ipt)
FILED
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ALABAMA
fr
99 tiAR -2 AN 11 : 59
RONALD K. DRUCKER, on Behalf
of Himself and An Others
Similarly Situated,
Plaintiff,
:
u1:5, C T UR T
N.D. OF ALAMA
5A
•
19
V.
: CIVIL ACTION NO. 97- -157B-S
JUST FOR FEET, INC., HAROLD J. :
RUTTENBERG, DON ALLEN
•
RUTTENBERG, SCOTT C. WYNNE,
ROBERT C. WABLER, PAMELA B.
•
RUTTENBERG, ADAM GILBURNE,
WILLIAM BLAIR & COMPANY, and
MONTGOMERY SECURITIES,
Defendants.
•
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x
AMENDED CLASS ACTION COMPLAINT
COMES NOW plaintiff Ronald K. Drucker ("Plaintiff"), by
and through his undersigned counsel, and for his Complaint
against Defendants, makes the following allegations upon
information and belief (except as to the allegations specifically
pertaining to the named plaintiff and his counsel), based upon
the facts alleged below, which are predicated upon, inter alia, a
review of relevant filings made with the Securities and Exchange
Commission ("SEC"), public statements, and an investigation
undertaken by plaintiff's counsel.
44/
NATURE OF THE ACTION
1.
This is a class action on behalf of a class (the
"Class") consisting of all persons, other than defendants, who
purchased the common stock of Just For Feet, Inc. ("Just For
Feet" or the "Company"), on or traceable to a public offering by
the Company, that became effective on or about June 17, 1996. By
that offering, the Company and the Individual Defendants (defined
below) offered and sold, through the Underwriter Defendants
(defined below), 1,950,000 shares of Just For Feet common stock
at a price of $51.375 per share (post-split price of $34.25 per
share l ) (the "Offering"). The Registration Statement and
Prospectus (together, with all amendments thereto and documents
incorporated therein, the "Prospectus"), filed and issued in
connection with the Offering, was materially false and
misleading.
2.
The Prospectus highlighted the Company's operating
results for the quarter ended April 30, 1996. The Company's
reported financial results in the Prospectus were materially
overstated because the Company used inappropriate accounting
practices with respect to reporting pre-opening store costs.
These inappropriate accounting practices had the effect of making
the Company appear more profitable than it actually was. The
Company's reported results for the fiscal years ending January
31, 1995 and January 31, 1994 (reported in the Prospectus, and
A three-for-two Just For Feet common stock split was
effectuated on October 15, 1996. Accordingly, references
throughout this complaint will be made to "pre-split" and "postsplit" common stock prices, as appropriate.
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:
earlier) also were materially overstated because of these
inappropriate accounting practices on pre-opening store costs.
3.
For all these fiscal periods, the Company deferred
pre-opening store costs until after the opening of a new store;
at which time, the Company amortized those costs over the ensuing
twelve month period. As described below, and as later
acknowledged by the Company, this accounting treatment was
inappropriate under the circumstances.
4.
On March 18, 1997 -- after the Offering was
successfully completed and two significant stock-for-stock
acquisitions were consummated -- the Company announced that it .
would change its method of accounting for these pre-opening store
costs. In conjunction with this change in accounting. practice,
the Company restated historic financial results for the first
three-quarters of 1996, including a change in the first quarter
for the cumulative effect of the change on periods prior to
fiscal 1996. This restatement had a materially negative impact
on the Company's previously reported results, which results the
Company has now acknowledged were inaccurate.
5.
As a result of the restatement, Just For Feet's
net income and earnings per share were materially decreased by
approximately 10 percent for the first fiscal quarter ended April
30, 1996, before taking into account the cumulative effect of the ----change on prior periods, and decreased 68 percent after taking
into account the cumulative effect of the change on prior
periods.
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,
6.
On March 18, 1997, when the Company formally
announced its revision of financial results as a result of the
change in accounting methods, Just For Feet's stock price closed
down 44% from the Offering price, at $18.75 share. On June 27,
1997, Just For Feet's stock was at a low of $16.56 a share.
7.
As a result of the use of this inappropriate
method of accounting for pre-opening store costs, the financial
statements presented by defendants in the Registration Statement
and Prospectus were materially false and misleading. Plaintiffs
and class members who purchased Just For Feet stock on or
•
traceable to the Offering were damaged.
'JURISDICTION AND VENUE
•
8.
The claims asserted herein arise under and
pursuant to Sections
al, 12(a)
(2), and 15 of the Securities Act
of 1933, as amended (the "Securities Act") [15 U.S.C. §§ 77k/
771(a) (2) and 7701 and Section 8-6-19 of the Alabama Securities
•
Act, 8 Ala. Code § 8-6-1, et seq.
9.
This Court has jurisdiction over the claims
asserted in this Complaint pursuant to Section 22 of the
Securities Act [15 U.S.C. § 77v] and 28 U.S.C. § 1367.
10.
Venue is properly laid in this judicial district
pursuant to Section 22 of the Securities Act. The majority of
the acts and conduct complained of herein, including the
dissemination of materially false and misleading information to
the investing public, occurred in this District. Just For Feet
maintains its corporate headquarters and principal place of
business in this District and did so at all relevant times.
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•
11.
In connection with the acts and conduct alleged in
this Complaint, defendants, directly or indirectly, used the
means and instrumentalities of interstate commerce including, but
not limited to, the mails, interstate telephone communications
and the facilities of the NASDAQ National Market System, a
national securities exchange.
PARTIES
12.
Plaintiff Ronald K. Drucker purchased 400 shares
of Just For Feet common stock on or traceable to the Offering on
June 17, 1996, pursuant to the Registration Statement and
Prospectus, as described in the certification att.adaed hereto,
and was damaged thereby.
13.
Defendant Just For Feet is an Alabama corporation
which was incorporated on September 14, 1977. The Company
purports to be a superstore retailer of brand-name athletic and
outdoor footwear. Just For Feet maintains its principal
executive offices at 153 Cahaba Valley Parkway North, Pelham,
Alabama, 35124. On or about June 17, 1996, pursuant to the
Prospectus, Just For Feet offered approximately 800,000 shares of
its common stock to the investing public, thereby receiving total
proceeds from the Offering of approximately $41,104,000.
14.
The individuals named as defendants herein (the
"Individual Defendants"), at times material to the claims set
forth herein, served as senior officers and/or directors of Just
For Feet in the following positions:
Name
Position
Harold J. Ruttenberg Chairman and Chief Executive Officer
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.
Don Allen Ruttenberg Executive Vice President and Secretary
(formerly Vice President of
Merchandising)
Scott C. Wynne
Executive Vice President (formerly
Vice President of Operations)
Robert C. Wabler
Chief Financial Officer and Director
Pamela B. Ruttenberg Retired Director
Adam Gilburne
15.
Vice President
Defendant Harold J. Ruttenberg sold approximately
583,186 shares of Just For Feet stock in connection with the
Offering, thereby receiving approximately $29,964,096 in
proceeds. He also was a signatory to the Registration Statetent
made effective June 17, 1996, in connection with the-Offering.
Harold Ruttenberg is the husband of defendant Pamela Ruttenberg
and the father of defendant Don Allen Ruttenberg. Harold J. Ruttenberg is also the beneficial owner of all shares held in
trust in the name of defendant Pamela Ruttenberg. As described
below, Pamela Ruttenberg sold 369;474 shares in the Offering. • .
16.
Defendant Don Allen Ruttenberg sold approximately
7,941 shares of Just For Feet stock on the Offering, thereby
receiving approximately $408,008 in proceeds. Don Allen
Ruttenberg is the son of defendants Harold and Pamela Ruttenberg.
17.
Defendant Scott C. Wynne sold approximately 7,941
shares of Just For Feet stock on the Offering, thereby receiving
approximately $408,008 in proceeds.
18.
Defendant Robert C. Wabler sold approximately
36,464 shares of Just For Feet stock on the Offering, thereby
receiving approximately $1,873,520 in proceeds. Wabler was a
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•
E
E
E
signatory to the Registration Statement made effective June 17,
1996, in connection with the Offering.
19.
Defendant Pamela B. Ruttenberg sold approximately
369,474 shares of Just For Feet on the Offering, thereby
receiving approximately $18,983,574 in proceeds. Patricia
Ruttenberg is the wife of defendant Harold Ruttenberg and the
mother of defendant Don Allen Ruttenberg.
20.
Defendant Adam Gilburne sold approximately 40,700
shares of Just For Feet stock on the Offering, thereby receiving
approximately $2,091,166 in proceeds.
21.
In connection with and as part of t1L Offering,
the Individual Defendants sold an aggregate 1,037,765 shares of
Company stock, and received in the aggregate $53,320,365 as a
result of the Offering.
22.
Defendants William Blair & Company and Montgomery
Securities (collectively, the "Underwriter Defendants"), acted as
lead Underwriters on the Offering of Just For Feet's shares. The
Underwriter Defendants were at all times material hereto,
entities engaged in the business of investment banking, underwriting and selling securities to the investing public. The
Underwriter Defendants were the lead underwriters of the
Offering, for which they received substantial fees. Prior to the
Offering, the Underwriter Defendants were required to and did
conduct an investigation into the business, operations,
prospects, financial condition and accounting and management
control systems of Just For Feet, known as a "due diligence
investigation." In the course of such investigation, the
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. I
j
Underwriter Defendants would have obtained knowledge of the facts
alleged herein if they had acted with reasonable care. At all
relevant times, the Underwriter Defendants had a duty to promptly
disseminate truthful and accurate information with respect to
Just For Feet, which they failed to fulfill.
PLAINTIFF'S CLASS ACT/ON ALLEGATIONS
23.
Plaintiff brings this lawsuit pursuant to Rule
23(a) and (b)(3) of the Federal Rules of Civil Procedure, on
behalf of a class (the "Class") consisting of all persons who
purchased Just For Feet common stock on or traceable to the
.
Offering, through March 18, 1997, inclusive. Excluded from th.
Class are the defendants named herein, members of the immediate
family of each of the defendants, any person, firm, trust,
corporation, officer, director or other individual or entity in
which any defendant has a controlling interest or which is
related to or affiliated with any of the defendants, and the
legal representatives, agents, affiliates, heirs, successors-ininterest or assigns of any such excluded party.
24.
This action is properly maintainable as a class
action for the following reasons:
a.
The Class
of investors for whose benefit this
action is brought is so numerous that joinder of all Class
members is impracticable. On or about June 17, 1996, a reported
1,950,000 shares of Jusu For Feet stock were sold in the Offering
to hundreds, if not thousands, of investors. Members of the
Class live throughout the United States.
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b.
There are questions of law and fact which are
common to members of the Class and which predominate over any
questions affecting only individual members. The common
questions include, inter alia, the following:
;1) Whether the federal securities laws were
violated by defendants' acts as alleged herein; •
(2) Whether Alabama's securities laws were
violated by defendants' acts as alleged herein;
(3) Whether documents, including but not •
limited to the Prospectus, filed with the SEC and disseminated to
the investing public in connection with the OffeJ:ing, .•
misrepresented material facts about the business, revenues, and
financial condition of Just For Feet; and
(4) The proper measure of the Class's
damages.
c.
The claims of Plaintiff are typical of the
claims of other members of the Class and Plaintiff has no
interests that are adverse or antagonistic to the interests of
the Class.
d.
Plaintiff is committed to the vigorous
prosecution of this action and has retained competent counsel
experienced in litigation of this nature. Accordingly, Plaintiff
is an adequate representative of the Class and will fairly and
adequately protect the interests of the Class.
e.
Plaintiff anticipates that there will not be
any difficulty in the management of this litigation as a class
action.
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)
25.
The names and addresses of the record purchasers
of shares of Just For Feet common stock
to the Offering are available from Just
purchased on or traceable
For Feet and its agents,
including the Underwriter Defendants. Notice can be provided to
such record owners by a combination of published notice and
first-class mail using techniques and a
form of notice
similar to
those customarily used in class actions arising under the federal
securities laws.
26.
For the reasons stated herein, a class action is
superior to other available methods for the fair and efficient
, .
adjudication of this action and th claims asserted herein.
Because of the size and complexity of the claims
of
individual
Class members, few, if any, Class members could afford to seek
. legal redress individually for the wrongs complained of herein.
PRE-OFFERING EVENTS
27.
Just For Feet
offered stock
to the investing
public for the first time in an initial public offering in March
of 1994.
28.
In its Form 10-K for the 1995 fiscal year ended
January 31, 1996, which was released on May 1, 1996, and
incorporated into the Prospectus by reference, the Company
described its method for accounting for pre-opening store costs
as follows:
Store Pre-Opening Costs - costs principally for
pre-opening employee salaries and travel are
capitalized and amortized over the twelve months
following the store opening. Such capitalized
costs are incremental and directly attributable to
the opening of a new store. At January 31, 1996
and 1995, unamortized pre-opening costs aggregated
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$3,307,000 and $1,201,000 respectively, and are
included in other current assets.
29.
The accounting method utilized by Just For Feet
materially overstated net income and was inappropriate based on
Just For Feet's factual circumstances. It is standard practice
that pre-opening store costs should be expensed as incurred.
There is a limited exception to this practice whereby a company
can amortize or otherwise defer incremental pre-opening costs if
the company has a demonstrated history of successful store
openings, such that the chance for success of a new store is
determined to be a reasonable certainty. When Just For Feet
first implemented its accounting practice of deferring preopening expenses, the Company had little or limited history of
successful store openings. Accordingly, Just For Feet was
required to expense pre-opening store costs, which it did not do.
THE OFFERING
30.
On June 3, 1996, a Form S-3 Registration Statement
was filed with the SEC announcing a public offering of 1,897,500
shares of Just For Feet common stock, of which the Individual
Defendants would be selling 1,150,000 shares, the Company would
be selling 500,000 shares and an overallotment of 247,500 shares
would be granted to the Underwriter Defendants.
31.
On or about June 13, 1996, a Form S-3 Registration
Statement was filed to register an additional 345,000 shares, of
which the Individual Defendants would be selling 45,000 shares
and the Company would be selling 300,000 shares. The Underwriter
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)
Defendants were also granted a further overallotment of
45,000
shares.
32.
On or about June 17, 1996, the Prospectus with
respect to the Offering and which forms part of the Registration
Statement became effective and Just For Feet and the Individual
Defendants sold, through the Underwriter Defendants,
common shares of Just For Feet for
33.
$51.375 per
1,950,000
share.
The Prospectus included numerous financial charts
and reports on pages
5, 12, 14
and
16,
all of which purported to
reflect the financial position and results of the Company. In •
particular the Prospectus highli91ited operating and financial
results as follows:
4730/96
Year Ending Year Ending 1/31/95
1/31/96
Quarter
($1,000s)
($1,000s)
($1,000s)
Gross Profit
Operating Income
Income Before Income
Taxes
$
Net Income
34.
23,871
50,850
20,753
4,770
11,628
4,405
5,146
14,558
5,363
3,218
9,722
3,473
The Prospectus also highlighted operating and
financial results for fiscal years
1995 and
1994, stating that
net sales had increased $63.4 million or 113t for fiscal
$119.8 million,
compared to net sales of
$56.4 million
1995 to
for fiscal
1994. The Prospectus stated that net income increased to $9.7
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million in fiscal 1995 from $3.2 million in fiscal 1994,
"representing a 203.1% increase over the prior period."
•
35.
SUBSEQUENT EVENTS
On or about March
announccd that it had acquired
18, 1997, Just For Feet
Imperial Sports,
a privately held
Flint, Michigan, athletic shoe and apparel retailer, for between
$25 to $30 million in
Just For
Feet common stock. The Company
. • also announced that it had acquired- Athletic Attic, a privately
held Gainesville, Florida, athletic shoe and apparel retailer,
for
$9.2
million in cash and $5 million in
Just
For Feet common
-stock.
36.
That same day, Just For Feet announced that it was
restating its previously reported earnings for the first three
fiscal quarters of its fiscal year 1996 (the year ending January
31,
1997) to
reflect a change in its accounting method for pre-
opening expenses, including the first quarter results which were
highlighted in the Prospectus. The Company acknowledged that it
was necessary to restate earnings for those quarters to reflect
pre-opening expenses being expensed immediately upon the opening
of a new store in accordance with Generally Accepted Accounting
Principles ("GAAP"). Including the cumulative effect of this
accounting restatement on the Company's previously reported
financial results, net income for the fiscal quarter ended April
30, 1996, was reduced to $1.1 million (from the previously
reported $3.5 million included in the Prospectus), and earnings
per share were reduced to $0.04 per share (from $0.19 reported in
the Prospectus). Without considering the cumulative effect of
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•
the restatement on prior period results, the accounting
restatement for the quarter alone reduced net income and earnings
per share by almost 10 percent.
37.
Neither extenuating circumstances nor unantici-
pated facts arose between the date of the Offering and the
announcement on March 18, 1997, which would have caused the
Company to reconsider its accounting position.
38.
The price of the Company's common stock -- which
was at a pre-split price of $51.375 per share in June of 1996 (a
post-split price of $34.25 per share) -- declined sharply to
close at a post-split price of $18.50 pe .
. c shar (..) 1
. i March 18,
1997, representing an approximate forty-four (44%) percent
decline from the price of the stock in the Offering. On June 27,
1997, Just For Feet's stock was at a low of $16.56 a share.
39.
Plaintiff, and other members of the Claso,
purchased or otherwise acquired Just For Feet common stock on or
traceable to the Offering.
JUST FOR FEET'S FALSE AND
MISLEADING FINANCIAL STATEMENTS
40.
In the Prospectus and the documents incorporated
therein by reference, Just For Feet represented that its
financial statements were prepared in accordance with GAAP. This
representation was materially false and misleading for the
reasons noted below. GAAP are those principles recognized by the
accounting profession as the conventions, rules, and procedures
necessary to define accepted accounting practice at a particular
time. Regulation S-X [17 C.F.R. § 210.4-01(a)(1)] provides that
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•
financial statements filed with the SEC that are not prepared in
conformity with GAAP are presumed to be misleading and
inaccurate.
41. As set forth in Financial Accounting Standards
Board ("FASE") Statement of Concepts ("Concepts Statement")
No. 1, one of the fundamental objectives of financial reporting
is that it provide accurate and reliable information concerning
an entity's financial performance during the period being
presented. Concepts Statement No. 1,
•
•
1 42, states:
Financial reporting should provide
information about an enterprise's financial
performance during a period. Investors and
creditors often use information about the
past to help in assessing the prospects of an .
enterprise. Thus, although investment and
credit decisions reflect investors' and
creditors' expectations about future
enterprise performance, those expectations
are commonly based at least partly on
evaluations of past enterprise performance.
42.
Just For Feet's financial statements for the years
ended January 31, 1996 and 1995 and quarter ended April 30, 1996,
were materially false and misleading because the Company
improperly failed to expense its pre-opening store costs as
required by GAAP. The failure to expense such costs materially
distorted the Company's reported financial performance contained
in the Prospectus.
43.
By virtue of its March 18, 1997 restatement of the
Company's financial statements contained in the Prospectus, Just
For Feet admitted that its previously applied accounting method
for pre-opening costs was improper based on the Company's
particular facts and circumstances. The restatement of Just For
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Feet's Condensed Consolidated Statement of Income, for the
quarter ended April 30, 1996, as reflected in the following .
chart, evidences the magnitude of defendants' accounting
. .
manipulation:
As Reported As Restated
($1,000s)
($1,000s)
•
% overstated
(understated)
Pre-opening costs
1,044
1,508
(30.8)%.
Operating Income
4,405
3,941
11.8 -%
Income Before Income Taxes 5,363
4,899
9.5
Net Income
3,473
3,175
9.4 %
44.
Ii
addiLioii
Lo-Lhe
above, the resLaLuLaeuL ot Jusi. -
For Feet's financial statements for the quarter ended April 30,
1996 included a $2,040,000 million charge for the "Cumulative
effect on prior years (to January 31, 1996) of change in
accounting principle, net of income taxes". This charge, taken
in the first quarter of fiscal 1996, represents the cumulative
effect of the change in the Company's policy of accounting for
pre-opening score costs for financial reporting periods prior to
February 1, 1996. Accordingly, Just For Feet also admitted that
its financial statements for its fiscal years prior to fiscal
1996 were materially false and misleading.
45. A comparison of Just For Feet's retained earnings
at January 31, 1996 and the amount of the "cumulative effect"
charge demonstrates the extent to which Just For Feet's financial
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-
results prior to February 1, 1996 were misstated. 2 Just For
Feet's retained earnings balance at January 31, 1996 totalled
approximately $17.62 million. Accordingly, the Company's
$2,040,000 charge, during the first quarter of 1996, effectively
eliminated 11.5t of the earnings just For Feet accumulated since
its inception.
46.
GAAP generally provides that an adopted accounting
policy not be changed unless the change is justifiably
preferable. For example, the Accounting Principles Board ("APB")
Opinion No. 20, provides that:
.
[Mere is a presulaption that an accounting
principle once adopted should not be changed
in accounting for events and transactions of
a similar type. Consistent use of accounting
principles from one period to another
enhances the utility of financial statements
to users by facilitating analysis and
understanding of comparative financial data.
The presumption that an entity should not
change an accounting principle may be
overcome only if the enterprise justifies the
use of an alternative acceptable accounting
principle on the basis that it is preferable
(emphasis added).
• - -
47.
-
The SEC, in Regulation S-X [17 C.F.R. § 210.10-
01(b)(6)1 requires public companies that make a material change
in its method of accounting to indicate the date of the change
and the reason therefore. In addition, Regulation S-X [17 C.F.R.
§ 210.10-01(b)(6)] also requires that a company's independent
accountant file a letter with the SEC stating whether or not the
change in the company's accounting policy is preferable.
2
Generally, retained earnings are the accumulated
earnings of a corporation since its inception, less dividends.
As of January 31, 1996, Just For Feet had not issued a dividend.
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•
48.
On March 18, 1997, Just For Feet announced a
change in its policy of accounting for pre-opening store costs.
Neither extenuating circumstances nor unanticipated facts arose
between the date of the Offering and the announcement on March
18, 1997, which would have caused the Company to reconsider its
accounting position.
49.
In its audited financial statements for the year
ended January 31, 1997, Just For Feet disclosed:
•
Effective February 1, 1996, the Company
changed it method of accounting for store
opening costs, which are costs principally
for pre-opening employee salaries and travel
that are Incremental and directly attributable to the opening of a new store.
The cumulative effect of this change in
accounting principle resulted in a $2,040,700
($0.07 per share) charge to operations for
the year ended January 31, 1997, net of
income taxes of $1,136,600. This change
increased operating expenses for the year
ended January 31, 1997 by approximately
$5,081,000 and decreased income before
cumulative effect of the change in accounting
principle by approximately $3,277,400 ($0.11
per share) Under the new accounting
principle, the Company charges store opening
costs to operations in the month the store
opens. Previously, store opening costs were
capitalized and amortized over twelve months
following the store opening.
At January 31, 1997 and 1996, capitalized
store costs of $623,500 and $3,307,000 are
included in other assets of the accompanying
balance sheets.
50.
Just For Feet did not disclose the justification
for the change in its policy of accounting pre-opening store
costs, even though such disclosure was required by GAAP and the
rules and regulations of the SEC. The necessary disclosures were
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. .
)
not made because the Company would have otherwise had to admit
expressly that its previous accounting policy that deferred and
amortized new store pre-opening costs had been improper.
51.
The Prospectus highlighted the Company's financial
performance during its 1995 and 1994 fiscal years and the quarter
ended April 30, 1996. In preparing the financial statements
which reported the Company's financial performance during these
periods, Just For Feet accounted for its pre-opening store costs
by deferring the recognition of such costs until the time that
the new store was opened. Upon the opening of the store, Just
For Feet ratably- amortized the deferred pl-e-opening store costsassociated with the store against income over a twelve month
period. Until amortized; the pre-opening store costs were
reported as "Other current assets" in the Company's financial
statements. This accounting treatment for pre-opening store
costs was improper.
52.
GAAP generally defines an asset as a probable
future economic benefit obtained or controlled by a particular
entity as a result of a past transaction. Concepts Statement No.
6,
11
25. Paragraph 28 of Concepts Statement No. 6 indicates that
an essential characteristic possessed by all assets is "service
potential" or "future economic benefit". This "service
potential" or "future economic benefit" eventually results in net
cash inflows to the enterprise.
53.
Paragraph 175 of Concepts Statement No. 6 provides
that uncertainty about the capacity of a transaction to provide
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° )
future economic benefits may preclude its recognition as an
asset.
54.
Accordingly, the deferral of store pre-opening
costs as an asset to be expensed at a later date is only
acceptable in limited circumstances. For example, SEC Accounting
and Auditing Enforcement Releases provide that pre-opening costs
may be deferred if: 1) the costs are identifiable and segregated
from ordinary operating expenses; 2) the costs provide a
quantifiable benefit to a future period; and 3) the costs
deferred as assets are recoverable from future revenues.
.
.
55. Accordingly, a company tay riot appropriately defer
a pre-opening cost as an asset unless, among other things, it has
a sufficient history of successful store openings demonstrating
that the likelihood of recovering deferred pre-opening costs from
the future revenues of store is reasonably certain.
56. Just For Feet's operating results, as reported in
the Prospectus, were materially false and misleading because the
Company failed to expense its pre-opening store costs as required
because: 1) several of its new stores were not profitable; 2) its
experience to date gave no reason to believe stores opened
outside of Just For Feet's core markets would be profitable; and
3) and Just For Feet had little or limited history of successful
store openings. In fact, the Prospectus itself contained
disclosures which demonstrated that the deferral of pre-opening
store costs was improper. Thus, the Prospectus specifically
acknowledged that Just For Feet "has a limited history of opening
and operating superstores." (Page 8) The Prospectus also
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. ;
represented, on page six, that "It]here can be no assurance that
the Company's new or acquired stores will be profitable or
achieve sales and profitability comparable to the Company's
existing stores." Lastly, the Prospectus represented, on page
eight, that "[t]he comparable store base used for the calculation
of comparable store data currently consists of only 1'6 stores.
The results achieved to date by the Company's relatively small
store base may not be indicative of the results that may be
-
achieved from a larger number of stores. (Emphasis added.)"
"-Jiven Just For Feet's admissions about its "limited history of
•
- opening and opelating superstores," the material uncertaicity - —
about profitability and its existing "relatively small store
base," there was reasonable uncertainty about the Company's ability to recovery pre-opening store costs.
•
•
57. Accordingly, Just For Feet was required to expense
its pre-opening store costs because such costs did not meet the
definition of an asset for which the recoverability of such costs
from future store revenues was reasonably uncertain.
Nonetheless, Just For Feet's Prospectus and its financial
statements materially distorted the Company's operating results
by improperly failing to expense its pre-opening store costs.
Although Just For Feet has now admitted that the financial
statements included in its Prospectus were materially false and
misleading, the defendants' failure to justify the reason for the
change in its policy of accounting for its store pre-opening
costs evidences the impropriety of the Company's accounting for
-21-
•
•
such costs during the period between the Offering and March 18,
1997, the date of the restatment.
58.
GAAP also provides that financial statement errors
result from mistakes in the application of accounting principles
at the time the financial statements wore prepared. APE 20,
1
13. As noted above, Just For Feet, in deferring store preopening costs as assets, violated GAAP by misapplying the
application of an accounting principle. Thus, Just For Feet's
financial statements for the quarter ended April 30, 1996 were
erroneous and its restated financial statements should have fully
disclosed the nature of the error contained in its prior •
financial statements.
59.
As a result of the foregoing, Just For Feet's
financial statements included in its Prospectus were materially
false and misleading. In addition to the accounting
improprieties noted above, the Company presented the financial
statements in its Prospectus in a manner which also violated at
least the following provisions of GAAP:
(a)
The concept that financial reporting should
provide information that is useful to present and potential
investors and creditors and other users in making rational
investment, credit and similar decisions (Concepts Statement
No. 1,
1
34);
(b) The concept that financial reporting should
provide information about the economic resources of an
enterprise, the claims to those resources, and the effects of
-22-
,
transactions, events and circumstances that change resources and
claims to those resources (Concepts Statement No. 1, 1 40);
(c) The concept that financial reporting should
provide information about how management of an enterprise has
discharged its stewardship responsibility to owners
(stockholders) for the use of enterprise resources entrusted to
it. To the extent that management offers securities of the
enterprise to the public, it voluntarily accepts wider
responsibilities for accountability to prospective investors and
to the public in general (Concepts Statement No. 1, 1 50);
(d)
The concept that financial reporting should .
provide information about an enterprise's financial performance
during a period. Investors and creditors often use information
about the Past to help in assessing the prospects of an
enterprise. Thus, although investment and credit decisions
reflect investors' expectations about future enterprise
performance, those expectations are commonly based at least
partly on evaluations of past enterprise performance (Concepts
Statement No. 1, 1 42);
(e)
The concept that financial reporting should
be reliable in that it represents what it purports to represent.
The fact that information should be reliable as well as relevant
is a notion that is central to accounting (Concepts Statement
No. 2, Ili 58-59);
(f)
The concept of completeness, which means that
nothing is left out of the information that may be necessary to
-23-
,
ensure that it validly represents underlying events and
conditions (Concepts Statement No. 2, 79); and
(g) The concept that conservatism be used as a
prudent reaction to uncertainty to try to ensure that
uncertainties and risks inherent in busincss situations are
adequately considered. The best way to avoid injury to investors
is to try to ensure that what is reported represents what
purports to represent (Concepts Statement No. 2,
11
it
95, 97).
COUNT
.
.
.•
[Against All Defendants For Violations
Of Section 11 Of The Securities Act]
.
60.
Plaintiff repeats and realleges each and every
allegation contained above. 61.
•
This Count is brought by Plaintiff for himself and
on "nehalf of the Class pursuant to Section 11 of the.SecUritieS
Act, 15 U.S.C.
77k, against all defendants and does not sound
in fraud.
62.
The Registration Statement for the Offering was
inaccurate and misleading, contained untrue statements of
material facts, omitted to state other facts necessary to make
the statements made not misleading, and concealed and failed to
adequately disclose material facts as described above_
63.
The Company is the registrant for the Offering.
The defendants named herein were responsible for the contents and
dissemination of the Prospectus.
-24-
•
,
herein alleged, each defendant violated, and/or controlled a
person who violated, Section 11 of the Securities Act.
68.
Plaintiff and other members of the Class acquired
shares of Just For Feet pursuant to, or traceable to, the
Prospectus and were legally entitled to receive a copy of the
Prospectus.
69.
Plaintiff and the Class have sustained damages.
The value of Just For Feet shares was inflated and has declined
substantially subsequent to and due to defendants' violations.
70.
At the times they purchased Just For Feet shares,
Plaintiff and the other members of the Class were without
knowledge of the facts concerning the wrongful conduct alleged
herein and could not have reasonably discovered those facts prior
to March 18, 1997. Less than one year elapsed from the time that
Plaintiff discovered or reasonably could have discovered the
facts upon which this complaint is based to the time that
Plaintiff commenced this Action. Less than three years elapsed
from the time that the securities upon which this Count is
brought were bona fide offered to the public to the time
Plaintiff commenced this Action.
COUNT II
[Against All Defendants For Violations Of
Section 12(a)(2) Of The Securities Act]
71.
Plaintiff repeats and realleges each and every
allegation contained above.
72.
This Count is brought by Plaintiff for himself and
on behalf of the Class pursuant to Section 12(a) (2) of the
-26-
Securities Act,
15 U.S.C. § 77k,
against all defendants and does
not sound in fraud.
73.
Defendants were sellers, offerors, and/or
solicitors of sales of the shares offered pursuant to the
Prospectus.
74.
The statements complained of herein, identified
above, were each made or incorporated in a "prospectus" as that
term is defined in Section 2(a)(10) of the Securities Act,
contained untrue statements of material facts, omitted to state
other facts necessary to make the statements made not misleading,
and concealed and failed to disclose material facts. The
defendants sold and/or solicited the sale of shares of Jut For
Feet common stock in the Offering for their personal financial
gain. Their actions of solicitation included participating in
the preparation of the false and misleading Prospectus and other
materials used in the sale of Just For Feet common stock
identified above.
75.
The defendants owed to the purchasers of Just For
Feet shares, including Plaintiff and the other members of the
Class, the duty to make a reasonable and diligent investigation
of the statements contained in the Offering materials, including
the Prospectus contained therein, to insure that such statements
were true and that there was no omission to state a material fact
required to be stated in order to make the statements contained
therein not misleading. The defendants knew of,. or in theexercise of reasonable care, should have known of, the
-27-
-
misstatements and omissions contained in or left out of the
Offering materials as set forth herein.
76.
The defendants sold and/or solicited the sale of
the Company's common stock offered pursuant to the Prospectus for
their individual financial gain.
77.
The Individual Defendants and the Company
solicited Plaintiff and the other Class Members for the sale of
Just For Feet common stock in the Offering by, among other
things, employing the Underwriter Defendants.
78.
Plaintiff and the other members of the Class
purchased or otherwise acquired Just For Feet shares pursuant to,
or traceable to, the Prospectus. Plaintiff and the other'members
of the Class did not know, or in the exercise of reasonable
diligence could not have known, of the untruths, omissions and
materially false and misleading statements contained in or made
in connection with the Prospectus.
79.
By reason of the conduct alleged herein, these
defendants violated, and/or controlled a person who violated,
§ 12(a)(2) of the Securities Act. Accordingly, Plaintiff and the
members of the Class who hold Just For Feet shares purchased in
the Offering have the right to rescind and recover the
consideration paid for their Just For Feet shares and, hereby
elect to rescind and tender their Just For Feet shares to the
defendants sued herein. The members of the Class who have sold
their Just For Feet shares are entitled to rescissory damages.
80.
Plaintiff, individually and representatively, on
behalf of all members of the Class who continue to own such
-28-
securities, hereby offers to tender to defendants those
securities which he and the other members of the Class continue
to own, in return for the consideration paid for those securities
together with interest thereon.
81.
Less than three years elapsed from the time that
the securities upon which this Count is brought were sold to the
public to the time of the filing of this action. Less than one
year elapsed from the time when Plaintiff discovered or
reasonably could have discovered the facts upon which this Count
is based to the time of the filing of this action.
COUNT III
[Against The Individual Defendants For
Violations of Section 15 of the Securities Act]
82.
Plaintiff repeats and realleges each and every
allegation contained above.
83.
This Count is brought by Plaintiff for himself and
on behalf of the Class pursuant to Section 15 of the Securities
Act, 15 U.S.C. § 77o, against the Individual Defendants and does
not sound in fraud.
84.
Just For Feet is liable as an issuer under Section
11 of the Securities Act as set forth in Count I herein and under
Section 12(a)(2) of the Securities Act as a seller or solicitor
of Just For Feet common stock, as set forth in Count II herein.
85.
Each of the Individual Defendants was a control
person of Just For Feet by virtue of their positions as directors
and/or as senior officers of Just For Feet. Furthermore, the
Individual Defendants each had a series of direct and/or indirect
-29-
business and/or personal relationships with other directors
and/or major shareholders of Just For Feet. By virtue thereof,
they were able to and did, directly or indirectly, in whole or in
material part, control the content of public statements issued by
or on behalf of the Company including the Registration Statement
and the Prospectus filed by Just For Feet with the SEC in
connection with the Offering, which they either signed in their
capacities as officers or tacitly approved by virtue of their
participation in the sale of Just For Feet common stock in the
Offering. By reason of their positions with the Company, the
Individual Defendants had access to internal Company documents,
reports and other information, including the adverse non-public
information concerning the Company's business and future
prospects, and attended management and/or board of director
meetings at which such subjects were discussed.
86.
As a result, the Individual Defendants are liable
to Plaintiff and the other members of the Class under Section 15
of the Securities Act for Just For Feet's primary violations of
Sections 11 and 12(a)(2) of the Securities Act.
COUNT IV
(Against All Defendants For Violations
Of Section 8-6-19 Of The Alabama Securities Act]
87.
Plaintiff repeats and realleges each and every
allegation contained above.
88.
This Count is brought by Plaintiff for himself and
on behalf of the Class pursuant to Section 8-6-19 of the Alabama
-30-
Securities Act against all defendants and does not sound in
fraud.
89.
The Registration Statement and Prospectus for the
Offering was inaccurate and misleading, contained untrue
statements of material facts, omitted to state other facts
necessary to make the statements made not misleading, and
concealed and failed adequately to disclose material facts as
described above.
90.
The Company is the registrant for the Offering.
The defendants named herein were responsible for the contents and
dissemination of the Registration Statement and the Prospectus.
91.
As issuer of the shares, Just For Feet is strictly
liable to Plaintiff and to the members of the Class for the
misstatements and omissions.
92.
Each of the Individual Defendants was a control
person of Just For Feet by virtue of their positions as directors
and/or as senior officers of Just For Feet. Furthermore, the
Individual Defendants each had a series of direct and/or indirect
business and/or personal relationships with other directors
and/or major shareholders of Just For Feet. By virtue thereof,
they were able to and did, directly or indirectly, in whole or in
material part, control the content of public statements issued by
or on behalf of the Company including the Registration Statement
and the Prospectus filed by Just For Feet with the SEC in
connection with the Offering, which they either signed in their
capacities as officers or tacitly approved by virtue of their
participation in the sale of Just For Feet common stock in the
-31-
Offering. By reason of their positions with the Company, the
Individual Defendants had access to internal Company documents,
reports and other information, including the adverse non-public
information concerning the Company's business and future
prospects, and attended management and/or board of director
meetings at which such subjects were discussed.
93. As a result, the Individual Defendants are also
liable to Plaintiff and the other members of the Class under
Section 8-6-19 of the Alabama Securities Act for Just For Feet's
primary violations of Section 8-6-19 of the Alabama Securities
94.
As underwriters of the Offering, each of the
Underwriter Defendants owed to the purchasers of the shares of
Just For Feet, including Plaintiff and the other members of the
Class, the duty to make a reasonable and diligent investigation
of the statements contained in the Prospectus at the time it
became effective, to ensure that said statements were true and
that there was no omission to state a material fact required to
be stated in order to make the statements contained therein not
materially false and misleading. The Underwriter Defendants knew, or in the exercise of reasonable care, should have known of
the material misstatements and omissions contained in or left out
of the Prospectus as set forth herein. As such, the Underwriter
Defendants are liable to Plaintiff and the other members of the
Class.
95.
None of the defendants named herein made a
reasonable investigation or possessed reasonable grounds for the
-32-
--
belief that the statements contained in the Registration
Statement and the Prospectus were true and without omissions of
any material facts and were not misleading.
96.
Defendants issued, caused to be issued and
participated in the issuance of materially false and misleading
written statements to the investing public which were contained
in the Prospectus, which misrepresented or failed to disclose,
inter alia, the facts set forth above. By reasons of the conduct
herein alleged, each defendant violated, and/or controlled a
person who violated, Section 8-6-19 of the Alabama Securities
97.
Plaintiff and other members of the Class acquired
shares of Just For Feet pursuant to, or traceable to, the
Registration Statement and were legally entitled to receive a
copy of the Prospectus.
98.
Plaintiff and the Class have sustained damages.
The value of Just For Feet shares was inflated and has declined
substantially subsequent to and due to defendants' violations.
99.
At the times they purchased Just For Feet shares,
Plaintiff and the other members of the Class were without
knowledge of the facts concerning the wrongful conduct alleged
herein and could not have reasonably discovered those facts prior
to March 18, 1997. Less than one year elapsed from the time that
Plaintiff discovered or reasonably could have discovered the
facts upon which this complaint is based to the time that
Plaintiff commenced this Action. Less than three years elapsed
from the time that the securities upon which this Count is
-33-
brought were bona fide offered to the public to the time
Plaintiff commenced this Action.
WHEREFORE, Plaintiff, on behalf of himself and the
Class, pray for judgment as follows:
A.
declaring this action to be a plaintiff class
action properly maintained pursuant to Rule 23 of the Federal
Rules of Civil Procedure;
B.
awarding Plaintiff and the other members of the
Class damages together with interest thereon;
C.
•
awarding Plaintiff and the members of the Class
rescission on Count II to the extent they still hold Just For
Feet shares, or if sold, awarding rescissory damages in
accordance with Section 12(a)(2) of the Securities Act;
D.
awarding Plaintiff and the members of the Class
rescission on Count IV to the extent they still hold Just For Feet shares, or if sold, awarding rescissory damages in
accordance with Section 8-6-19 of the Alabama Securities Act;
E.
awarding Plaintiff and the other members of the
Class their costs and expenses of this litigation, including
reasonable attorneys' fees, accountants' fees and experts' fees
and other costs and disbursements; and
F.
awarding Plaintiff and the other members of the
Class such other and further relief as may be just and proper
under the circumstances.
WHEREFORE, premises considered, plaintiff requests
relief on all counts as specified herein above.
-34-
•
_
JURY TRIAL DEMANDED
Plaintiff hereby demands a trial by jury.
Dated: March 2, 1999
LAW OFFICES OF
M. CLAY RAGSDALE, ESQ.
By:
/4
r24C—
M. Clay Ragsrle
a
E. Ans 1 Strickland
'
Farley Building, Suite 550
1929 Third Avenue North
Birmingham, Alabama 35203
(205) 251-4775
Liaison counsel For Plaintiff
Robert P. Sugarman
Joan T. Brown
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
One Pennsylvania Plaza
49th Floor
New York, NY 10119
(212) 594-5300
Richard S. Schiffrin
Andrew L. Barroway
SCHIFFRIN & BARROWAY, LLP
Three Bala Plaza East
Suite 400
Bala Cynwyd, PA 19004
(610) 667-7706
Steven J. Toll
COHEN, MILSTEIN, HAUSFELD
& TOLL, P.L.L.C.
999 Third Avenue, Suite 3600
Seattle, Washington 98104
(206) 521-0080
-andLisa M. Mezzetti
COHEN, MILSTEIN, HAUSFELD
& TOLL, P.L.L.C.
1100 New York Avenue N.W.
Suite 500 - West Tower
-35-
Washington, D.C. 20005
(202) 408-4600
Co-Lead Counsel For Plaintiff
Alfred G. Yates, Jr.
LAW OFFICES OF
ALFRED G. YATES, JR.
519 Allegheny Building
429 Forbes Avenue
Pittsburgh, PA 15219
(412) 391-5164
Richard Freese
LANGSTON FRAZER SWEET
& FREESE, P.A.
Morgan Keegan Center
2900 Highway 280
Suite 240
Birmingham, Alabama 35223
(205) 871-4144
Co-Counsel For Plaintiff -
-36-
•
,
•
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•
•
•
•
•
14AMSD PLAINTIFF
CERTIFW.ATION W
15111aWslan.11UMALICCEICIMIAMI •
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seentidss laws, dot •
•
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•
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2. • Plaisdirdid not pardon the smoky Oar 011114110a1a miss attihe &Woe
aphides coma! ar in ceder to path:limes in this pdeeto notion.
- 3.
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provng tostiotony dtpasitiss sednini, if siossory.
•
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tbilowe.
Plaintiff's tnessectiog is Just For Past, Inc. thst is the whim &dal sodas is a
Oxman
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647-96
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S. Daring the threnyeas pier to ths date edit Caiae. Plahniftbas sought is serve
or saved a a represents* portray a dash. the islossigg minas tiled ander die *dorsi seserides
lairE RONALD K. DRUCKER.% TWIPLAB CORPORATION, CIVIL AMON NO. SII .CV7423 U.S.D.0 E.D. N.Y.
. 6.
The Plaiseiff sill not accept any moan ler ars* us repressatative pay co
Moira/the ohms *aid the Mild& pro Ma Owe ormei recovery, isceptasoll ressoesiis costs
ad sepessas Crectudel; lost vows) dint* Midis to the repressetetioe ores dna as Geduld or
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TOTAL P.02