grantee, means that
the Grantee (1) has established to the satisfaction of the Committee
that the Grantee is unable to engage in any substantial gainful
activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or which has lasted
or can be expected to last for a continuous period of not less than 12
months, and (2) has satisfied any requirement imposed by the Committee
in regard to evidencing such disability.
1.3 Aggregate Limitation.
--------------------
(a) The aggregate number of shares of Common Stock with respect to which
Options may be granted shall not exceed 125,000 shares of Common Stock,
subject to possible adjustment in accordance with Section 3.1.
(b) Any shares of Common Stock to be delivered by the Company upon the
exercise of Options shall, at the discretion of the Committee, be
issued from the Company's authorized but unissued shares of Common
Stock or transferred from any available Common Stock held in treasury.
(c) In the event any Option expires or otherwise terminates prior to being
fully exercised, new Options may be granted hereunder for the shares
with respect to which the expired or terminated Option was not
exercised.
1.4 Administration of the Plan.
--------------------------
(a) The Plan shall be administered by the Committee which shall have the
authority:
(1) To interpret and construe the provisions of the Plan and to
establish rules and regulations relating to it;
(2) To prescribe the terms and conditions of the Option Agreements for
the grant of Options in accordance and consistent with the
requirements of the Plan; and
-2-
<PAGE>
(3) To make all other determinations necessary or advisable to
administer the Plan in a proper and effective manner.
(b) All decisions and determinations of the Committee in the administration
of the Plan and on questions or other matters concerning the Plan or
any Option shall be final, conclusive and binding on all persons,
including, without limitation, the Company, the shareholders and
directors of the Company and any persons have any interest in any
Options which may be granted under the Plan.
1.5 Effective Date and Duration of Plan. The Plan shall become
-----------------------------------
effective upon its adoption by the Board of Directors. In the event shareholder
approval of the adoption of the Plan is not obtained at the 1995 Annual Meeting
of Shareholders, then any Options granted in the intervening period shall be
void. Unless previously terminated by the Board of Directors, the Plan (but not
any then outstanding Options which have not yet expired or otherwise terminated)
shall terminate on the tenth annual anniversary of its adoption by the Board of
Directors.
ARTICLE 2
---------
Stock Options
-------------
2.1 Grant of Options.
----------------
(a) Upon the date of the adoption of this Plan by the Board of Directors,
each of the three then serving Non-Employee Directors of the Company,
with the exception of Mr. Bart Starr, shall be granted Options to
purchase 25,000 shares of Common Stock at an exercise price equal to
the Fair Market Value of such Common Stock on such date; provided that
such grants shall be conditioned upon approval of the Plan by the
shareholders of the Company at the next regular meeting of such
shareholders.
(b) Upon the election of any additional Non-Employee Director of the
Company after the date of the adoption of the Plan, such person shall
be granted Options to purchase 25,000 shares of Common Stock at an
exercise price equal to the Fair Market Value of such Common Stock on
the date of such election to the Board of Directors; provided, however,
such grant shall be conditioned upon approval of the Plan by the
shareholders of the Company at the next regular meeting of shareholders
if the Plan has not been previously approved by the shareholders.
(c) Each year on the first day of the Company's fiscal year, each Non-
Employee Director serving on the Board of Directors on such date shall
automatically be granted Options to purchase 2,500 shares of Common
Stock at an exercise price equal to the Fair Market Value of such
Common Stock on that date; provided, that if on any such date the
shares available for grant under the Plan are insufficient to cover
such levels of grants, then each such director shall be granted Options
to purchase that number of shares which is equal to the number of
shares available for
-3-
<PAGE>
grant hereunder divided by the number of Non-Employee Directors then
serving as directors.
2.2 Option Requirements.
-------------------
(a) An Option shall be evidenced by an Option Agreement specifying the
number of shares of Common Stock that may be purchased upon its
exercise and containing such other terms and conditions consistent with
the Plan as the Committee shall determine.
(b) Options granted pursuant to Section 2.1(a) or (b) hereof shall become
vested and exercisable with respect to one-third of the shares of
Common Stock subject to such Option on each of the first, second and
third annual anniversaries of the Grant Date thereof, and 100%
immediately upon the death of the Grantee. Options granted pursuant to
Section 2.1(c) hereof shall become vested and exercisable with respect
to 100% of the shares of Common Stock subject to such option on the
first annual anniversary of the Grant Date thereof, and 100%
immediately upon the death of the Grantee.
(c) The Option price per share of Common Stock shall be equal to the Fair
Market Value of a share of Common Stock on the Grant Date.
(d) An Option shall not be transferable other than by will or the laws of
descent and distribution and, during the Grantee's lifetime, an Option
shall be exercisable only by the Grantee, or if the Grantee is disabled
and the Option remains exercisable, by his or her duly appointed
guardian or other legal representative.
(e) Each Option granted hereunder, to the extent that it has not previously
been exercised, shall terminate upon the earliest to occur of (i) the
tenth annual anniversary of the date of grant, (ii) the expiration of
90 days after the Grantee's retirement or termination from service on
the Board of Directors for any reason other than Total and Permanent
Disability or death, or (iii) the expiration of six months after the
death or Total and Permanent Disability of the director entitled to the
Option.
(f) A person electing to exercise an Option shall give written notice of
such election to the Company, in such form as the Committee may
require, accompanied by payment in the manner determined by the
Committee, of the full purchase price of the shares of Common Stock for
which the election is made. Payment of the purchase price shall be made
in cash or in such other form as the Committee may approve, including
shares of Common Stock valued at their Fair Market Value on the date of
exercise of the Option.
-4-
<PAGE>
ARTICLE 3
---------
General Provisions
------------------
3.1 Adjustment Provisions.
---------------------
(a) In the event the dividends are payable in Common Stock of the Company
or in the event there are splits, subdivisions or combinations of
shares of Common Stock of the Company, the number of shares available
under the Plan shall be increased or decreased proportionately, as the
case may be, and the number of shares deliverable upon the exercise
thereafter of any portion theretofor granted shall be increased or
decreased proportionately, as the case may be, without change in the
aggregate purchase price. In the event the Company is merged or
consolidated with another corporation and the Company is not the
surviving corporation, or in the event the property or stock of the
Company is acquired by another corporation, or in the event of a
reorganization, recapitalization or liquidation of the Company, the
Committee or the Board of Directors of the Company, or the Board of
Directors of any corporation assuming the obligations of the Company
shall make appropriate provision for the protection of any outstanding
options by the substitution on an equitable basis of appropriate stock
of the Company, or of the merged, consolidated or otherwise reorganized
corporation which will be issuable in respect to the shares of Common
Stock of the Company, provided only that the excess of the aggregate
fair market value of the shares subject to option immediately after
such substitution over the purchase price thereof is not more than the
excess of the aggregate fair market value of the shares subject to
option immediately before such substitution over the purchase price
thereof.
(b) Except as provided in paragraph (a) immediately above, the issuance by
the Company of shares of stock of any class or securities convertible
into shares of stock of any class shall not affect the Options.
3.2 Additional Conditions. Any shares of Common Stock issued or
---------------------
transferred under any provision of the Plan may be issued or transferred subject
to such conditions, in addition to those specifically provided in the Plan, as
the Committee or the Company may impose.
3.3 No Right as Shareholder. No Grantee or any other person
-----------------------
authorized to purchase Common Stock upon exercise of an Option shall have any
interest in or shareholder rights with respect to any shares of the Common Stock
which are subject to any option until such shares have been issued and delivered
to the Grantee or any such person pursuant to the exercise of such Option.
3.4 Legal Restrictions. If in the opinion of legal counsel for the
------------------
Company the issuance or sale of any shares of Common Stock pursuant to the
exercise of an Option would not be lawful for any reason, including without
limitation the inability of the Company to obtain from any governmental
authority or regulatory body having jurisdiction the authority deemed by such
counsel to be necessary to such issuance or sale, the Company shall not be
obligated to issue or sell any
-5-
<PAGE>
Common Stock pursuant to the exercise of an Option to its Grantee or any other
authorized person unless a registration statement that complies with the
provisions of the Securities Act of 1933, as amended (the "Act") in respect of
such shares is in effect at the time thereof, or other appropriate action has
been taken under and pursuant to the terms and provisions of the Act, or the
Company receives evidence satisfactory to such counsel that the issuance and
sale of such shares, in the absence of an effective registration statement or
other appropriate action, would not constitute a violation of the Act or any
applicable state securities law. The Company is in no event obligated to
register any such shares, to comply with any exemption from registration
requirements or to take any other action which may be required in order to
permit, or to remedy or remove any prohibition or limitation on, the issuance or
sale of such shares to any Grantee or other authorized person.
3.5 Rights Unaffected. The existence of the Options shall not
-----------------
affect: (i) the right or power of the Company or its shareholders to make
adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or its business; (ii) any issue of bonds,
debentures, preferred or prior preference stocks affecting the Common Stock or
the rights thereof; (iii) the dissolution or liquidation of the Company, or sale
or transfer of any part of its assets or business; (iv) or any other corporate
act of the Company, whether of a similar character or otherwise.
3.6 Withholding Taxes. As a condition of exercise of an Option, the
-----------------
Company may, in its sole discretion, withhold or require the Grantee to pay or
reimburse the Company for any taxes which the Company determines are required to
be withheld in connection with the grant or any exercise of an Option.
3.7 Choice of Law. The validity, interpretation and administration
-------------
of the Plan and of any rules, regulations, determinations or decisions made
thereunder, and the rights of any and all persons having or claiming to have any
interest therein or thereunder, shall be determined exclusively in accordance
with the laws of the State of Alabama.
Without limiting the generality of the foregoing, the period within
which any action in connection with the Plan must be commenced shall be governed
by the laws of the State of Alabama, without regard to the place where the act
or omission complained of took place, the residence of any party to such action
or the place where the action may be brought or maintained.
3.8 Amendment and Termination of Plan. The Plan may at any time or
---------------------------------
from time to time be terminated, modified or amended by the affirmative vote of
not less than a majority of the votes entitled to be cast thereon by the
Company's shareholders. The Board of Directors may, at any time and from time to
time, modify or amend the Plan in any respect, except that without the approval
of the shareholders of the Company, the Board of Directors may not:
(a) increase the maximum number of shares for which Options may be granted
under the Plan either in the aggregate or to any eligible participant,
except as required under any adjustment pursuant to Section 3.1 hereof,
or
-6-
<PAGE>
(b) change the class of persons eligible for Options under the Plan or
otherwise materially modify the requirements as to eligibility for
participation in the Plan or otherwise materially increase the benefits
accruing to participants under the Plan.
Provided, that in no event may the Plan be amended more than once every six
months, other than to comport with changes in the Code, the Employee Retirement
Income Security Act or the rules thereunder.
The termination or any modification or amendment of the Plan shall not,
without the consent of a Grantee, affect his or her rights under an Option
previously granted to him or her. With the consent of the Grantee affected, the
Board of Directors or the Committee may amend outstanding Option Agreements in a
manner not inconsistent with the Plan.
-7-
<PAGE>
EXHIBIT 10.12.1
AMENDMENT NO. 1
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
JUST FOR FEET, INC.
WHEREAS, the Board of Directors of Just For Feet, Inc. (the "Corporation")
has previously adopted, and the shareholders of the Corporation have approved,
the Non-Employee Director Stock Option Plan (the "Plan") pursuant to which
options to purchase stock of the Corporation may be issued to non-employee
directors of the Corporation; and
WHEREAS, the Board of Directors of the Corporation deems it desirable to
amend the Plan as provided herein to provide that the Plan be administered by
the Stock Option Committee rather than the Compensation Committee of the Board
of Directors in order to conform the Plan to recent amendments made to Rule
16b-3 under the Securities Exchange Act of 1934;
NOW, THEREFORE, the Plan is amended upon the terms, and subject to the
conditions, set forth herein:
ARTICLE I
AMENDMENT TO PLAN
1.1 Paragraph (c) of Section 1.2 of the Plan shall be amended by deleting
paragraph (c) in its entirety and substituting therefor the following new
paragraph:
"(c) "Committee" shall mean a committee designated by the Board of
Directors, which shall consist of no fewer than two members of the Board of
Directors, each of whom shall be a "Non-Employee Director" within the
meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended.
Should the Board of Directors consist of only two or fewer than two members
or should the committee at any time consist of an individual who does not
meet the definition of a "Non-Employee Director" within the meaning of Rule
16b-3 under the Securities Exchange Act of 1934, as amended or if the Board
of Directors should not designate the Committee, the references herein to
the Committee shall be deemed to mean the Board of Directors."
ARTICLE II
EFFECTIVE DATE OF AMENDMENT
2.1 The amendment effected hereby shall be effective for options granted
under the Plan on or after the date this amendment is approved by the Board of
Directors of the Corporation.
<PAGE>
EXHIBIT 10.12.2
AMENDMENT NO. 2
TO
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
WHEREAS, the Board of Directors of Just For Feet, Inc. (the "Corporation")
has previously adopted, and the stockholders of the Corporation have approved,
the Non-Employee Director Stock Option Plan (the "Plan") pursuant to which non-
qualified stock options may be granted to non-employee directors of the
Corporation; and
WHEREAS, the Board of Directors of the Corporation deems it desirable to
amend the Plan so as to increase the number of shares available for issuance
pursuant to options granted under the Plan;
NOW, THEREFORE, the Plan is amended upon the terms, and subject to the
conditions, set forth herein:
ARTICLE 1.
AMENDMENT TO PLAN
1.1 Section 1.3(a) of the Plan shall be amended by deleting such section
in its entirety and substituting therefor the following:
"(a). The aggregate number of shares of Common Stock with respect to
which Options may be granted shall not exceed 400,000 shares of Common
Stock, subject to possible adjustment in accordance with Section 3.1."
ARTICLE 2.
EFFECTIVE DATE OF AMENDMENT
2.1 The amendment effected hereby shall be effective for options under the
Plan to eligible directors on or after the date this amendment is approved by
the Board of Directors of the Corporation, but subject to approval of a majority
of the shares of Common Stock of the Corporation entitled to vote thereon
represented in person and by proxy at a meeting of stockholders. In the event
stockholder approval of adoption of this amendment is not obtained within twelve
months of the date this amendment is approved by the Board of Directors of the
Corporation, then any option granted in the intervening period shall be void.
<PAGE>
EXHIBIT 10.13
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 26th day
of May, 1999 by and between JUST FOR FEET, INC., a Delaware corporation (the
"Company"), and ROBERT E. OYSTER (the "Executive"), an individual.
For and in consideration of the mutual covenants described below, the
parties hereto agree as follows:
1. EMPLOYMENT. The Company agrees to employ Executive, and Executive
agrees to accept such employment, upon the following terms and conditions.
2. DUTIES. Executive shall assume the responsibilities and perform the
duties of President of the Super Store Division of the Company (the "Super Store
Division") with the following duties: (i) oversee the Super Store Division's
day-to-day operations including merchandising, advertising, sales and store
operations, (ii) prepare and update strategic and operations plans for approval
by the President and the Board of Directors, and (iii) execute approved
strategic and operations plans for the Superstore Division,. Such
responsibilities and duties may be revised from time to time at the sole
discretion of the Board of Directors of the Company, and Executive shall assume
such responsibilities and perform such duties as the Company may direct from
time to time subject to Executive's right of termination for Good Reason (as
that term is defined in Section 12.5 (iii)). Executive agrees to devote his
full time and energy to the furtherance of the business of the Company and shall
be loyal to the Company and use his best efforts to further its interests, and
shall not during the term hereof, without the prior written consent of the
Company, work or perform services in any advisory or other capacity for any
individual, firm, company, or corporation other than for the Company.
Notwithstanding the foregoing, the Executive shall not be precluded from
devoting such time to his personal or financial affairs or to community,
charitable, trade and professional activities as shall not interfere with his
duties to the Company in the reasonable judgment of the Board of Directors.
3. COMPENSATION.
3.1 Base Salary. The Company shall pay Executive as compensation for all
-----------
the services to be rendered by Executive hereunder a base salary equal to a rate
of $250,000 per year ("Base Salary") for the first year during the Initial Term
hereof (as hereinafter defined) and supplemental salary at the rate of $12,500
per year for each of the years during the Initial Term hereof. After the
initial year of this Agreement the Executive's Base Salary shall be reviewed by
the Company on each successive anniversary of this Agreement and the rate
thereof shall be increased as of such review date by an amount equal to the
greater of (i) five (5%) or (ii) the percentage increase in the "Consumer Price
Index" for the preceding twelve (12) month period. For purposes of this
provision, the "Consumer Price Index" shall mean and refer to that table in the
Consumer Price Index published by the U.S. Department of Labor, Bureau of Labor
Statistics, now known as the "Consumer Price Index for All Urban Consumers: U.S.
City Average--(CPI-U) All Items (1982-84=100)." If the Consumer price Index
referenced above is changed, and such change affects the calculations described
above, the Consumer Price Index shall be converted in accordance with the
conversion factor published by the U.S. Department of Labor, Bureau of
Statistics. If the Consumer Price Index is discontinued or revised during the
term of this
<PAGE>
Agreement, such other government index or computation with which it is replaced
shall be used in order to obtain substantially the same result as would have
been obtained in the Consumer Price Index had not been discontinued or revised.
If the Consumer Price Index is discontinued and there is no substituted
government index or computation, the most closely comparable statistics on the
purchasing power of the consumer dollar of urban consumers, as published by a
responsible financial authority and selected by the Company shall be utilized in
lieu of such index. Thereafter, if this Agreement is extended pursuant to
Section 4(a) below, Executive's base salary shall be subject to review and
increase in the discretion of the Board of Directors. Executive's salary shall
be payable beginning with the period starting June 14, 1999 in equal monthly
installments and shall be prorated on a daily basis for the years in which
Executive commences and terminates his employment pursuant to this Agreement.
The Company's obligation to pay Executive any compensation shall cease upon
termination of Executive's employment with the Company; provided, however, if
Executive's employment is terminated due to his death, Company shall pay as a
lump sum payment to the estate of Executive his Base Salary for one year.
3.3 Bonus.
-----
Executive shall be eligible to receive a performance and merit-based bonus
during the fiscal year of his employment hereunder beginning with the Company's
fiscal year starting January 1, 1999 equal in an amount up to fifty percent
(50%) of Executive's Base Salary for such fiscal year. Fifty percent (50%) of
such bonus shall be based upon the achievement by the Company of certain
quantitative revenue and profit margin numbers, and fifty percent (50%) of such
bonus shall be based upon the achievement by the Company of certain other
quantitative and/or qualitative goals, in each case, as may be determined by the
Board of Directors of the Company for the relevant fiscal year.
3.4 Stock Options. Subject to Executive's execution of and compliance with
-------------
the terms of that certain Just For Feet, Inc. Incentive Stock Option Agreement
substantially in the form attached hereto as Exhibit A, Company grants to
Executive options to acquire 250,000 shares of the common stock of Just For
Feet, Inc. at the Fair Market Value per share on the date of the grant.
3.5 Other Benefits. Executive shall be entitled to receive health and
--------------
dental insurance benefits, vacation benefits and other benefits substantially
similar to those provided to other executives of the Company. Company shall
have the right to change said benefit program at any time or times.
3.6 Reimbursement of Expenses. In addition to the compensation described
-------------------------
in this Agreement, Executive shall be entitled to reimbursement by Company for
all actual, reasonable and direct expenses incurred by him in the performance of
his duties hereunder, provided such expenses are properly characterized as being
business expenses that are properly tax deductible for Company, and further
provided that such expenses were incurred only in accordance with the policies
and procedures established by the Board of Directors from time to time.
Executive shall provide Company with written documentation of such expenses in
form complying with the records required of Company by the Internal Revenue
Service and appropriate state authorities for tax deductibility purposes in such
cases, and reimbursement for each item of approved expense shall be made within
a reasonable time after receipt by Company of the written documentation thereof.
-2-
<PAGE>
3.7 Vacation. The Executive shall be entitled to three (3) weeks annual
--------
paid vacation and such holidays as the Board of Directors may approve. In the
event of any termination of employment, Executive shall not be entitled to
receive payment for any unused vacation time.
3.8 Withholdings. All amounts payable to Executive pursuant to this
------------
Agreement shall be subject to all applicable withholdings as required by all
laws.
4. TERM AND TERMINATION.
4.1 Term. This Agreement shall be effective upon the date first set forth
----
above and, unless earlier terminated as provided herein, shall remain in full
force and effect for an initial period which ends on June 15, 2004 (the "Initial
Term"). This Agreement may be renewed on the same terms and conditions for
additional successive periods of one (1) year upon the execution of a written
agreement by the parties hereto.
4.2 Termination. Notwithstanding anything contained herein to the
-----------
contrary, the Company may terminate Executive's employment immediately for
cause. For purposes of this Agreement, "for cause" shall mean the occurrence of
the following: (i) the commission of any act of fraud, dishonesty materially
harmful to the Company, misappropriation or moral turpitude on the part of the
Executive, (ii) a material breach by the Executive of his duties and obligations
hereunder, (iii) continued neglect by Executive in fulfilling his duties as an
executive officer of the Company as a result of alcoholism, addiction to illegal
substances, or excessive unauthorized absenteeism, after written notification
from the Board of Directors of such neglect, setting forth in detail the matters
involved and Executive's failure to cure the problem resulting in such neglect
within a reasonable time thereafter, (iv) the Executive becomes Completely
Disabled (as hereinafter defined), or (v) the death of Executive. For purposes
of this Agreement, "Completely Disabled" shall mean Executive's inability, due
to illness, accident or any other physical or mental incapacity, to perform the
duties provided for herein for an aggregate of 91 days during any period of 180
consecutive days during the term hereof. In addition, termination of
Executive's employment upon the occurrence of any act specified in (i) through
(iii) above shall result, to the extent not otherwise prohibited by law, in
Executive's loss of any benefits provided by the Company.
4.3 Return of Property. Upon termination of employment for any reason,
------------------
Executive shall return immediately to the Company all documents, property, and
other records of the Company, and all copies thereof, within Executive's
possession, custody or control, including but not limited to any materials
containing any Trade Secrets or Confidential Information (each as defined below)
or any portion thereof.
5. RELOCATION EXPENSES.
The Company agrees to reimburse Executive for the following expenses
incurred with respect to Executive's relocation from Columbus, Ohio to
Birmingham, Alabama: (i) reasonable expenses incurred for the movement of normal
household goods provided Executive obtains bids from three (3) moving companies
and takes the lowest bid, (ii) actual closing costs and real estate commissions
paid with respect to the sale by Executive of his home in Columbus, Ohio up to a
maximum of six percent (6%)
-3-
<PAGE>
of the sales price, (iii) the costs of temporary living quarters for Executive
in Birmingham, Alabama, not to exceed $1,500.00 per month until the earlier of:
(i) the date Executive sells his home in Columbus, Ohio or (ii) six (6) months
from the date hereof; and (iii) the reasonable costs of four (4) trips for
Executive and his spouse to Birmingham, Alabama to search for a new residence.
To the extent that the amounts payable to Executive pursuant to this Section
5 are taxable to Executive, Company shall pay to Executive an amount equal to
the federal and state income tax payable by Executive on said amounts (grossed
up for taxes).
6. TRADE SECRETS AND CONFIDENTIAL INFORMATION.
6.1 Confidentiality. The Company may disclose to Executive certain Trade
---------------
Secrets and Confidential Information (each as defined below). Executive
acknowledges and agrees that the Trade Secrets and Confidential Information are
the sole and exclusive property of the Company (or a third party providing such
information to the Company) and that the Company or such third party owns all
worldwide rights therein under patent, copyright, trade secret, confidential
information, or other property rights laws. Executive acknowledges and agrees
that the disclosure of the Trade Secrets and Confidential Information to
Executive does not confer upon Executive any license, interest or rights of any
kind in or to the Trade Secrets or Confidential Information. Executive may use
the Trade Secrets and Confidential Information solely for the benefit of the
Company while Executive is employed or retained by the Company. Except in the
performance of services for the Company, Executive will hold in confidence and
not reproduce, distribute, transmit, reverse engineer, decompile, disassemble,
or transfer, directly or indirectly, in any form, by any means, or for any
purpose, the Trade Secrets or the Confidential Information or any portion
thereof. Executive agrees to return to the Company, upon request by the
Company, the Trade Secrets and Confidential Information and all materials
relating thereto. Notwithstanding the above, Executive may disclose any Trade
Secrets or Confidential Information compelled by summons or service of process,
or as otherwise required by law. Executive agrees, to the extent reasonably
possible, to provide advance notice to the Company of any such request for
information.
6.2 Duration. Executive's obligations under this Agreement with regard to
--------
the Trade Secrets shall remain in effect for as long as such information shall
remain a trade secret under applicable law. Executive acknowledges that its
obligations with regard to the Confidential Information shall remain in effect
while Executive is employed or retained by the Company and for five (5) years
thereafter. As used herein, "Trade Secrets" means information of the Company,
its licensors, suppliers, customers, or prospective licensors or customers,
including, but not limited to, technical or nontechnical data, formulas,
patterns, compilations, programs, devices, methods, techniques, drawings,
processes, financial data, financial plans, product plans, or a list of actual
or potential customers or suppliers, which (i) derives economic value, actual or
potential, from not being generally known to, and not being readily
ascertainable by proper means by, other persons who can obtain economic value
from its disclosure or use; and (ii) is the subject of efforts that are
reasonable under the circumstances to maintain its secrecy. As used herein,
"Confidential Information" means information, other than Trade Secrets, that is
of value to its owner and is treated as confidential, including, but not limited
to, future business plans, financial information, marketing strategies and
advertising campaigns, information regarding Company's executives and employees,
and the terms and conditions of this Agreement. For purposes of this
-4-
<PAGE>
Agreement, "Confidential Information" and "Trade Secrets" shall not include the
following: (i) anything or any information that was or becomes generally
available to the public other than as a result of a disclosure by the Executive,
(ii) was available to the Executive on a nonconfidential basis prior to its
disclosure to the Executive by the Company, (iii) becomes available to the
Executive on a nonconfidential basis from a source other than the Company,
provided that such source is not prohibited from disclosing such information by
a contractual or legal obligation to the Company of such information, or (iv)
that the Executive can conclusively show by documentary evidence was
independently developed by the Executive without use of any information
disclosed to Executive by the Company. Executive and the Company acknowledge
that the intent of this Section 5 is not to restrict Executive's employment
following his tenure with the Company, but rather it is to protect the rights
that the Company has in its Trade Secrets and Confidential Information.
7. COVENANT NOT TO COMPETE. In consideration of his employment hereunder,
Executive agrees as follows.
7.1 Term. Executive will not, during the term of his employment with the
----
Company and for a period of two (2) years after termination for any reason of
his employment with the Company, directly or indirectly, engage in or carry on
(i) within a fifty (50) mile radius of any of the Company's retail outlets
existing upon the date of termination of such employment (the "Territory"), any
business, like or similar to the retail sale of athletic shoes, sporting goods
or athletic wear whether through retail outlets or by means of the Internet or
other similar medium of electronic commerce or any other business the Company
may actually be engaged in at the time of termination of Executive's employment
with the Company, either individually or as a stockholder, director, officer,
consultant, independent contractor, Executive, agent, member or otherwise of or
through any corporation, partnership, association, joint venture, firm,
individual or otherwise, or in any other capacity: The above two (2) year
period shall be extended by any period of time during which Executive is in
default of the covenants contained in this Agreement. Nothing contained in this
Section 7.1 shall prohibit Executive from owning up to five percent (5%) of any
class of securities of a company that are traded on a regularly recognized stock
exchange or over the counter market.
7.2 Remedies. In the event of a breach or threatened breach by Executive
--------
of all or any part of the provisions of Section 7.1, the Company shall be
entitled to an injunction restraining Executive from such breach without
limiting any other rights or remedies available to the Company for such breach
or threatened breach.
7.3 Exclusions. Notwithstanding any provision to the contrary herein
----------
contained, Section 7.1 shall not apply upon the termination of the Executive's
employment by the Company other than for cause within one (1) year following a
Sale of the Company.
7.4 Sale of Company.
---------------
(a) In the event of a Sale of the Company following the execution of this
Agreement, Executive expressly agrees that the terms and conditions set forth in
this Section 7 shall be binding upon Executive and shall be fully enforceable by
the successor to the Company.
-5-
<PAGE>
(b) For purposes of this Agreement, "Sale of the Company" shall mean (i) the
acquisition by any individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), (a "Person"), of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of more than 50% of either the
then outstanding shares of common stock of the Company (the "Outstanding Common
Stock") or the combined voting power of the then outstanding voting securities
of the Company entitled to vote generally in the election of directors (the
"Outstanding Voting Securities"), or (ii) consummation by the Company of a
reorganization, merger or consolidation, or sale or other disposition of all or
substantially all of the assets of the Company; unless, following such
acquisition of beneficial ownership or transaction (A) more than 60% of the then
outstanding shares of common stock of the Person resulting from such
reorganization, merger or consolidation, or (B) more than 60% of the then
outstanding shares of common stock of the Person acquiring such beneficial
ownership or assets, and the combined voting power of the then outstanding
voting securities of such Person entitled to vote generally in the election of
directors of such Person, is then beneficially owned, directly or indirectly, by
all or substantially all of the individuals and entities who were the beneficial
owners, respectively, of Outstanding Common Stock and Outstanding Voting
Securities immediately prior to such acquisition or transaction, in
substantially the same proportion as their ownership of Outstanding Common Stock
and Outstanding Voting Securities prior to such event.
8. CUSTOMER NON-SOLICITATION. Executive agrees that for a period of
eighteen (18) months immediately following termination of Executive's employment
with the Company for any reason, including, without limitation, voluntary
resignation from employment by Executive (the "Non-Solicitation Period"),
Executive shall not, on Executive's own behalf or on behalf of any person, firm,
partnership, association, corporation or business organization, entity or
enterprise, solicit, contact, call upon, communicate with or attempt to
communicate with any customer or prospect of the Company, or any representative
of any customer or prospect of the Company, with a view to selling or providing
any product or service competitive or potentially competitive with any product
or service sold or provided or under development by the Company during the time
of two (2) years immediately preceding cessation of Executive's employment with
the Company, provided that the restrictions set forth in this paragraph shall
apply only to customers or prospects of the Company, or representatives of
customers or prospects of the Company, with which Executive had contact during
such two-year period. Executive acknowledges that the Company provides products
and services to customers throughout the Territory.
9. EMPLOYEE NON-SOLICITATION. Executive agrees that Executive shall not
call upon, solicit, recruit, or assist others in calling upon, recruiting or
soliciting any person who is or was an Employee of the Company within the Non-
Solicitation Period, for the purpose of having such person work in any other
corporation, association, entity, or business engaged in providing products or
services of the same or similar kind as offered by the Company.
10. EQUITABLE RELIEF. The parties to this Agreement acknowledge that a
breach by Executive of any of the terms or conditions of this Agreement will
result in irrevocable harm to the Company and that the remedies at law for such
breach may not adequately compensate the Company for damages suffered.
Accordingly, Executive agrees that in the event of such breach, the Company
shall be entitled to injunctive relief or such other equitable remedy as a court
of competent jurisdiction
-6-
<PAGE>
may provide. Nothing contained herein will be construed to limit the Company's
right to any remedies at law, including the recovery of damages for breach of
this Agreement.
11. ARBITRATION. Any difference, claim or matter in dispute arising
between the parties out of this Agreement or connected therewith (other than
requests by the Company for injunctive relief to enforce the provisions of
Sections 7 through 10 hereof) shall be submitted by them to arbitration by a
panel of three arbitrators appointed by and in accordance with the rules of the
American Arbitration Association. The determination or decision rendered by the
arbitrators shall be final and absolute. The arbitrators shall apply Alabama
law and the arbitration shall take place in Birmingham, Alabama. The decision
of the arbitrators may be entered as a judgment in any court of the State of
Alabama or elsewhere.
12. CHANGE IN CONTROL OF THE COMPANY.
12.1 Subject to Section 12.2 hereof, the Company shall pay the Executive the
payments described in this Section 12.1 (the "Change of Control Payments") upon
the termination of the Executive's employment following a Change in Control and
during the term of this Agreement, including voluntary termination by the
Executive for Good Reason (as defined in Section 12.5 (iii)), in addition to any
of the then unpaid compensation and benefits previously required to be paid to
Executive through the date of termination, unless such termination is (i) by the
Company for cause, or (ii) by reason of death, becoming Completely Disabled (as
defined in Section 4.2) or voluntary resignation without Good Reason or
retirement of Executive. The Change of Control Payments shall be as follows:
(a) In lieu of any further salary payments to the Executive for periods
subsequent to the date of termination and in lieu of any severance benefit
otherwise payable to the Executive, the Company shall pay to the Executive a
lump sum severance payment, in cash, equal to two (2) times the Executive's
annual Base Salary in effect immediately prior to the occurrence of the event or
circumstance upon which the notice of termination is based;
(b) The Company shall pay to the Executive a lump sum amount, in cash, equal
to the sum of (i) any annual and quarterly performance or discretionary bonuses
which have been allocated or awarded to the Executive for a completed calendar
year preceding the date of termination but has not yet been paid (pursuant to
Section 3.3 hereof or otherwise), (ii) a pro rata portion of any annual and
quarterly performance or discretionary bonuses for the calendar year in which
the date of termination occurs, determined by multiplying the Executive's
bonuses awarded or paid for the most recently completed calendar year by a
fraction, the numerator of which shall be the number of full days the Executive
was employed by the Company during the fiscal year in which the Executive's date
of termination occurred and the denominator of which shall be three hundred and
sixty-five (365) days; and
(c) For a twelve (12) month period after the date of termination, the
Company shall arrange to provide the Executive with life, disability, accident
and health insurance benefits substantially similar to those which the Executive
is receiving immediately prior to the notice of termination. Benefits otherwise
receivable by the Executive pursuant to this Section 12.1(c) shall be reduced to
the extent comparable benefits are actually received by or made available to the
Executive without cost during the
-7-
<PAGE>
twelve (12) month period following the Executive's termination of employment
(and any such benefits actually received by the Executive shall be reported to
the Company by the Executive). If the benefits provided to the Executive under
this Section 12.1.(c) shall result in a decrease, pursuant to Section 12.2, in
the Change of Control Payments and these Section 12.1(c) benefits are thereafter
reduced pursuant to the immediately preceding sentence because of the receipt of
comparable benefits, the Company shall, at the time of such reduction, pay to
the Executive the lesser of (a) the amount of the decrease made in the Change of
Control Payments pursuant to Section 12.2, or (b) the maximum amount which can
be paid to the Executive without being, or causing any other payment to be,
nondeductible by the Company by reason of section 280G of the Code.
12.2 Notwithstanding any other provisions of this Agreement, in the event
that any payment or benefit received or to be received by the Executive in
connection with and contingent on a Change in Control or the termination of the
Executive's employment (whether pursuant to the terms of this Agreement or any
other plan, arrangement or agreement with the Company, any person whose actions
result in a Change in Control or any person affiliated with the Company or such
person) (all such payments and benefits, including the Change of Control
Payments, being hereinafter called "Total Payments") would not be deductible (in
whole or part), by the Company, an affiliate or person making such payment or
providing such benefit, as a result of section 280G of the Code, then, to the
extent necessary to make the remaining portion of the Total Payments deductible
(and after taking into account any reduction in the Total Payments provided by
reason of Section 280G of the Code in such other plan, arrangement or
agreement), (A) the cash Change of Control Payments and/or other cash payments
provided for hereunder, in each case, to the extent still unpaid, shall first be
reduced (if necessary, to zero), and (B) all other noncash Change of Control
Payments and/or other noncash benefits provided for hereunder, in each case, to
the extent still unfurnished, shall next be reduced (if necessary, to zero), and
(C) the Executive shall have no right to receive hereunder, and neither the
Company, any person whose actions result in a Change in Control or any person
affiliated with the Company or such person shall be obligated to make, pay or
furnish to the Executive hereunder any payment or benefit in excess of those
payments or benefits provided hereunder as reduced, if applicable, pursuant to
clause (A) or clause (B) above. For purposes of this limitation (i) no portion
of the Total Payments the receipt or enjoyment of which the Executive shall have
effectively waived in writing prior to the date of termination shall be taken
into account, (ii) no portion of the Total Payments shall be taken into account
which in the opinion of tax counsel selected by the Company's independent
auditors and reasonably acceptable to the Executive does not constitute a
"parachute payment" within the meaning of section 280G(b)(2) of the Code,
including by reason of section 280G(b)(4)(A) of the Code, (iii) the Change of
Control Payments shall be reduced only to the extent necessary so that the Total
Payments (other than those referred to in clauses (i) or (ii)) in their entirety
constitute reasonable compensation for services actually rendered within the
meaning of section 280G(b)(4)(B) of the Code or are otherwise not subject to
disallowance as deductions, in the opinion of the tax counsel referred to in
clause (ii); and (iv) the value of any noncash benefit or any deferred payment
or benefit included in the Total Payments shall be determined by the Company's
independent auditors in accordance with the principles of sections 280G(d)(3)
and (4) of the Code.
If it is established pursuant to a final determination of a court or an
Internal Revenue Service proceeding that, notwithstanding the good faith of the
Executive and the Company in applying the terms of this Section 12.2, the
aggregate "parachute payments" paid to or for the Executive's benefit are in an
-8-
<PAGE>
amount that would result in any portion of such "parachute payments" not being
deductible by reason of section 280G of the Code, then the Executive shall have
an obligation to pay the Company upon demand an amount equal to the sum of (i)
the excess of the aggregate "parachute payments" paid to or for the Executive's
benefit over the aggregate "parachute payments" that could have been paid to or
for the Executive's benefit without any portion of such "parachute payments" not
being deductible by reason of section 280G of the Code; and (ii) interest on the
amount set forth in clause (i) of this sentence at the rate provided in section
1274(b)(2)(B) of the Code from the date of the Executive's receipt of such
excess until the date of such payment.
12.3 The payments and other items provided for in Section 12.1 (other than
Section 12.1(c)) hereof shall be made not later than the fifteenth (15th) day
following the date of termination or the date of exercise by Executive of any of
Executive's rights hereunder; provided, however, that if the amounts of such
payments, and the limitation on such payments set forth in Section 12.2 hereof,
cannot be finally determined on or before such day, the Company shall pay to the
Executive on such day an estimate, as determined in good faith by the Company,
of the minimum amount of such payments to which the Executive is clearly
entitled and shall pay the remainder of such payments (together with interest at
the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount
thereof can be determined but in no event later than the thirtieth (30th) day
after the date of termination. In the event that the amount of the estimated
payments exceeds the amount subsequently determined to have been due, such
excess shall constitute a loan by the Company to the Executive, payable on the
fifth (5th) business day after demand by the Company (together with interest at
the rate provided in section 1274(b)(2)(B) of the Code). At the time that
payments are made under this Section 12.3, the Company shall provide the
Executive with a written statement setting forth the manner in which such
payments were calculated and the basis for such calculations including, without
limitation, any opinions or other advice the Company has received from outside
counsel, auditors or consultants (and any such opinions or advice which are in
writing shall be attached to the statement).
12.4 The Company also shall pay to the Executive all legal and accounting
fees and expenses incurred by the Executive as a result of a termination which
entitles the Executive to the Change of Control Payments (including all such
fees and expenses, if any, incurred in disputing any such termination or in
seeking in good faith to obtain or enforce any benefit or right provided by this
Agreement or in connection with any tax audit or proceeding to the extent
attributable to the application of section 4999 of the Code to any payment or
benefit provided hereunder). Such payments shall be made within fifteen (15)
business days after delivery of the Executive's written requests for payment
accompanied with such evidence of fees and expenses incurred as the Company
reasonably may require.
12.5 For purposes of this Agreement, the following terms shall have the
meanings indicated below:
(i) A "Change in Control" shall be deemed to have occurred if the
conditions set forth in any one of the following paragraphs shall have been
satisfied:
(I) any "person" (as such term is used in Section 13(d) and 14(d)
of the Exchange Act, other than Harold Ruttenberg or any affiliate of Harold
Ruttenberg, the Company, a subsidiary of the Company or any Company
Executive benefit plan
-9-
<PAGE>
(including its trustee), is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly of securities of
the Company representing 50.01 percent or more of the combined voting power
of the Company's then outstanding securities;
(II) during any period of two consecutive years (not including any
period prior to the execution of this Agreement) the individuals who, at the
beginning of such period, constitute the Board cease, for any reason other
than death, to constitute at least a majority thereof, unless each director
who was not a director at the beginning of such period was elected by, or on
the recommendation of, at least two-thirds of the directors at the beginning
of such period; or
(III) the occurrence of a transaction requiring stockholder
approval for the acquisition of the Company by an entity other than the
Company or a subsidiary of the Company through purchase of assets, or by
merger, or otherwise.
(ii) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(iii) "Good Reason" for termination, by the Executive, of the
Executive's employment shall mean the occurrence (without the Executive's
express written consent) after any Change in Control, of any one of the
following acts by the Company, or failures by the Company to act:
(I) the assignment to the Executive of any duties inconsistent
with the Executive's status as an executive officer of the Company or a
substantial adverse alteration in the nature or status of the Executive's
responsibilities from those in effect pursuant to this Agreement;
(II) a reduction by the Company in the Executive's annual base
salary as in effect on the date hereof or as the same may be increased from
time to time;
(III) the relocation of the Company's principal executive offices
to a location outside a forty (40) mile radius from the city limits of
Birmingham, Alabama or the Company's requiring the Executive to be based
anywhere other than the Birmingham, Alabama metropolitan area except for
required travel on the Company's business to an extent substantially
consistent with the Executive's present business travel obligations;
(IV) the failure by the Company, without the Executive's consent,
to pay to the Executive any portion of the Executive's current compensation
or to pay to the Executive any portion of an installment of deferred
compensation under any deferred compensation program of the Company, within
seven (7) days of the date such compensation is due;
(V) the failure by the Company to continue in effect any
compensation plan in which the Executive participates which is material to
the Executive's total
-10-
<PAGE>
compensation, including but not limited to the Company's stock option,
incentive compensation, bonus and other plans or any substitute plans
adopted prior to the Change in Control, unless an equitable arrangement
(embodied in an ongoing substitute or alternative plan) has been made with
respect to such plan, or the failure by the Company to continue the
Executive's participation therein (or in such substitute or alternative
plan) on a basis not materially less favorable, both in terms of the amount
of benefits provided and the level of the Executive's participation relative
to other participants, as existed on the date of this Agreement; or
(VI) the failure by the Company to continue to provide the
Executive with benefits substantially similar to those enjoyed by the
Executive under any of the Company's pension, life insurance, medical,
dental, health and accident, or disability plans in which the Executive was
participating at the time of the Change in Control, the taking of any action
by the Company which would directly or indirectly materially reduce any of
such benefits or deprive the Executive of any material fringe benefit
enjoyed by the Executive at the time of the Change in Control, or the
failure by the Company to provide the Executive with the number of paid
vacation days to which the Executive is entitled pursuant to this Agreement.
(VII) the Executive not reporting directly to Harold Ruttenberg
for so long as he is Chairman of the Company, or not reporting to the
Chairman or Vice Chairman of the Company thereafter;
provided, that, the Executive's right to terminate Executive's employment for
- --------------
Good Reason shall not be affected by the Executive's incapacity due to physical
or mental illness and the Executive's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder.
(iv) "person" shall mean legal person, whether an individual or an
entity, as the context may require.
13. SEVERABILITY. If any provision or part of any provision of this
Agreement is held invalid or unenforceable by a court of competent jurisdiction,
such holding shall not affect the enforceability of any other provisions or
parts thereof, and all other provisions and parts thereof shall continue in full
force and effect.
14. MISCELLANEOUS. This Agreement shall not be amended or modified except
by a writing executed by both parties. This Agreement shall be binding upon and
inure to the benefit of the Company and its successors and assigns. Due to the
personal nature of this Agreement, neither Executive or the Company shall not
have the right to assign Executive's rights or obligations under this Agreement
without the prior written consent of the other, except subject to the provisions
of this Agreement that the Company may assign all of its rights and obligations
hereunder to any entity that succeeds to the business of Company. This
Agreement shall be governed by the laws of the State of Alabama without regard
to its rules governing conflicts of law. This Agreement and any attached
exhibits represent the entire understanding of the parties concerning the
subject matter hereof and
-11-
<PAGE>
supersede all prior communications, agreements and understandings, whether oral
or written, relating to the subject matter hereof. All communications required
or otherwise provided under this Agreement shall be in writing and shall be
deemed given when delivered to the address provided below such party's signature
(as may be amended by notice from time to time), by hand, by courier or express
mail, or by registered or certified United States mail, return receipt
requested, postage prepaid. Exhibit A attached hereto is incorporated herein by
this reference.
[SIGNATURES ON FOLLOWING PAGE]
-12-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement under
seal effective as of the date first above written.
JUST FOR FEET, INC.
By: /s/ H.M. Rockey
-----------------------------------------
Title: Pres./CEO
--------------------------------------
[CORPORATE SEAL]
Address:
7400 Cahaba Valley Road
Birmingham, Alabama 35242
EXECUTIVE:
/s/ Robert E. Oyster (SEAL)
-------------------------------------
Robert E. Oyster
Address:
2249 Yorkshire Road
Columbus, Ohio 43221
-13-
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<PERIOD-START> MAY-02-1999 MAY-01-1998
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<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 14,251 2,328
<INCOME-PRETAX> (34,610) 22,425
<INCOME-TAX> (13,323) 8,634
<INCOME-CONTINUING> (21,287) 13,791
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> (1,847) 0
<NET-INCOME> (23,134) 13,791
<EPS-BASIC> (0.74) 0.46
<EPS-DILUTED> (0.74) 0.44
<FN>
<F1> Includes sales, franchise fees, royalties and other revenue.
<F2> Includes CGS, store operating and store opening costs.
<F3> Includes amortization of intangibles and general and administrative.
</FN>
</TABLE>
