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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ x ] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended: January 30, 1999 OR
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[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from:______________________
to ______________________
Commission file number: 333-57011
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Iron Age Corporation
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(Exact name of registrant as specified in its charter)
Delaware 25-1376723
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Robinson Plaza Three, Suite 400, Pittsburgh, Pennsylvania 15205
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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
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Applicable only to registrants involved in bankruptcy proceedings during the
preceding five years: Indicate by check mark whether the registrant has filed
all documents and reports required to be filed by Sections 12, 13 or 15(d) of
the Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court.
Yes _______ No ______ Not Applicable.
(Applicable only to corporate registrants:) On April 26, 1999, all of the
voting stock of Iron Age Corporation was held by Iron Age Holdings Corporation
("Holdings"), a Delaware corporation.
As of April 26, 1999, Iron Age Corporation had 1,000 shares of Common Stock
issued and outstanding.
Documents incorporated by reference: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part II of this Form 10-K or
any amendment to this Form 10-K. [ X ]
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FORM 10-K INDEX
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Page
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Part I 3
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
Part II 8
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 8
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 16
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 47
Part III 48
Item 10. Directors and Executive Officers of the Registrant 48
Item 11. Executive Compensation 50
Item 12. Security Ownership of Certain Beneficial Owners and Management 54
Item 13. Certain Relationships and Related Transactions 56
Part IV 57
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 57
</TABLE>
Reference in this Annual Report on Form 10-K is made to the Iron Age(R) and
Knapp(R) trademarks, which are owned by Iron Age Holdings Corporation or its
subsidiaries.
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Part I
Item 1. Business
Iron Age Corporation (the "Company" or "Iron Age") is a leading distributor of
safety shoes in the United States. The Company's primary business is the
specialty distribution of safety, work and uniform related shoes under the Iron
Age(R) and Knapp(R) brand names, which comprised 91.5% of fiscal 1999 sales. The
Company also distributes footwear directly to retail and wholesale customers
through its wholesale division and manufacturing subsidiary Falcon Shoe Mfg. Co.
("Falcon"). In addition, the Company began distribution of prescription safety
eyewear, on a limited basis, in conjunction with the acquisition of a regional
distributor in April 1998. The Company distributes directly to its customers
over 400 styles of footwear under the Iron Age and Knapp brand names. The Iron
Age and Knapp products and services are marketed principally to industrial,
service and government employers, most of which require safety shoes to be worn
at the workplace and provide purchase subsidies under employer safety programs
to the end-user employee.
Company History
The Company, a wholly-owned subsidiary of Iron Age Holdings Corporation
("Holdings"), was founded in 1817 and has specialized in safety footwear since
the popularization of steel toe shoes during the 1940s. On February 26, 1997,
Fenway Partners Capital Fund, L.P. (the "Fenway Fund"), together with certain
investors, in partnership with certain members of management, formed Holdings in
order to effect the acquisition of all of the outstanding stock of the
predecessor to Holdings for an aggregate purchase price of $143.6 million (the
"Fenway Acquisition").
Concurrent with the Fenway Acquisition, (i) Holdings and the Company entered
into a syndicated senior bank loan facility (the "Old Credit Facility"), (ii)
the Company issued its 12.5% Senior Subordinated Notes due 2006 (the "Old
Subordinated Notes") in the amount of $14.55 million, (iii) Holdings issued
shares of Series A Preferred Stock (the "Holdings Series A Preferred Stock") for
$14.9 million, (iv) Holdings issued shares of Common Stock for approximately
$32.2 million, (v) Holdings issued warrants to acquire Common Stock of Holdings
for $0.1 million, and (vi) management rolled over certain options and were
granted additional options to acquire shares of Common Stock of Holdings.
On April 24, 1998, (i) Holdings issued its 12 1/8% Senior Discount Notes due
2009 (the "Discount Notes") in an aggregate principal amount at maturity of
$45.14 million, (ii) the Company issued its 9 7/8% Senior Subordinated Notes due
2008 (the "Senior Subordinated Notes") in an aggregate principal amount of
$100.0 million, and (iii) Holdings and the Company entered into a new credit
facility (the "New Credit Facility") that, as amended, provides for a $52.0
million senior secured credit facility consisting of a $30.0 million revolving
working capital facility and a $22.0 million revolving acquisition facility.
Holdings and the Company used excess cash and net proceeds from the Discount
Notes, the Senior Subordinated Notes and the New Credit Facility to repay the
Old Credit Facility, repay the Old Subordinated Notes and redeem the Holdings
Series A Preferred Stock. The transactions described in this paragraph are
collectively referred to herein as the "April 1998 Transactions."
Industry Overview
The work shoe market consists of men's and women's work, safety and uniform
shoes and boots. In the United States, the safety shoe sector of the work shoe
market is comprised of three types of customers--industrial or commercial,
government and mass merchandising retail. The Company estimates that sales to
industrial and government customers represent over 60% of the safety shoe
market. End-user safety shoe customers include workers in the primary metals,
chemical and petroleum, automotive, paper, mining, utilities, electronics,
aerospace, food service, hospitality and entertainment, pharmaceutical,
biomedical, agriculture, construction and retail and wholesale trade industries.
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A significant factor influencing the demand for safety shoes is the
increasing concern regarding workplace safety that is derived from the
employer's desire to reduce employee costs from on-the-job injury and to reduce
workers' compensation expenses. Beginning in the 1970s, the federal government
adopted Occupational Safety and Health Administration ("OSHA") regulations
establishing heightened workplace safety standards, including regulations
governing footwear. OSHA regulations established standards requiring employers
to provide their workers with workplaces free from recognized hazards that could
cause serious injury or death and requiring employees to abide by all safety and
health standards that apply to their jobs. Changes to OSHA regulations in 1994
required employers to assess footwear related hazards and implement a program
designed to mitigate such hazards.
In order to satisfy the criteria set forth in OSHA regulations, protective
footwear must comply with standards (the "ANSI Standards") established by the
American National Standards Institute ("ANSI"). There are six ANSI categories
for foot protection: impact and compression, metatarsal footwear, conductive
footwear, electrical hazard footwear, sole puncture resistance footwear and
electro-static dissipative footwear. These OSHA regulations, more strict
regulatory enforcement and increased consumer awareness of the regulations have
heightened the focus on safety in the workplace.
Within the service sector of the work shoe market, a growing category of
safety footwear is non-slip footwear. Uniform shoes with non-slip soles are
used increasingly by customers in the food service, hotel, gaming and resort
industries. Fueling the demand are some of the same factors influencing
traditional safety shoe users including the increasing concern regarding
workplace safety. In addition, employers in these industries require
consistency and uniformity in the performance and appearance of their employees'
footwear.
In the industrial sector of the work shoe market, sales are made primarily
between the distributor and employer, which generally maintain safety
departments that monitor compliance with overall safety requirements and provide
safety shoe purchase subsidies. Distributors of safety shoes to industrial
customers typically provide a range of services, including advice with respect
to assessment of workplace safety requirements, recommendations as to
appropriate product selection, coordination of employer safety subsidy programs,
worksite delivery and fitting of shoes and feedback and follow-up with corporate
employers.
Government sales, which include armed forces, penal institutions, federal,
state, and local municipal employees or civilian employees, are made to two
primary purchasers: GSA-contracted vendors and the military. GSA-contracted
purchases of safety shoes include retail sales to GSA-contracted vendors through
store and shoemobile service and catalog operations. These orders are made for a
variety of purposes and activities and involve a wide range of products.
Suppliers bid for these orders on the basis of product style and quality,
distribution capability and customer service. Sales to the military consist of
price-sensitive, large-volume orders that are designed to strict specifications
and are generally bid directly by the manufacturers. Style selection is minimal
and geared towards a specific purpose.
The retail/mass merchandiser sector includes large retail chain stores,
specialty retailers and other retail outlets. This is a source of low-end,
protective footwear, the buyers of which include workers whose employers do not
have company-sponsored programs as well as self-employed individuals,
occupational users and agricultural workers.
Safety prescription eyewear is a related product that the Company has recently
entered into distribution through its subsidiary, IA Vision Acquisition Co. ("IA
Vision"). Eye protection is another element of personal protective equipment
that is regulated by OSHA. Many of the same customers to whom the Company
currently sells safety footwear have similar requirements for safety eyewear.
Sales and Distribution
Substantially all shoes sourced for distribution by the Company are
transported to its central distribution facility in Penn Yan, New York. From
Penn Yan, the Company distributes its product to end-users through its multi-
pronged distribution network. The Company also distributes its products through
catalog operations and channels associated with consumer brands, which include
wholesale merchandising, independent sales representatives and third-party
vendors.
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Mobile and Store Centers. Each "mobile and store center" consists of a
retail store for its products and generally one or more affiliated shoemobiles.
Each shoemobile acts as a mobile selling vehicle for the Company's products,
operating generally within a 150-mile radius of its affiliated retail store.
This sector of the Company's business has grown as its customers have become
more demanding and have required a higher level of customer service. Throughout
the last seven years, the Company has identified this shift in the market and
has established new locations in major industrial markets while upgrading the
locations of its existing stores. Through the retail store channel, the Company
is able to service corporate and individual customers generally located within a
40-mile radius of a given store.
The Company operates its fleet of shoemobiles throughout the United States,
Canada and Mexico. Shoemobiles vary in size--transporting from 900 to 1,600 pair
of shoes--and each contains a display area and a fitting room. The shoemobile
driver/salesperson is responsible for the fitting of footwear and processing of
orders.
Catalog Direct. The Company reaches both large and small customers with its
safety shoe catalogs. The mail-order sector of the Company's business provides
direct service to certain customers who are either too small or do not require
direct shoemobile service or who are remotely located. Mail-order sales are
promoted through a combination of the product catalogs, the Company's field
sales force and trade advertising.
In-Plant Stores. To add further flexibility to its distribution
capabilities, the Company offers large-volume customers an in-plant store
program, which provides the customer with a base stock of inventory and a sales
staff to manage the store on-site at the customer's manufacturing facility. The
customer provides the Company with the necessary store space and all utilities.
Wholesale and Consumer Channels. The Company markets branded products to
select third-party retail customers. The Company also markets primarily Knapp
branded product directly to consumers through a Direct Mail and Counselor
(independent sales representatives) division.
Falcon Manufacturing. Through its Falcon subsidiary, the Company manufactures
private label footwear for such well known customers as New Balance Athletic
Shoe, Inc., Browning Arms Company, L.L. Bean, Inc., Cabela's Inc. and H.S. Trask
& Co.
IA Vision. The Company markets safety prescription eyewear to its existing
industrial customer base through distribution methods identical to its safety
footwear distribution. Mobile service is utilized to bring the product on site
for the customer, where the selection, fitting and sale may be consummated
utilizing a mobile point-of-sale ("POS") system designed specifically for
prescription eyewear.
Products
The Company's product line addresses a full range of protective footwear
applications covering all six ANSI categories in styles for both men and women
in both steel and non-metallic toe caps. Product categories include work,
athletic, hikers, metatarsal, dress/casual and rubber footwear and consist of
over 400 individual styles ranging in price from $15.00 for an inexpensive steel
PVC boot to a $185.00 waterproof boot. The Company's safety footwear is
manufactured in more than 300 length and width combinations, ranging in sizes
from 5 to 17. Sales of Iron Age products are concentrated in traditional, well-
established styles, with sales of new styles in each of fiscal 1997, 1998 and
1999 representing less than 16% of net sales in each period. All the Company's
work and safety shoes and boots are designed, manufactured and laboratory tested
to meet or exceed applicable ANSI Standards. Through its long-standing
relationship with users of safety footwear, the Company has assembled a product
line that is widely regarded as the industry's most complete. In addition to the
Iron Age product line, the Company distributes work, service oxfords, non-slip
and high-end work and hunting boots under the Knapp brand name. In 1997, the
Company acquired and successfully integrated Knapp Shoes, Inc. ("Knapp"), an
underperforming competitor with a strong franchise in the uniform and service
sector market (the "Knapp Acquisition"). On August 31, 1998, the
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Company sold the Dunham(R) trademark for $2.0 million and on-hand Dunham
inventory for approximately $0.7 million to New Balance Athletic Shoe, Inc. and
New Balance Trading Company, Ltd. (together, "New Balance"). In connection
therewith, the Company agreed to manufacture for New Balance certain products
which New Balance will continue to sell under the Dunham brand name. Net sales
of Dunham products in fiscal 1998, the last full fiscal year of ownership, were
$4.0 million. This transaction did not have a material effect on the results of
operations.
The Company has successfully expanded its product line to meet new customer
demands and substantially increased the categories and types of footwear
offered. As the safety shoe market has diversified, the Company has expanded its
product line, moving from the basic heavy-duty styles toward casual, lightweight
safety footwear that meet the needs of professional, light industrial and
service sector employees.
Manufacturing
General. As a result of its strategic acquisitions of Falcon and Knapp,
during fiscal 1999 the Company operated two manufacturing facilities in
Lewiston, Maine. Work shoes are manufactured in the Falcon facility in Lewiston
primarily for sale by the Company under the Iron Age brand name. In addition,
the Company sells work shoes manufactured at the Falcon facility directly to
third parties, including New Balance, Browning Arms Company, L.L. Bean, Inc.,
Cabela's Inc. and H.S. Trask & Co. The Company manufactured the Knapp product
line at its other Lewiston facility. As of March 1999 the Company has
consolidated the Knapp manufacturing operations into the Falcon facility as
originally intended at the time of the Knapp Acquisition.
Suppliers. As a result of its market leadership position and long operating
history, the Company has developed key supply arrangements with 22 leading
footwear manufacturers in seven countries: the United States, China, Korea,
Canada, Taiwan, Maylasia and the Netherlands. Although in fiscal 1999 one
supplier in China manufactured approximately 24% of the pairs of shoes sold by
the Company, the Company does not believe that it is dependent upon any specific
supplier for its product manufacturing. In fiscal 1999, 49% of its total pairs
were produced by foreign suppliers and 38% of its total pairs were produced in
China. The Company has not experienced any material adverse effects as a result
of the current economic downturn in Asia. However, the economic climate could
have an adverse effect on the Company's suppliers located in Asia. The Company
believes that it could find alternative manufacturing sources for those products
it currently sources from Asia, including its largest supplier in China, through
its existing relationships with independent third-party manufacturing facilities
located outside of Asia. However, the loss of a substantial portion of this
manufacturing capacity or the inability of Asian suppliers to provide products
on schedule or on terms satisfactory to the Company, could have a material
adverse effect on the Company's business, financial condition or results of
operations during the transition to alternative manufacturing facilities.
Transportation/Freight. The Company utilizes its own trucks as well as common
carriers to deliver product orders from its Falcon manufacturing subsidiary and
to its mobile and store centers.
Competition
The work shoe market is highly competitive. Management believes that
competition in the industry is based on distribution capabilities, retail
presence, brand name recognition, corporate relationships, systems, service,
product characteristics, product quality and price. The Company's major
competitors in the safety shoe sector of the work shoe industry are Lehigh (a
subsidiary of U.S. Industries, Inc.), Hy-Test (a subsidiary of Wolverine World
Wide, Inc.) and Red Wing Shoe Co. Some of the Company's competitors have greater
financial and other resources than the Company. In addition, the work shoe
market is a mature industry that could experience limited growth.
Environmental Matters
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The Company's operations, including manufacturing, are subject to extensive
federal, state, local, and foreign laws and regulations relating to the storage,
handling, generation, treatment, emission, release, transportation, discharge
and disposal of certain substance and waste materials. Permits are required for
certain of the Company's operations, and these permits are subject to
revocation, modification and renewal by issuing authorities. Governmental
authorities have the power to enforce compliance with their regulations, and
violations may result in the payment of fines or the entry of injunctions, or
both. The Company does not believe it will be required under existing
environmental laws and enforcement policies to expend amounts that will have a
material adverse effect on its results of operations or financial condition. The
requirements of such laws and enforcement policies, however, have generally
become stricter in recent years. Accordingly, the Company is unable to predict
the ultimate cost of compliance with environmental laws and enforcement
policies.
Employees
As of January 30, 1999, the Company employed approximately 1,000 people in
sales and distribution, manufacturing and administration. None of the Company's
employees is presently covered by collective bargaining agreements. Management
considers its employee relations to be good.
Item 2. Properties.
The Company's executive offices are located in Pittsburgh, Pennsylvania. All
of the Company's properties are maintained on a regular basis and are adequate
for the Company's present requirements.
The following table identifies, as of January 30, 1999, the principal
properties utilized by the Company.
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Square
Facility Own/Lease Location Footage(1)
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Corporate Headquarters .............. Lease Pittsburgh, Pennsylvania 20,500
Distribution Facility ............... Own Penn Yan, New York 175,000
Knapp Direct Mail Facility .......... Lease Penn Yan, New York 5,500
Falcon Manufacturing Facility(2) .... Lease Lewiston, Maine 112,000
Knapp Manufacturing Facility(2) ..... Lease Lewiston, Maine 122,000
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(1) Square footage has been rounded up to the nearest 500 square feet.
(2) The Company consolidated the Knapp manufacturing facility into the Falcon
manufacturing facility in March 1999. The Knapp manufacturing facility is
vacant as of March 15, 1999. The lease for the Knapp facility expires in
December 1999.
Item 3. Legal Proceedings.
The Company is a party to various legal actions arising in the ordinary course
of its business. The Company believes that the resolution of these legal actions
will not have a material adverse effect on the Company's business, results of
operations and financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matters during the fourth quarter of the
fiscal year covered by this report to a vote of security holders through the
solicitation of proxies or otherwise.
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Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
As of April 26, 1999, the Company had 1,000 authorized shares of common
stock, par value $1.00, all of which were issued and outstanding and held by
Holdings. There is no established public trading market for the Company's
common stock. The Company's ability to pay dividends is limited under an
indenture dated as of April 24, 1998 between the Company and The Chase Manhattan
Bank, as trustee (the "Indenture").
Item 6. Selected Financial Data.
The following table sets forth selected historical consolidated financial data
of the Company and its predecessors for the five-year period ended January 30,
1999, which was derived from audited consolidated financial statement of the
Company and its predecessors. The following table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and consolidated financial statements of the Company and
accompanying notes thereto included in Item 8 of this Annual Report on
Form 10-K.
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Successor Predecessor
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Fiscal Years Ending(1)
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Fiscal Year February 27, January 26,
Ending (1) 1997 through 1997 through
January 30, January 31, February 26, January 25, January 27, January 28,
1999 1998(2) 1997 1997 1996 1995
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(Thousands of Dollars)
Summary of Operations:
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Net sales ............................. $124,294 $107,769 $10,937 $99,360 $95,263 $85,543
Net income (loss) ..................... $ (5,605)(4) $ 1,957 $ (195) (3) $ 5,589 $ 5,667 $ 4,772
Financial Position at Year End:
Total assets .......................... $179,228 $174,792 $ -- $90,043 $91,151 $86,173
Total debt ............................ $123,674 $101,675 $ -- $19,212 $38,295 $35,294
Holdings Series A Preferred Stock (5)... $ -- $ 17,031 $ -- $ -- $ -- $ --
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(1) The Company utilizes a fiscal year of 52 or 53 weeks, ending on the last
Saturday in January. Each of the Company's fiscal years set forth herein
contained 52 weeks except for its fiscal year ended January 31, 1998 which
contained 53 weeks.
(2) The statement of income data and other financial data for the period
February 27, 1997 through January 31, 1998 include the results of Knapp
since it was acquired by the Company on March 14, 1997.
(3) Includes $1,054 of non-cash stock-based compensation and $1,000 of non-
recurring management bonuses paid in connection with the Fenway Acquisition.
(4) Includes an extraordinary loss on early extinguishment of debt, net of tax
effect, of $4,015 and compensation payments to certain members of management
of Iron Age, net of tax effect, of $1,285 incurred in connection with the
April 1998 Transactions.
(5) The Holdings Series A Preferred Stock is included in the Company's
consolidated financial statements for financial reporting purposes since the
Company paid a dividend of $13,700 to Holdings from the proceeds of the
Transactions that was used to redeem a portion of the Holdings Series A
Preferred Stock.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following is management's discussion and analysis of the financial
condition and results of operations of the Company for the fiscal years ended
January 30, 1999 ("fiscal 1999"), January 31, 1998 ("fiscal 1998") and January
25, 1997 ("fiscal 1997"). For purposes of this discussion and analysis, the
financial condition and results of operations of the Company for fiscal 1998
represent the combined results of the Company and its predecessor, unless
otherwise indicated. This discussion and analysis should be read in conjunction
with, and is qualified in its entirety by, "Selected Financial Data" and the
consolidated financial statements and accompanying notes thereto included in
Item 8 of this Annual Report on Form 10-K.
Overview
The Company's primary business is the specialty distribution of safety, work
and uniform related shoes directly to end users under the Iron Age and Knapp
brand names, which comprised 91.5% of fiscal 1999 sales. The Company also
distributes footwear directly to retail and wholesale customers through its
wholesale division and its manufacturing subsidiary Falcon. The Company
manufactures approximately 20% of total pairs of shoes sold through Falcon. In
addition, the Company began distributing prescription safety eyewear, on a
limited basis, through its subsidiary IA Vision in conjunction with the
acquisition of a regional distributor in April 1998. The Company's net sales
growth was 4.7% in fiscal 1999, or 6.7% excluding the impact of the additional
week in fiscal 1998. The Company's net sales growth has averaged 9.4% over the
last three fiscal years, excluding the impact of the additional week in fiscal
1998.
The Company has an extended history of sales and income growth. Historically,
the Company's growth has been generated both internally and through the
acquisition of regional independent distributors. From fiscal 1987 to fiscal
1999, The Company's net sales and EBITDA have increased at a compound annual
growth rate ("CAGR") of 14.2% and 20.1%, respectively.
Acquisitions and Restructuring
The Fenway Acquisition occurred on February 26, 1997. Concurrent with the
Fenway Acquisition, (i) Holdings and the Company entered into the Old Credit
Facility, (ii) the Company issued the Old Subordinated Notes, (iii) Holdings
issued the Holdings Series A Preferred Stock, (iv) Holdings issued Common Stock
for equity capital of approximately $32.2 million and (v) management rolled over
certain options to acquire shares of the predecessor company into options to
acquire shares of Common Stock of Holdings and were granted additional options
to acquire shares of Common Stock of Holdings. In the April 1998 Transactions,
Holdings and the Company used excess cash and net proceeds from the Discount
Notes, the Senior Subordinated Notes and the New Credit Facility to repay the
Old Credit Facility and the Old Subordinated Notes, to redeem the Holdings
Series A Preferred Stock, to make compensation payments to certain members of
management and to make a distribution to Holdings' stockholders.
On October 21, 1998, the Company consummated an exchange offer of Senior
Subordinated Notes registered under the Securities Act of 1933, as amended. The
Senior Subordinated Notes and the notes exchanged therefor are referred to as
the "Senior Subordinated Notes."
In April 1998, the Company, through IA Vision, acquired the stock of Safety
Supplies & Service Co., Inc. and acquired certain assets and assumed certain
liabilities of Safety Depot Ltd., ACT Safety, Inc. and J. Mars Knapp Shoes (the
"First Quarter Acquisitions"). The combined purchase price for the First
Quarter Acquisitions was approximately $4.64 million, including transactions
costs of approximately $0.15 million. In addition, on July 7, 1998, the Company
acquired certain assets of Work-Saf, Inc. for approximately $0.75 million (the
"Second Quarter Acquisition"). The First Quarter Acquisitions and the Second
Quarter Acquisition have been accounted for using the purchase method of
accounting for business combinations, and accordingly, (i) the results of
operations for each of the acquired companies are included in the Company's
financial statements only from the date of the respective acquisitions and (ii)
the purchase price has been allocated to the Company's net assets based upon
their fair market
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values. The First Quarter Acquisitions and the Second Quarter Acquisition
resulted in goodwill of approximately $2.8 million, which is being amortized
over 40 years.
Divestitures
Effective August 31, 1998, the Company sold the Dunham product line and
related trademarks to New Balance for $2.0 million and recorded a gain of $1.7
million (the "Dunham Sale"). In conjunction with the Dunham Sale, Falcon agreed
to a minimum two year supply agreement with New Balance and the sale of on-hand
inventory.
Results of Operations
The following table sets forth for the periods indicated certain historical
income statement data derived from the consolidated statement of income of the
Company and its predecessor. The application of the purchase method of business
combinations resulted in a presentation of the results of operations for fiscal
1998 in two periods: a one-month period prior to the Fenway Acquisition and an
11-month period following the date of the Fenway Acquisition.
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Successor Predecessor
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Feb. 27, 1997 Jan. 26, 1997
through through
Fiscal 1999 January 31, 1998 Feb. 26, 1997 Fiscal 1997
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(Thousands of Dollars)
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Income Statement Data:
Net sales ........................................ $124,294 $107,769 $10,937 $99,360
Gross profit ..................................... 61,066 54,465 5,327 46,923
Selling, general and administrative .............. 46,854 36,541 5,120 31,267
Depreciation and amortization .................... 5,193 4,426 238 2,751
Operating income (loss) .......................... 9,019 13,498 (31) 12,905
Gain on divestiture................................ 1,678 -- -- --
Interest expense ................................. 12,354 9,855 232 3,627
(Benefit) provision for income taxes ............. (67) 1,686 (68) 3,689
Extraordinary item, net of tax effect.............. (4,015) -- -- --
Other Data:
Gross profit margin .............................. 49.1% 50.5% 48.7% 47.2%
Operating income (loss) margin ................... 7.2% 12.5% (0.3)% 13.0%
</TABLE>
Fiscal 1999 Compared to Fiscal 1998
Net Sales. For comparability with fiscal 1999, net sales for the predecessor
and successor periods in fiscal 1998 have been discussed on a combined basis.
Management believes that a combined discussion of predecessor and successor
periods is reasonable and appropriate because there were no adjustments to net
sales for a change in basis resulting from the Fenway Acquisition. The Company's
net sales for fiscal 1999 were $124.3 million compared to $118.7 million for
fiscal 1998, an increase of $5.6 million, or 4.7%. Excluding the impact of the
additional week in fiscal 1998, sales increased $7.8 million, or 6.7%. The
increase in fiscal 1999 was primarily attributable to growth in the Company's
primary business of $6.0 million, or 5.6%. Sales of prescription safety eyewear
and safety and medical products were $2.1 million in fiscal 1999. Growth in net
sales was partially offset by a $2.5 million decrease in sales through the
Company's wholesale division and Dunham wholesale sales due to the Dunham Sale.
Gross Profit. For comparability with fiscal 1999, gross profit for the
predecessor and successor periods in fiscal 1998 has been discussed on a
combined basis. Management believes that a combined discussion of predecessor
and successor periods is reasonable and appropriate because there were no
adjustments to gross profit for a change in basis resulting from the Fenway
Acquisition. The Company's gross profit for fiscal 1999 was $61.1 million
compared to $59.8 million for fiscal 1998, an increase of $1.3 million, or 2.2%.
Total gross profit percentage decreased 1.3% to 49.1% in fiscal 1999 compared to
fiscal 1998. Gross profit percentage increased in the
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<PAGE>
Company's primary business by 0.3% in fiscal 1999. The overall decrease in the
gross profit percentage was primarily related to integrating the operations of
the prescription safety eyewear and safety and medical products business and an
increase in lower gross profit margin private label Dunham sales resulting from
the Dunham Sale.
Selling, General and Administrative Expenses. For comparability with fiscal
1999, selling, general and administrative expenses for the predecessor and
successor periods in fiscal 1998 have been discussed on a combined basis.
Management believes that a combined discussion of predecessor and successor
periods is reasonable and appropriate because there were no adjustments to
selling, general and administrative expenses for a change in basis resulting
from the Fenway Acquisition. Selling, general and administrative expenses for
fiscal 1999 were $46.9 million compared to $41.7 million for fiscal 1998, an
increase of $5.2 million, or 12.5%. Selling, general and administrative expenses
for fiscal 1999 include non-recurring charges of $2.2 million of compensation
payments to certain members of management in connection with the April 1998
Transactions, a $0.2 million charge related to store closings scheduled for the
first and second quarter of fiscal 2000 and $0.2 million of recruitment fees.
Selling, general and administrative expenses for fiscal 1998 include a non-
recurring charge of $2.1 million of stock compensation expense and compensation
payments to certain members of management in connection with the Fenway
Acquisition. Selling, general and administrative expenses increased $4.6
million, or 11.6%, from fiscal 1998 to fiscal 1999, excluding non-recurring
charges in both fiscal 1999 and fiscal 1998. The increase in fiscal 1999 was
primarily related to the First Quarter Acquisitions and infrastructure added in
the Knapp distribution channel since the first half of fiscal 1998. Growth in
selling, general and administrative expenses in the primary business was $1.8
million, or 6.1%, in fiscal 1999, excluding the non-recurring charges discussed
above.
Operating Income. Operating income for fiscal 1999 was $9.0 million, or 7.2%
of net sales, compared to $13.5 million, or 12.5% of net sales, for the period
from February 27, 1997 through January 31, 1998. The decrease was attributable
to the increased selling, general and administrative expenses as discussed
above. Operating loss and operating loss as a percentage of net sales for the
predecessor period January 26, 1997 through February 26, 1997 were $0.03 million
and 0.3%, respectively. Operating income for the successor period included
increased selling, general and administrative expenses, as discussed above, and
additional depreciation and amortization of $0.8 million. The additional
depreciation and amortization is primarily due to the increase in basis of
goodwill, customer lists and other intangible and tangible assets capitalized as
a result of the Fenway Acquisition, the Knapp Acquisition, the First Quarter
Acquisitions and the Second Quarter Acquisition.
Gain on Divestiture. Gain on divestiture for fiscal 1999 was $1.7 million
which was related to the gain on the Dunham Sale discussed above.
Interest Expense. Interest expense for fiscal 1999 was $12.4 million
compared to $9.9 million for the period from February 27, 1997 through January
31, 1998, an increase of $2.5 million, or 25.3%. Interest expense for the
predecessor period January 26, 1997 through February 26, 1997 was $0.2 million.
Interest expense for the successor periods prior to April 25, 1998 reflect the
additional indebtedness of the Company incurred in connection with the Fenway
Acquisition and the Knapp Acquisition. The successor periods subsequent to April
24, 1998 reflect interest incurred in connection with the April 1998
Transactions.
Income Tax Expense. Income tax benefit was $0.07 million for fiscal 1999
compared to income tax expense of $1.7 million for the period from February 27,
1997 through January 31, 1998. Income tax benefit for the predecessor period
January 26, 1997 through February 26, 1997 was $0.07 million. Income tax benefit
for fiscal 1999 differs from that of the statutory income tax rate due primarily
to nondeductible goodwill amortization. The Company recognized a state income
tax benefit of $1.1 million from net operating loss carryforwards for fiscal
1999.
The Company needs to generate $10.0 million of state taxable income to realize
this benefit before expiration of the net operating loss carryforward periods,
which begin in fiscal 2002 through fiscal 2019. The Company evaluates the
adequacy of the valuation reserve and the realization of the deferred tax
benefit on an ongoing basis. Management believes that future taxable income
will more likely than not allow the Company to realize this benefit.
-11-
<PAGE>
Extraordinary Item. For fiscal 1999, the Company recorded an extraordinary
loss of $4.0 million, net of a $2.9 million tax benefit, due to the early
extinguishment of indebtedness resulting from the repayment of the Old
Subordinated Notes and the Old Credit Facility in April 1998 in connection with
the April 1998 Transactions.
Fiscal 1998 Compared to Fiscal 1997
Net Sales. For comparability with prior periods, net sales for the predecessor
and successor periods in fiscal 1998 have been discussed on a combined basis.
Management believes that a combined discussion of predecessor and successor
periods is reasonable and appropriate because there were no adjustments to net
sales for a change in basis resulting from the Fenway Acquisition. The Company's
net sales for fiscal 1998 increased to $118.7 million, an increase of $19.3
million, or 19.4%, compared to fiscal 1997. The increase was attributable to
increased sales in the primary business of $6.2 million, or 7.1%, sales of $12.8
million from the operations of the Knapp brand sales channel and $2.0 million
for the additional week in fiscal 1998. The increase was partially offset by a
$1.7 million decrease in sales of Dunham brand products, the Company's wholesale
division and private label.
Gross Profit. For comparability with prior periods, gross profit for the
predecessor and successor periods in fiscal 1998 have been discussed on a
combined basis. Management believes that a combined discussion of predecessor
and successor periods is reasonable and appropriate because there were no
adjustments to gross profit for a change in basis resulting from the Fenway
Acquisition. The Company's gross profit increased to $59.8 million in fiscal
1998, an increase of $12.9 million, or 27.5%, compared to fiscal 1997. The
increase in gross profit was primarily attributable to the increase in net
sales. In addition, gross profit percentage increased 3.2% in fiscal 1998
compared to fiscal 1997. The increase in gross profit percentage was
attributable to higher margin product sales of both Iron Age and Knapp branded
products, through the higher margin shoemobile and retail store channels, and
stable product costs.
Selling, General and Administrative Expenses. For comparability with prior
periods, selling, general and administrative expenses for the predecessor and
successor periods in fiscal 1998 have been discussed on a combined basis.
Management believes that a combined discussion of predecessor and successor
periods is reasonable and appropriate because there were no adjustments to
selling, general and administrative expenses for a change in basis resulting
from the Fenway Acquisition. Selling, general and administrative expenses were
$41.7 million in fiscal 1998, an increase of $10.4 million, or 33.2%, compared
to fiscal 1997. The acquired Knapp sales channels contributed $5.8 million of
this increase and the primary business contributed $2.5 million of this
increase, which represented a percentage increase of 8.8% over fiscal 1997.
Approximately $0.5 million of the increase was attributable to the Knapp
manufacturing operation within Falcon and $1.0 million related to compensation
payments to management in connection with the Fenway Acquisition. The additional
week in fiscal 1998 contributed $0.6 million of the increase.
Operating Income. Operating income was $13.5 million and $12.9 million in
the period February 27, 1997 through January 31, 1998 and fiscal 1997,
respectively. Operating income in the period February 27, 1997 through January
31, 1998 reflects the direct result of the Company's gains on both sales and
margins. Operating income as a percentage of net sales was 12.5% in the period
February 27, 1997 through January 31, 1998 and 13.0% in fiscal 1997. Operating
loss and operating loss as a percentage of net sales for the predecessor period
January 26, 1997 through February 26, 1997 were $0.03 million and 0.3%,
respectively. Operating income as a percentage of net sales in the period
February 27, 1997 through January 31, 1998 included additional amortization due
to the increase in the basis of goodwill, customer lists and other intangible
assets capitalized as a component of the purchase accounting related to the
Fenway Acquisition and the Knapp Aquisition.
Interest Expense. Interest expense was $9.9 million in the period February
27, 1997 through January 31,
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<PAGE>
1998 and $3.6 million in fiscal 1997. Interest expense for the predecessor
period January 26, 1997 through February 26, 1997 was $0.2 million. Interest
expense for the period February 27, 1997 through January 31, 1998 reflects the
increase in indebtedness of the Company incurred in connection with the Fenway
Acquisition and the Knapp Acquisition.
Income Tax Expense. Income tax expense was $1.7 million in the period
February 27, 1997 through January 31, 1998 and $3.7 million in fiscal 1997.
Income tax benefit for the predecessor period January 26, 1997 through February
26, 1997 was $0.07 million. Income taxes for the successor period reflect the
effect of additional non-deductible goodwill amortization.
Liquidity and Capital Resources
The Company's primary cash needs are working capital, capital expenditures and
debt service. The Company anticipates that it may use cash in the future to
finance acquisitions. The Company has financed cash requirements primarily
through internally generated cash flow and funds borrowed under Holdings' and
the Company's credit facilities.
Net cash provided by operating activities was $1.0 million in fiscal 1999, as
compared to net cash used for operating activities of $0.5 million in fiscal
1998 and net cash provided by operating activities of $9.1 million in fiscal
1997. The increase in cash provided by operating activities in fiscal 1999 is
primarily the result of the decrease in inventory levels of $0.5 million,
compared to an increase of $6.2 million in fiscal 1998, due to the Knapp
Acquisition. The reduction in cash provided by operating activities in fiscal
1998 was the result of a one-time increase in inventory of $7.0 million related
to the Knapp Acquisition. The major component of the increase in net cash
generated by operating activities in fiscal 1997 was income before non-cash
charges of $5.6 million, primarily due to increased income from operations.
Excluding cash paid for acquisitions and proceeds from the divestiture, the
Company's investing activities consisted of capital expenditures of $2.3 million
in fiscal 1999 compared to $2.5 million in fiscal 1998 and $2.2 million in
fiscal 1997. The Company's capital expenditures for fiscal 1999 included $0.2
million in remaining costs related to an addition to the Company's central
distribution center building. The remaining $2.1 million in capital expenditures
was related to improvements in retail stores, shoemobiles and equipment in the
core business and installing the POS systems in stores and trucks acquired in
connection with the First Quarter Acquisitions and the Second Quarter
Acquisition.
The Company's total working capital as of January 30, 1999 was $48.0 million.
At January 31, 1998, working capital was $42.7 million. The primary reason for
the increase to working capital was the elimination of the current portion of
long term senior debt in connection with the April 1998 Transactions.
Excluding cash paid for acquisitions, the Company used approximately $2.5
million from financing activities in fiscal 1999, due primarily to the April
1998 Transactions. In fiscal 1998, the Company generated cash of $3.7 million
due primarily to borrowings under the Old Credit Facility. In fiscal 1997, the
Company used $7.3 million for financing activities due primarily to principal
payments on debt and the payment of a dividend.
Cash flow from operations for fiscal 1999 was sufficient to cover debt service
requirements under the New Credit Facility. Cash flow from operations for fiscal
1998 was sufficient to cover debt service requirements under the Old Credit
Facility. The Company's ability to make scheduled payments of principal, or to
pay the interest or premium (if any) on, or to refinance, its indebtedness
(including the Senior Subordinated Notes), or to fund planned capital
expenditures will depend on its future performance, which, to a certain extent,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond its control. Based upon the current level of
operations, management believes that cash flow from operations and available
cash, together with available borrowings under the New Credit Facility, will be
adequate to meet the Company's anticipated future requirements for working
capital, budgeted capital expenditures and scheduled payments of principal and
interest on its indebtedness for the next several years. There can be no
assurance that the Company's business will generate sufficient cash flow from
operations or that future borrowing will be available under the New Credit
Facility in an
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<PAGE>
amount sufficient to enable the Company to service its indebtedness, including
the Senior Subordinated Notes, or to make capital expenditures.
As of January 30, 1999 the Company's debt consisted of the Senior Subordinated
Notes, the New Credit Facility and certain other debt. As of January 30, 1999,
the New Credit Facility consisted of a $35.0 million multiple draw acquisition
term loan facility (the "New Acquisition Credit Facility") and approximately
$30.0 million in revolving credit loans, letters of credit and swing line loans
(the "New Revolving Credit Facility"). The Company's other debt of $1.0 million
consisted of capital leases and other notes. As of January 30, 1999,
approximately $11.7 million of the New Acquisition Credit Facility and
approximately $11.0 million of the New Revolving Credit Facility were
outstanding, and the Company had additional borrowing availability under the New
Acquisition Credit Facility of $23.3 million and under the New Revolving Credit
Facility of approximately $19.0 million. The New Credit Facility was amended
effective March 5, 1999 to reduce the New Acquisition Credit Facility to $22.0
million. The New Acquisition Credit Facility matures in quarterly installments
from July 2001 until final payment in April 2004. The New Revolving Credit
Facility will mature in April 2004 and has no scheduled interim principal
payments.
Year 2000 Issue
Many existing computer systems use only two digits, rather than four, to
represent a year. The Year 2000 issue arises because date-sensitive software or
hardware written or developed in this manner may recognize a date using "00" as
the year 1900 rather than the year 2000. This could potentially result in
system failures or miscalculations causing disruption of operations, including,
among other things, a temporary inability to process transactions, send invoices
or engage in normal business activities.
The Company classifies its response to the Year 2000 Issue into five phases:
inventory, assessment, renovation, validation and implementation. Inventory is
the process in which all electronic/computer components are defined for all
systems (information technology ("IT") and non-information technology ("non-
IT")). Assessment is the process in which all components are classified as
either compliant or non-compliant. Renovation is the process in which a system
is upgraded, replaced or retired. Validation is the process in which compliant
systems are tested within the Company's infrastructure to validate either the
initial compliant assessment is correct or the upgrade or replacement from the
renovation phase is compliant with the Company's infrastructure. Implementation
is the process in which a compliant system is installed in the Company's
production environment and is used to support business operations.
The Company has completed the inventory, renovation and validation phases of
its IT systems, and implemented these systems in March 1999. In the ordinary
course of business, the Company upgraded applications software covering the main
integrated system. As of January 30, 1999, the Company had expended $26,000 and
has a total expected cost of $50,000 to renovate, validate and implement
software to address the Year 2000 Issue. The cost is being funded out of
operating cash flow with the entire amount being capitalized as new hardware and
software.
The Company's inventory and assessment of its non-IT systems (including
telephone, heating/air conditioning, electricity and security systems) was
completed by December 31, 1998. This is being followed by any required
renovation in calendar 1999. The Company is using internal resources to address
the Year 2000 Issue of its non-IT systems and has not incurred significant costs
through January 30, 1999 and does not expect to incur significant costs in order
to upgrade its non-IT systems. All validation and implementation of these non-
IT systems is expected to be completed by mid-1999.
The cost of systems implementation and Year 2000 modifications are based upon
management's best estimates, which are derived utilizing numerous assumptions
and future events, including continued availability of certain resources, and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties. As of January 30, 1999, the cost of
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<PAGE>
bringing the Company's IT and non-IT systems into Year 2000 compliance is not
expected to have a material effect on the Company's financial condition or
results of operations.
In addition to reviewing its internal systems, the Company has polled its
major footwear and other vendors, to determine whether they are Year 2000
compliant or to identify any potential issues. As a result of this
correspondence, management has no reason to believe that the Company's major
footwear and other vendors will not be Year 2000 compliant. If the Company's
customers and vendors do not achieve Year 2000 compliance before the end of
1999, the Company may experience a variety of problems which may have a material
adverse effect on the Company. To the extent such vendors are not Year 2000
compliant by the end of 1999, such vendors may fail to deliver ordered materials
and products to the Company and may fail to bill the Company properly and
promptly. Consequently, the Company may experience delays in sourcing product
to sell to its customers. The Company plans to address potential problems by
identifying and arranging for alternate sources of supply. Due to the nature of
its product, the Company does not believe it has any exposure contingencies
related to the Year 2000 Issue for the products it has sold.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. This Statement
permits early adoption as of the beginning of any fiscal quarter after its
issuance. The Company expects to adopt the new Statement effective January 30,
2000. The Statement will require the Company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If a derivative is a hedge, depending
upon the nature of the hedge, changes in the fair value of the derivative will
either be offset against the change in the fair value of the hedged asset,
liability or firm commitment through earnings, or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
Company does not anticipate that the adoption of this Statement will have a
significant effect on its results of operations or financial position.
Inflation and Changing Prices
The Company's sales and costs are subject to inflation and price fluctuations.
However, they historically have not, and in the future are not expected to have,
a material adverse effect on the Company's results of operations.
Forward Looking Statements
When used in this Annual Report on Form 10-K, the words "believes",
"anticipates", "expects" and similar expressions are used to identify forward
looking statements. Such statements are subject to risks and uncertainties which
could cause actual results to differ materially from those projected. The
Company wishes to caution readers that the following important factors and
others in some cases have affected and in the future could affect the Company's
actual results and could cause the Company's actual results to differ materially
from those expressed in any forward looking statements made by the Company: (i)
economic conditions in the safety shoe market, (ii) availability of credit,
(iii) increase in interest rates, (iv) cost of raw materials, (v) inability to
maintain state-of-the-art manufacturing facilities, (vi) heightened competition,
including intensification of price and service competition, the entry of new
competitors and the introduction of new products by existing competitors, (vii)
inability to capitalize on opportunities presented by industry consolidation,
(viii) loss or retirement of key executives, (ix) loss or disruption of the
Company's relationships with its major suppliers, including the Company's
largest supplier in China and (x) inability to grow by acquisition of additional
safety shoe distributors or to effectively consolidate operations of businesses
acquired.
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<PAGE>
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The Company is exposed to market risk primarily from changes in interest rates
and foreign exchange rates.
The following discussion of the Company's exposure to various market risks
contains "forward looking statements" that are subject to risks and
uncertainties. These projected results have been prepared utilizing certain
assumptions considered reasonable in the circumstances and in light of
information currently available to us. Nevertheless, because of the inherent
unpredictability of interest rates and foreign currency translation rates,
actual results could differ materially from those projected in such forward
looking statements.
Interest Rates
At January 30, 1999, the Company had fixed-rate debt totaling $101.0
million in principal amount and having a fair value of $76.0 million. These
instruments are entered into for purposes other than trading. These instruments
bear interest at a fixed rate and, therefore, do not expose the Company to the
risk of earnings loss due to changes in market interest rates. However, the
fair value of these instruments would decrease by approximately $5.7 million if
interest rates were to increase by 10% from their levels at January 30, 1999
(i.e., an increase from the weighted average interest rate of 9.9% to a weighted
average interest rate of 10.9%).
At January 30, 1999, the Company had floating-rate long-term debt totaling
$22.7 million in principal amount and having a fair value of $22.7 million.
These instruments are entered into for purposes other than trading. These
borrowings are under the New Credit Facility (see "Notes to Consolidated
Financial Statements-Note 7, Long-term debt"). If floating rates were to
increase by 10% from their levels at January 30, 1999, the Company would incur
additional annual interest expense of approximately $0.2 million.
The Company has entered into interest rate swap agreements with a combined
notional amount of $50.0 million to reduce its exposure to adverse fluctuations
in interest rates relating to this floating-rate debt, rather than for trading
purposes. The Company has not entered into any derivative financial instruments
for trading purposes. If floating rates were to increase by 10% from their
levels at January 30, 1999, the Company would incur additional interest expense
of approximately $0.1 million after taking into account the effect of the
interest rate swap agreements.
Foreign Exchange Rates
A substantial majority of the Company's sales, expenses and cash flows are
transacted in U.S. dollars. For the fiscal year ended January 30, 1999, sales
denominated in currencies other than U.S. dollars (primarily Mexican peso and
the Canadian dollar) totaled $6.6 million, or approximately 5.3% of total sales.
Net income denominated in currencies other than U.S. dollars totaled $0.03
million, or approximately 2% of total net income before extraordinary item. An
adverse change in exchange rates of 10% would have resulted in a decrease in
sales of $0.7 million and an immaterial increase in net loss for the year ended
January 30, 1999. The Company's subsidiaries that operate in Mexico and Canada
have certain accounts receivable and payable accounts in their home currencies
which can act to further mitigate the impact of foreign exchange rate changes.
The Company has no foreign currency exchange contracts.
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<PAGE>
Item 8. Financial Statements and Supplementary Data.
Iron Age Corporation
(a wholly owned subsidiary of Iron Age Holdings Corporation)
Financial Statements
Years ended January 30, 1999 and January 31, 1998
Contents
Report of Independent Auditors............................................ 18
Audited Financial Statements
Consolidated Balance Sheets................................................ 19
Consolidated Statements of Income.......................................... 20
Consolidated Statements of Stockholders' Equity............................ 21
Consolidated Statements of Cash Flows...................................... 22
Notes to Consolidated Financial Statements................................. 24
Schedule II-Valuation and Qualifying Accounts.............................. 47
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<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Iron Age Corporation
We have audited the accompanying consolidated balance sheets of Iron Age
Corporation and subsidiaries (a wholly owned subsidiary of Iron Age Holdings
Corporation) (the "Company") as of January 30, 1999 and January 31, 1998, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended January 30, 1999. Our
audits also included the financial statement schedule listed in the index at
Item 8. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Iron Age
Corporation and subsidiaries at January 30, 1999 and January 31, 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 30, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
Ernst & Young LLP
Pittsburgh, Pennsylvania
March 15, 1999
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<PAGE>
Iron Age Corporation
(a wholly owned subsidiary of Iron Age Holdings Corporation)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Successor
----------------------------------
January 30 January 31
1999 1998
------------------------------------
(In Thousands)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 508 $ 2,060
Accounts receivable, net 17,455 15,996
Inventories 36,681 36,841
Prepaid expenses 4,433 1,640
Deferred income taxes 861 640
------------------------------------
Total current assets 59,938 57,177
Other noncurrent assets 431 290
Property and equipment, net 11,008 10,479
Intangible assets, net 107,851 106,846
------------------------------------
Total assets $179,228 $174,792
=====================================
Liabilities and stockholders' equity
Current liabilities:
Current maturities of long-term debt $ 544 $ 3,699
Accounts payable 3,307 3,510
Accrued expenses 8,134 7,263
------------------------------------
Total current liabilities 11,985 14,472
Long-term debt, less current maturities 123,130 97,976
Other noncurrent liabilities 516 516
Deferred income taxes 5,728 6,949
------------------------------------
Total liabilities 141,359 119,913
Commitments and contingencies -- --
Redeemable preferred stock -- 17,031
Stockholders' equity:
Common stock, $1 par value, 1,000 shares authorized,
issued and outstanding 1 1
Additional paid-in capital 44,466 38,086
Accumulated deficit (6,412) (174)
Other comprehensive income (186) (65)
------------------------------------
Total stockholders' equity 37,869 37,848
------------------------------------
Total liabilities and stockholders' equity $179,228 $174,792
=====================================
</TABLE>
See accompanying notes.
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<PAGE>
Iron Age Corporation
(a wholly owned subsidiary of Iron Age Holdings Corporation)
Consolidated Statements of Income
<TABLE>
<CAPTION>
Successor Predecessor
----------------------------------------------------------------
February 27 January 26
Year ended 1997 through 1997 through Year ended
January 30 January 31 February 26 January 25
1999 1998 1997 1997
--------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Net sales $124,294 $107,769 $10,937 $99,360
Cost of sales 63,228 53,304 5,610 52,437
--------------------------------------------------------------------
Gross profit 61,066 54,465 5,327 46,923
Selling, general and administrative 46,854 36,541 5,120 31,267
Depreciation 1,670 1,443 121 1,322
Amortization of intangible assets 3,523 2,983 117 1,429
--------------------------------------------------------------------
Operating income (loss) 9,019 13,498 (31) 12,905
Gain on divestiture 1,678 -- -- --
Interest expense 12,354 9,855 232 3,627
--------------------------------------------------------------------
(Loss) income before income taxes (1,657) 3,643 (263) 9,278
(Benefit) provision for income taxes (67) 1,686 (68) 3,689
--------------------------------------------------------------------
(Loss) income before extraordinary item (1,590) 1,957 (195) 5,589
Extraordinary item, net of tax effect (4,015) -- -- --
--------------------------------------------------------------------
Net (loss) income $ (5,605) $ 1,957 $ (195) $ 5,589
====================================================================
</TABLE>
See accompanying notes.
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<PAGE>
Iron Age Corporation
(a wholly owned subsidiary of Iron Age Holdings Corporation)
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Retained
Common Stock Earnings Other
------------------------ Paid-In (Accumulated Comprehensive
Shares Amounts Capital Deficit) Income Total
------------------------------------------------------------------------------------
(In Thousands)
Predecessor
<S> <C> <C> <C> <C> <C> <C>
Balance at January 27, 1996 1,000 $ 1 $35,761 $6,296 $(244) $41,814
Net income -- -- -- 5,589 -- 5,589
Capital contribution -- -- 2,441 -- -- 2,441
Stock-based compensation -- -- 1,065 -- -- 1,065
Dividends paid on common
stock -- -- -- (2,718) -- (2,718)
Foreign currency translation
adjustment, net of tax -- -- -- -- 21 21
---------------------------------------------------------------------------------------
Balance at January 25, 1997 1,000 1 39,267 9,167 (223) 48,212
Net loss -- -- -- (195) -- (195)
Stock-based compensation -- -- 1,054 -- -- 1,054
Foreign currency translation
adjustment, net of tax -- -- -- -- (22) (22)
---------------------------------------------------------------------------------------
Balance at February 26, 1997 1,000 $ 1 $40,321 $8,972 $(245) $49,049
=======================================================================================
Successor
Balance at February 27, 1997 -- $-- $ -- $ -- $ -- $ --
Net income -- -- -- 1,957 -- 1,957
Capital contribution 1,000 1 38,086 -- -- 38,087
Dividend accrued on
preferred stock -- -- -- (2,131) -- (2,131)
Foreign currency translation
Adjustment, net of tax -- -- -- -- (65) (65)
---------------------------------------------------------------------------------------
Balance at January 31, 1998 1,000 1 38,086 (174) (65) 37,848
Net loss -- -- -- (5,605) -- (5,605)
Capital contribution -- -- 6,380 -- -- 6,380
Dividend paid on preferred
stock -- -- -- (633) -- (633)
Foreign currency translation
adjustment, net of tax -- -- -- -- (121) (121)
---------------------------------------------------------------------------------------
Balance at January 30, 1999 1,000 $1 $44,466 $(6,412) $(186) $37,869
=======================================================================================
</TABLE>
See accompanying notes.
-21-
<PAGE>
Iron Age Corporation
(a wholly owned subsidiary of Iron Age Holdings Corporation)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Successor Predecessor
-----------------------------------------------------------
February 27 January 26
Year ended 1997 through 1997 through Year ended
January 30 January 31 February 26 January 25
1999 1998 1997 1997
----------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Operating activities
Net (loss) income $(5,605) $1,957 $ (195) $5,589
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
Extraordinary item, net of tax 4,015 -- -- --
Gain on divestiture (1,678) -- -- --
Depreciation and amortization 5,592 4,727 246 3,109
Amortization of deferred financing fees included in interest 528 613 16 384
Provision for losses on accounts receivable (107) 30 10 45
Deferred income taxes (1,612) (596) -- 82
Stock-based compensation -- -- 1,054 1,065
Changes in operating assets and liabilities:
Accounts receivable (405) 372 (954) (688)
Inventories 502 (6,976) 797 1,558
Prepaid expenses 99 232 65 (143)
Other noncurrent assets (14) (14) 20 (182)
Accounts payable (981) (1,375) (573) (19)
Accrued expenses 638 (882) 949 (1,657)
--------------------------------------------------------------
Net cash provided by (used in) operating activities 972 (1,912) 1,435 9,143
Investing activities
Net cash used in business acquisitions (5,241) (141,717) -- --
Proceeds from divestiture 2,544 -- -- --
Purchases of property and equipment (2,338) (2,365) (117) (2,222)
--------------------------------------------------------------
Net cash used in investing activities (5,035) (144,082) (117) (2,222)
Financing activities
Borrowing under revolving credit agreement 49,150 44,450 (1,909) 93,617
Proceeds from senior term notes
-- 65,000 -- --
Proceeds from senior subordinated notes 100,000 14,550 -- --
Contribution by Holdings 6,380 40,000 -- 2,441
Issuance of Preferred Stock -- 14,900 -- --
Issuance of stock purchase warrants -- 100 -- --
Principal payments on debt (127,683) (23,531) (357) (100,352)
Payment of financing costs (5,553) (7,468) -- --
Call premium on early extinguishment of old subordinated notes (1,562) -- -- --
Redemption of Holdings Series A Preferred Stock, including
cumulative unpaid dividends (17,664) -- -- --
Dividend paid on common stock -- -- -- (2,718)
Principal payments on capital leases (333) (328) (33) (305)
--------------------------------------------------------------
Net cash provided by (used in) financing activities 2,735 147,673 (2,299) (7,317)
Effect of exchange rate changes on cash and cash equivalents (224) (110) (37) 40
--------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (1,552) 1,569 (1,018) (356)
Cash and cash equivalents at beginning of year 2,060 491 1,509 1,865
-------------------------------------------------------------
Cash and cash equivalents at end of year $ 508 $ 2,060 $ 491 $1,509
=============================================================
</TABLE>
-22-
<PAGE>
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Successor Predecessor
----------------------------------------------------------
February 27 January 26
Year ended 1997 through 1997 through Year ended
January 30 January 31 February 26 January 25
1999 1998 1997 1997
----------------------------------------------------------
(In Thousands)
Supplemental disclosures of cash flow information
Cash paid during the period for:
<S> <C> <C> <C> <C>
Interest $10,377 $ 7,837 $552 $2,717
Income taxes 1,254 1,138 7 2,568
Supplemental schedule of noncash investing and financing
activities
Capital lease agreements for equipment $ 373 $ 206 $ -- $ 340
=========================================================
Assets acquired and liabilities assumed in connection with
acquisitions:
Fair value of assets acquired $ 6,626 $171,328 $ -- $ --
Liabilities assumed (1,236) (21,946) -- --
---------------------------------------------------------
Cash paid 5,390 149,382 -- --
Less fees and expenses (149) (7,468) -- --
Less cash acquired -- (197) -- --
---------------------------------------------------------
Net cash used in business acquisitions $ 5,241 $141,717 $ -- $ --
=========================================================
</TABLE>
See accompanying notes.
-23-
<PAGE>
Iron Age Corporation
(a wholly owned subsidiary of Iron Age Holdings Corporation)
Notes to Consolidated Financial Statements
January 30, 1999 and January 31, 1998
1. Organization and Significant Accounting Policies
Organization and Activities
The accompanying consolidated financial statements include the accounts of Iron
Age Corporation and its wholly owned subsidiaries, Falcon Shoe Mfg. Co.
("Falcon"), Iron Age Investment Company, Iron Age Mexico S.A. de C.V., Iron Age
Canada Ltd., IA Vision Acquisition Co., and Safety Supplies and Service Company,
Inc. (together, the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
The Company is a wholly owned subsidiary of Iron Age Holdings Corporation
("Holdings') which is majority-owned by Fenway Partners Capital Fund, L.P. (the
'Fenway Fund"). Holdings was acquired by the Fenway Fund and certain other
investors, in partnership with certain members of management, effective February
26, 1997 (the "Fenway Acquisition") (see Note 2). The consolidated financial
statements of the Company reflect Holdings' cost in the Company because the
Company is a wholly owned subsidiary of Holdings and Holdings has no assets
other than its investment in the Company.
The accompanying consolidated financial statements present the twelve-month
period ended January 31, 1998 in two components. The period January 26, 1997
through February 26, 1997 includes the historical results of Iron Age
Corporation prior to the Fenway Acquisition of Holdings and the period after
February 26, 1997 includes the results of Iron Age Corporation after the Fenway
Acquisition of Holdings. In these financial statements, Iron Age Corporation is
referred to as the "Predecessor" prior to February 26, 1997 and as the
"Successor" or the "Company" after such date.
Effective April 24, 1998, Holdings and the Company refinanced their old credit
facility (the "Old Credit Facility") and the Company's old subordinated notes
(the "Old Subordinated Notes") with a new credit facility (the "New Credit
Facility"), 9-7/8% senior subordinated notes due 2008 (the "Senior Subordinated
Notes"), and 12-1/8% senior discount notes due 2009 (the "Holdings Senior
Discount Notes") (collectively, the "Transactions") (see Note 7).
The Company distributes and manufactures work footwear with operations
concentrated in North America. As a percentage of sales, 97% and 3% of the
Company's operations are related to distributing and manufacturing,
respectively. The Company has one reportable segment, distribution of work
footwear in the United States.
-24-
<PAGE>
1. Organization and Significant Accounting Policies (continued)
Fiscal Year
The Company's fiscal year ends on the last Saturday in January. The 1997 and
1999 fiscal years include 52 weeks. The combined periods of January 26, 1997
through February 26, 1997 and February 27, 1997 through January 31, 1998 include
53 weeks.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of 90 days
or less at the time of original purchase to be cash equivalents.
Inventories
Approximately 93% and 96% of inventories at January 30, 1999 and January 31,
1998, respectively, are stated at the lower of last-in, first-out (LIFO) cost or
market. The remaining inventories are stated at the lower of first-in, first-out
(FIFO) cost or market.
Catalog Costs
The Company produces periodic catalogs and amortizes the mailing and production
costs over the related revenue stream, generally four to twelve months. The
Company has $766,000 and $749,000 of unamortized catalog costs at January 30,
1999 and January 31, 1998, respectively. For the year ended January 30, 1999,
the periods February 27, 1997 through January 31, 1998 and January 26, 1997
through February 26, 1997, and the year ended January 25, 1997, advertising
expense recorded by the Company was $2,455,000, $1,801,000, $110,000, and
$1,134,000, respectively.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided on the straight-line method based on estimated useful
lives, as follows:
Building and improvements
40 years
Machinery and equipment
3-10 years
-25-
<PAGE>
1. Organization and Significant Accounting Policies (continued)
Property and Equipment (continued)
Leasehold improvements are amortized over the shorter of the useful life of the
asset or the term of the lease. Expenses for repairs, maintenance and renewals
are charged to operations as incurred. Expenditures which improve an asset or
extend its useful life are capitalized.
Intangible Assets
Goodwill--Goodwill represents the excess of amounts paid and liabilities assumed
over the fair value of identifiable tangible and intangible assets acquired.
This amount is amortized using the straight-line method over a period of 40
years. The Company evaluates the carrying value of goodwill for potential
impairment on an ongoing basis. Such evaluation considers projected future
operating results, trends and other circumstances. If factors indicated that
goodwill could be impaired, the Company would use an estimate of the related
undiscounted future cash flows over the remaining life of the goodwill in
measuring whether the goodwill is recoverable. If such an analysis indicated
that impairment had occurred, the Company would adjust the book value of the
goodwill to fair value.
Customer Lists--Customer lists represent the estimated cost of replacing the
Company's customer base and are being amortized by the straight-line method over
15 years. The amortization period of 15 years approximates the Company's
historical customer loss experience.
Deferred Financing Cost--Deferred financing costs relate to the costs of
obtaining financing. These costs are being amortized over the period the related
loans are outstanding.
Foreign Currency Translation
The assets and liabilities of the Company's foreign subsidiaries are measured
using the local currency as the functional currency and are translated into U.S.
dollars at exchange rates as of the balance sheet date. Income statement amounts
are translated at the weighted average rates of exchange during the year. The
translation adjustment is accumulated in "other comprehensive income." Foreign
currency transaction gains and losses are included in determining net income.
Such amounts are not material.
Revenue Recognition
Revenue from product sales is recognized at the time products are shipped.
-26-
<PAGE>
1. Organization and Significant Accounting Policies (continued)
Financial Instruments
The Company periodically enters into interest rate swap agreements to moderate
its exposure to interest rate changes. The Company has effectively converted $25
million of its floating rate debt to a fixed rate basis and $25 million of its
fixed rate debt to a floating rate basis. These agreements involve the receipt
of fixed rate amounts in exchange for floating rate interest payments and
floating rate amounts in exchange for fixed rate interest payments over the life
of the agreements without an exchange of the underlying principal amounts. The
differential to be paid or received is accrued as interest rates change and
recognized as an adjustment to interest expense related to the debt. The related
amount payable to or receivable from counterparties is included in accrued
interest. Based upon the terms of the agreements, the fair values of the swap
agreements are not recognized in the financial statements. The fair value of the
swap agreements are $225,000 and $(702,000) at January 30, 1999 and January 31,
1998, respectively. Approximately 41%, or $50 million, of the Company's
outstanding long-term debt was subject to interest-rate swap agreements at
January 30, 1999.
Stock-Based Compensation
Certain members of the Company's management are granted options to purchase
stock in Holdings. Holdings recognizes stock-based compensation using the
intrinsic value method. Compensation expense related to stock option grants is
reflected in the Company's financial statements as a charge to income and as an
addition to paid-in capital. For disclosure purposes, pro forma net income is
provided as if the fair value method had been applied.
Income Taxes
Deferred income taxes are provided for the tax consequences of temporary
differences between financial statement carrying amounts and the tax bases of
assets and liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period of the enactment.
Other Comprehensive Income
As of February 1, 1998, the Company adopted Financial Accounting Standards Board
Statement No. 130, Reporting Comprehensive Income. Statement No. 130 establishes
new rules for the reporting and display of comprehensive income and its
components. Statement No. 130 requires foreign currency translation gains and
losses, which are reported separately in stockholders' equity, to be included in
other comprehensive income. The adoption of this statement had no impact on the
Company's net income or stockholders' equity.
-27-
<PAGE>
1. Organization and Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Reclassification
Certain reclassifications have been made to the January 25, 1997 consolidated
financial statements to conform to the January 31, 1998 and January 30, 1999
presentations.
2. Acquisitions and Divestiture
Iron Age Corporation (Predecessor)
On February 26, 1997, the Predecessor was acquired in a leveraged buyout
transaction by Holdings through an acquisition corporation for approximately
$143,550,000, including transaction costs of $6,962,000. Holdings was formed by
Fenway Partners, Inc. ("Fenway") and other investors, including certain members
of management, to effect the acquisition. The acquisition was financed by
capital contributions of approximately $34,037,000 (net of carryover basis
adjustment of $1,963,000), mandatorily redeemable preferred stock issued for
$14,900,000 (the "Holdings Series A Preferred Stock"), common stock purchase
warrants issued for $100,000, borrowings under the Old Credit Facility of
$79,000,000, and the Old Subordinated Notes issued to certain Outside Investors
(see Note 12) in the amount of $14,550,000 (net of a $450,000 discount).
The Fenway Acquisition of the Predecessor was accounted for under the purchase
method of accounting because, on a fully diluted basis, 90% of the existing
voting interest of Holdings common stock was acquired through a new holding
company which was capitalized by a group of new shareholders, constituting a
change in control of voting interest. The new holding company was capitalized
through the issuance of 88,625 shares of common stock and was owned 100% by the
Fenway Fund prior to the acquisition of Holdings. The new holding company was
subsequently renamed Iron Age Holdings Corporation. Accordingly, the purchase
price was allocated to the assets and liabilities assumed based on their
relative fair values. However, since certain members of management had ownership
in the Predecessor, the net assets acquired were recorded at the reinvesting
stockholders' carryover basis. Therefore, in allocating the purchase price of
the Company among its net assets, the difference between the fair
-28-
<PAGE>
2. Acquisitions and Divestiture (continued)
Iron Age Corporation (Predecessor) (continued)
values of the net assets acquired has been proportionately reduced by
approximately $1,963,000 with such amount being charged against the gross
stockholder's equity of $36,100,000. The adjustment to stockholder's equity
represents the difference between the fair value of management's 10% ownership
and the carryover basis. The Company recorded goodwill of approximately
$84,073,000 in connection with the transaction, which is being amortized on a
straight-line basis over 40 years. The 40 year amortization period was
established based upon the characteristics of the Company, its distribution
system and its products. Because of this purchase price allocation, the
accompanying consolidated financial statements of the Company are not directly
comparable to those of the Predecessor.
The Company's 1998 financial statements only include the Predecessor's
operations from the date of acquisition.
Knapp Shoes, Inc.
On March 14, 1997, the Company acquired certain assets and assumed certain
liabilities of Knapp Shoes, Inc. ("Knapp") for approximately $5,832,000,
including transaction costs of approximately $506,000 (the "Knapp Acquisition").
The Knapp Acquisition was funded with capital contributions from Holdings of
$4,000,000 and additional borrowings under the Old Credit Facility of
$1,326,000. The results of operations for Knapp are included in the consolidated
statement of income from the date of acquisition. Knapp was a distributor and
manufacturer of safety footwear. The Knapp Acquisition has been accounted for
using the purchase method of accounting and, accordingly, the purchase price and
transaction costs have been allocated to assets acquired and liabilities assumed
based on their estimated fair values. The excess of consideration paid over the
estimated fair value of assets acquired and liabilities assumed of approximately
$4,885,000 is being amortized on the straight-line basis over 40 years. The
Company has not provided selected unaudited pro forma information as if the
Knapp Acquisition had occurred as of January 26, 1997 because the Knapp
Acquisition was not a significant business combination.
Other Acquisitions
During the year ended January 30, 1999, the Company acquired the stock of Safety
Supplies & Service Co., Inc., and acquired certain assets and assumed certain
liabilities of Safety Depot Ltd., ACT Safety, Inc., J. Mars Knapp Shoes and
Work-Saf, Inc. for approximately $5,390,000, including transaction costs of
approximately $150,000. The results of operations are included from the date of
the acquisitions. The acquisitions have been accounted for using the purchase
method of accounting and, accordingly, the purchase price and transaction costs
have been allocated to assets acquired and liabilities assumed based upon their
estimated fair values. The excess of consideration paid over the estimated fair
value of assets acquired and liabilities assumed of approximately $2,849,000 is
being amortized on the straight-line basis, over 40 years. The Company has not
provided selected unaudited pro forma information as if these acquisitions had
occurred as of January 26, 1997 because these acquisitions, individually and
collectively, were not significant business combinations.
-29-
<PAGE>
Divestiture
On September 9, 1998, the Company announced the sale of the Dunham product line
and related trademarks to New Balance Athletic Shoes, Inc. and New Balance
Trading Company, Ltd. ("New Balance"), effective August 31, 1998, for $2,000,000
and recorded a gain of $1,678,000. In conjunction with the sale, the Company's
Falcon manufacturing subsidiary entered into a separate agreement whereby it
agreed to a minimum two-year supply arrangement with New Balance and the sale of
on-hand inventory.
3. Accounts Receivable
Accounts receivable are presented net of allowance for doubtful accounts of
approximately $275,000 and $382,000 as of January 30, 1999 and January 31, 1998,
respectively. The Company does not require collateral for its trade accounts
receivable. Management continually evaluates its accounts receivable and adjusts
its allowance for doubtful accounts for changes in potential credit risk. The
Company serves a diverse customer base and believes there is minimal
concentration of credit risk.
4. Inventories
The major components of inventories are as follows:
<TABLE>
<CAPTION>
Successor
--------------------------------------
January 30 1999 January 31 1998
--------------------------------------
(In Thousands)
<S> <C> <C>
Finished products $33,814 $33,527
Raw materials 3,143 3,470
--------------------------------------
36,957 36,997
Less excess of current cost over LIFO inventory value 276 156
--------------------------------------
$36,681 $36,841
======================================
</TABLE>
5. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Successor
--------------------------------------
January 30 1999 January 31 1998
--------------------------------------
(In Thousands)
<S> <C> <C>
Land and buildings $ 3,217 $ 3,158
Vehicles 3,727 3,047
Furniture and fixtures 1,234 917
Machinery and equipment 5,471 4,133
Leasehold improvements 1,060 857
--------------------------------------
14,709 12,112
Less accumulated depreciation and amortization 3,701 1,633
--------------------------------------
Net property and equipment $11,008 $10,479
======================================
</TABLE>
-30-
<PAGE>
6. Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
Successor
--------------------------------------
January 30 1999 January 31 1998
--------------------------------------
(In Thousands)
<S> <C> <C>
Goodwill $ 91,823 $ 88,592
Customer lists 17,188 16,150
Deferred financing costs 5,555 5,518
Other 234 262
--------------------------------------
114,800 110,522
Less accumulated amortization 6,949 3,676
--------------------------------------
$107,851 $106,846
======================================
</TABLE>
In connection with the Transactions, the Company expensed approximately
$4,927,000 of unamortized deferred financing costs, related to the Old Credit
Facility and the Old Subordinated Notes. Such costs are included in the
Company's extraordinary loss, net of tax, for the fiscal year ended January 30,
1999. Financing costs incurred in connection with obtaining the Senior
Subordinated Notes and the New Credit Facility of approximately $5,553,000 have
been deferred by the Company as of January 30, 1999 and will be amortized over
the periods the Senior Subordinated Notes and the New Credit Facility are
outstanding (see Note 7).
-31-
<PAGE>
7. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
Successor
--------------------------------------
January 30 1999 January 31 1998
--------------------------------------
(In Thousands)
<S> <C> <C>
9-7/8% Senior Subordinated Notes due 2008 $100,000 $ -
New Credit Facility 22,700 -
Old Credit Facility (retired):
Working capital advance - 23,000
Term A Note - 18,500
Term B Note - 19,850
Term C Note - 24,813
Old Subordinated Notes (retired) - 15,000
Other Notes 178 208
Capitalized lease obligations 796 754
- -
--------------------------------------
123,674 102,125
Less:
Current maturities 544 3,699
Unamortized discount - 450
--------------------------------------
$123,130 $ 97,976
======================================
</TABLE>
9-7/8% Senior Subordinated Notes Due 2008
On April 24, 1998, the Company issued $100,000,000 of Senior Subordinated Notes.
The Company used the net proceeds from the issuance of the Senior Subordinated
Notes, approximately $21,600,000 of borrowings under its New Credit Facility and
approximately $1,200,000 of cash to (i) extinguish certain existing
indebtedness, (ii) pay a dividend to Holdings of approximately $13,679,000 to
redeem a portion of Holdings Series A Preferred Stock, and (iii) pay fees and
expenses related to these transactions. These transactions resulted in the
recording of an extraordinary loss during April 1998 of approximately
$6,923,000, excluding related tax effect of $2,908,000. The extraordinary loss
on the extinguishment of debt is comprised of prepayment penalties on the Old
Credit Facility of $1,562,000; unamortized deferred financing fees of
$4,927,000; and unamortized discount on the Old Subordinated Notes of $434,000.
-32-
<PAGE>
7. Long-Term Debt (continued)
The Senior Subordinated Notes accrue interest at the rate of 9-7/8% per annum
and are payable semiannually in arrears on May 1 and November 1, commencing on
November 1, 1998.
The Senior Subordinated Notes are subordinated in right of payment to all
existing and future senior indebtedness of the Company.
The Senior Subordinated Notes are redeemable at the option of the Company on and
after May 1, 2003 at prices decreasing from 104.938% of the principal amount
thereof to par on May 1, 2006 and thereafter. The Company is required to redeem
the outstanding notes based upon certain events as described in the indenture
for the Senior Subordinated Notes.
The indenture for the Senior Subordinated Notes requires the Company and its
subsidiaries to comply with certain restrictive covenants, including a
restriction on dividends and limitations on the incurrence of indebtedness,
certain payments and distributions and sales of the Company's assets and stock.
Effective September 15, 1998, the Company filed a registration statement on Form
S-4 under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to its offer to exchange an aggregate principal amount of up to
$100,000,000 of its 9-7/8% Senior Subordinated Notes due 2008 (the "Exchange
Notes"), which have been registered under the Securities Act, for a like
principal amount of its Senior Subordinated Notes, which have not been so
registered. The terms of the Exchange Notes are identical in all material
respects to the Senior Subordinated Notes, except for certain transfer
restrictions and registration rights relating to the Senior Subordinated Notes.
-33-
<PAGE>
7. Long-Term Debt (continued)
9-7/8% Senior Subordinated Notes Due 2008 (continued)
Concurrent with the Transactions, Holdings issued $45,140,000 principal amount
at maturity of 12-1/8% Senior Discount Notes due 2009 ("Holdings Senior
Discount Notes"), the proceeds of which were used (i) to pay a dividend to
Holdings' stockholders of $17,745,000, (ii) to redeem a portion of the Holdings
Series A Preferred Stock, (iii) to make a capital contribution to the Company of
approximately $2,245,000 for compensation payments to certain members of
management, and (iv) to pay fees and expenses related to these transactions. The
Holdings Senior Discount Notes accrete at a rate of 12-1/8% per annum compounded
semiannually until May 1, 2003. No interest will accrue prior to May 1, 2003.
Interest will accrue thereafter at a rate of 12-1/8% per annum and is payable
semiannually in arrears on May 1 and November 1, commencing on November 1, 2003.
The Holdings Senior Discount Notes mature on May 1, 2009 and will be serviced
entirely by the cash flows of the Company.
Effective September 15, 1998, Holdings filed a registration statement on Form S-
4 under the Securities Act with respect to its offer to exchange an aggregate
principal amount of up to $45,140,000 at maturity of its 12-1/8% Senior Discount
Notes due 2009 (the "Holdings Exchange Senior Discount Notes"), which have
been registered under the Securities Act, for a like principal amount at
maturity of its Holdings Senior Discount Notes, which have not been so
registered. The terms of the Holdings Exchange Senior Discount Notes are
identical in all material respects to the Holdings Senior Discount Notes, except
for certain transfer restrictions and registration rights relating to the
Holdings Senior Discount Notes.
New Credit Facility
On April 24, 1998, the Company entered into a $65,000,000 New Credit Facility
with a syndicate of lenders and a financial institution, as agent for itself and
the other lenders, that is comprised of a $30,000,000 revolving working capital
facility and a $35,000,000 revolving acquisition facility. The revolving
acquisition facility was amended on March 5, 1999 to reduce the borrowing
commitment to $22,000,000. The working capital facility matures on April 24,
2004. The balance of the revolving acquisition facility converts into a term
loan on April 30, 2001 and matures in quarterly installments from July 31, 2001
to April 30, 2004. Under the working capital facility, the Company has a
$2,000,000 letter of credit and a $3,000,000 swing line facility which will
expire April 24, 2004. Outstanding obligations under the letter of credit and
the swing line facility were $294,000 and $0, respectively, at January 30, 1999.
-34-
<PAGE>
7. Long-Term Debt (continued)
New Credit Facility (continued)
Borrowings under the New Credit Facility may be used to fund the Company's
working capital requirements, finance certain permitted acquisitions and general
corporate requirements of the Company and pay fees and expenses related to the
foregoing. The Company is required to pay a 0.4375% fee on the average daily
unused portion of the New Credit Facility. The Company is also subject to
mandatory prepayment terms as described in the New Credit Facility.
Borrowings under the New Credit Facility accrue interest, at the option of the
Company, at either LIBOR plus 2.25% or the greater of the financial
institution's prime rate and the federal funds rate plus 0.5%. Borrowings on the
New Credit Facility accrue interest at 8.50% and 7.50% for prime rate borrowings
and LIBOR borrowings, respectively, at January 30, 1999.
The Company has classified its borrowings under the New Credit Facility as long-
term as of January 30, 1999 due to its ability and intent to maintain such
borrowings on a long-term basis.
The New Credit Facility is guaranteed on a senior basis by Holdings and is
collateralized by substantially all of the Company's and its subsidiaries'
assets. The New Credit Facility contains certain covenants which require the
Company to maintain leverage ratios, fixed charge coverage ratios and interest
coverage ratios. The New Credit Facility further limits capital expenditures and
sales of assets, declaration of dividends and other restricted payments, and
additional indebtedness. The New Credit Facility also restricts the sale or
transferring of the Company's assets or capital stock.
Old Credit Facility (Retired)
On February 26, 1997, the Company entered into the $100,000,000 Old Credit
Facility with a financial syndicate of lenders and a financial institution, as
agent for itself and the other lenders, that was comprised of a $23,000,000
working capital advance and three term notes (A, B and C) of $18,500,000,
$19,850,000 and $24,813,000, respectively.
The Old Credit Facility obligations of $86,820,000, including accrued interest
of $253,000, were extinguished with the proceeds of the Senior Subordinated
Notes and the New Credit Facility on April 24, 1998.
-35-
<PAGE>
7. Long-Term Debt (continued)
Old Subordinated Notes (Retired)
On February 26, 1997, the Company issued the Old Subordinated Notes in the
principal amounts of $10,000,000 and $5,000,000 at a discount. The Old
Subordinated Notes of $15,000,000 were extinguished with the proceeds of the
Senior Subordinated Notes and the New Credit Facility on April 24, 1998. The
extinguishment required repayment premiums of $1,562,000 which are included in
extraordinary loss, net of tax, for the year ended January 30, 1999. The
unamortized debt discount of approximately $434,000 was also expensed in
connection with the extinguishment of the Old Subordinated Notes and is included
in the Company's extraordinary loss, net of tax, for the fiscal year ended
January 30, 1999.
Other Notes
The Company has other notes of approximately $178,000 and $208,000 at January
30, 1999 and January 31, 1998, respectively. The notes will be paid during 1999.
The notes accrue interest at 9.5%.
Future Maturities of Long-Term Debt
Five-year maturities of long-term debt are as follows (in thousands):
2000 $ 544
2001 226
2002 2,760
2003 3,574
2004 4,400
Thereafter 112,170
-----------
$ 123,674
===========
-36-
<PAGE>
8. Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents--The carrying amount reported in the balance sheet for
cash and cash equivalents approximates its fair value.
Long-term debt and interest rate swaps--The carrying amounts of the Company's
borrowings under its new credit facility, old credit facility, and old
subordinated notes approximate their fair value. The fair values of the
Company's senior subordinated notes are estimated based upon quoted market
prices. The fair values of the Company's long-term debt and interest rate swaps
are estimated using discounted cash flow analysis, based on the Company's
current incremental borrowing rates for similar types of borrowing arrangements.
The carrying amounts and fair values of the Company's financial instruments at
January 30, 1999 and January 31, 1998 are as follows:
<TABLE>
<CAPTION>
Successor
------------------------------------------------------------------
January 30, 1999 January 31, 1998
------------------------------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 508 $ 508 $ 2,060 $2,060
9-7/8% Senior Subordinated Notes due 2008 100,000 75,000 - -
New Credit Facility 22,700 22,700 - -
Working capital advance (retired) - - 23,000 23,000
Term notes (retired) - - 63,163 63,163
Old Subordinated Notes (retired) - - 15,000 15,000
Other notes 178 178 208 208
Interest rate swap agreements - 225 _ (702)
</TABLE>
9. Employee Benefit Plans
The Company and its subsidiary Falcon sponsor 401(k) profit sharing defined
contribution pension plans. In connection with the Knapp Acquisition, the
Company assumed a third 401(k) defined contribution plan which was merged into
the Company's plan on December 31, 1998. Contributions to the plans are based on
a percentage of profits, but may be increased or decreased at the discretion of
the Board of Directors. The plans cover substantially all of its salaried
employees. For the fiscal years ended January 30, 1999, and the periods February
27, 1997 through January 31, 1998 and January 26, 1997 through February 26,
1997, and for the year ended January 25, 1997, pension and profit sharing
expenses were approximately $520,000, $820,000, $156,000, and $744,000
respectively.
-37-
<PAGE>
10. Income Taxes
Income tax expense consisted of the following:
<TABLE>
<CAPTION>
Successor Predecessor
-------------------------------------------------------------------------------
February 27 1997 January 26 1997
Year ended through January 31 through February Year ended
January 30 1999 1998 26 1997 January 25 1997
-------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Income taxes:
Current:
Federal $ 569 $2,306 $(66) $2,958
State 145 (24) (2) 649
-------------------------------------------------------------------------------
714 2,282 (68) 3,607
Deferred:
Federal (327) (458) - 34
State (454) (138) - 48
-------------------------------------------------------------------------------
(781) (596) - 82
===============================================================================
$ (67) $1,686 $(68) $3,689
===============================================================================
</TABLE>
A reconciliation of U.S. income tax computed at the statutory rate and actual
expense is as follows:
<TABLE>
<CAPTION>
Successor Predecessor
-------------------------------------------------------------------------------
February 27 1997 January 26 1997
Year ended through January 31 through February Year ended
January 30 1999 1998 26 1997 January 25 1997
-------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Amount computed at statutory rate
$(563) $1,239 $(89) $3,154
State and local taxes less
applicable federal income tax
(203) (107) (1) 460
Goodwill and other amortization
642 657 26 232
Other 57 (103) (4) (157)
===============================================================================
$ (67) $1,686 $(68) $3,689
===============================================================================
</TABLE>
-38-
<PAGE>
10. Income Taxes (continued)
The components of the net deferred tax asset and liability are as follows:
<TABLE>
<CAPTION>
Successor
----------------------------------------
January 30 1999 January 31 1998
----------------------------------------
(In Thousands)
<S> <C> <C>
Deferred tax liabilities:
Inventory $2,244 $2,244
Property and equipment 1,147 1,088
Customer lists 5,584 5,783
Other 257 349
----------------------------------------
Total deferred tax liabilities 9,232 9,464
Deferred tax assets:
Interest expense 2,016 2,016
State net operating loss carryforwards 1,100 -
Inventory 556 568
Accrued expenses 553 526
Other 140 45
----------------------------------------
Total deferred tax assets 4,365 3,155
========================================
Net deferred tax liabilities $4,867 $6,309
========================================
</TABLE>
State net operating loss carryforwards ("NOLs") were generated during the 1999
fiscal year. Approximately $831,000 relates to the state income tax benefit from
extraordinary losses incurred in connection with the early debt extinguishment
(see Note 7). The NOLs expire at various times beginning in fiscal 2002 through
2019.
11. Commitments and Contingencies
Purchase Commitments
The Company purchases the majority of its inventory through purchase order
commitments which are denominated in U.S. dollars. The Company purchased
approximately 24%, 20%, 17%, and 17% of its inventory from one vendor for the
fiscal year ended January 30, 1999, and the periods February 27, 1997 through
January 31, 1998 and January 26, 1997 through February 26, 1997, and the fiscal
year ended January 25, 1997, respectively. At January 30, 1999 and January 31,
1998, the Company had outstanding inventory purchase commitments of
approximately $16,189,000 and $15,275,000, respectively.
A significant amount of the Company's products are produced in the Far East. As
a result, the Company's operations could be adversely affected by political
instability resulting in the disruption of trade from the countries in which
these suppliers are located or by the imposition of additional duties or
regulations relating to imports or by the supplier's inability to meet the
Company's production requirements.
-39-
<PAGE>
11. Commitments and Contingencies (continued)
Lease Commitments
The Company leases substantially all of its vehicles and certain other equipment
and facilities. These leases are subject to renewal options for varying periods.
Future minimum payments, by year and in the aggregate, under capital leases and
noncancelable operating leases with initial or remaining terms of one year or
more consisted of the following:
<TABLE>
<CAPTION>
Capital Leases Operating Leases
----------------------------------------
<S> <C> <C>
2000 $ 451 $ 3,427
2001 291 2,663
2002 226 1,784
2003 92 1,062
2004 34 707
Thereafter - 811
----------------------------------------
Total minimum lease payments 1,094 $10,454
====================
Less amounts representing interest 298
--------------------
Present value of future minimum lease payments 796
Less current maturities of capital lease obligations 366
====================
Capital lease obligations $ 430
====================
</TABLE>
Operating lease expense under such arrangements was approximately $3,972,000,
$3,785,000, $203,000, and $2,271,000, for the fiscal year ended January 30,
1999, the periods February 27, 1997 through January 31, 1998 and January 26,
1997 through February 26, 1997, and the year ended January 25, 1997,
respectively.
-40-
<PAGE>
11. Commitments and Contingencies (continued)
Lease Commitments (continued)
At January 30, 1999 and January 31, 1998, property and equipment include
capitalized vehicle leases of approximately $1,627,000 and $1,223,000,
respectively, and accumulated amortization of approximately $592,000 and
$315,000, respectively.
Litigation
The Company is involved from time to time in lawsuits that arise in the normal
course of business. The Company actively and vigorously defends all lawsuits.
Management believes that there are no lawsuits that will have a material effect
on the Company's financial position, results of operations or liquidity.
12. Redeemable Preferred Stock and Stock Purchase Warrants
Effective February 26, 1997, in connection with the Fenway Acquisition described
in Note 2, Holdings authorized 10,000 shares and issued to New York Life
Insurance Company and American Home Assurance Company (the "Outside Investors")
1,500 shares of Series A nonvoting, cumulative, redeemable preferred stock with
a par value of $.01 per share (the "Holdings Series A Preferred Stock") for
consideration of $14,900,000, with a liquidation preference of $10,000 per
share. Dividends are cumulative at an annual rate of 15.5% and are payable in
cash or, at the option of Holdings, in whole or in part in additional Holdings
Series A Preferred Stock. The Holdings Series A Preferred Stock ranks senior to
all classifications of stock. The Holdings Series A Preferred Stock is
optionally redeemable at any time, and mandatorily redeemable on February 26,
2007, upon not less than ten days notice at a redemption price equal to the
liquidation preference thereof plus accrued and unpaid dividends to the
redemption date. The Holdings Series A Preferred Stock, including accrued and
unpaid dividends of $2,764,000, was redeemed with a portion of the proceeds of
the New Credit Facility, the Holdings Senior Discount Notes and the Senior
Subordinated Notes.
In connection with the Fenway Acquisition and the Knapp Acquisition described in
Note 2 and in conjunction with the issuance of preferred stock described above,
Holdings issued to the Outside Investors 9,818 shares of Holdings common stock
for an aggregate consideration of approximately $3,570,000, or $363.64 per
share, and common stock purchase warrants ("Warrants") to acquire 6,962 shares
of Holdings common stock for an aggregate consideration of $100,000. The
Warrants can be exercised at any time through February 26, 2007 for an exercise
price of approximately $186 per share. The value ascribed to the Warrants to
purchase the Holdings common stock in the Securities Purchase Agreement dated
February 26, 1997 among Holdings, the Company and the preferred stockholders
resulted in a corresponding discount of $100,000 to the Holdings Series A
Preferred Stock and an addition to paid-in capital of approximately $100,000.
The discount is being amortized over the life of the preferred stock using the
straight-line method. The addition to paid-in capital is net of tax of
approximately $40,000.
-41-
<PAGE>
13. Stock Options
Successor
The 1997 Stock Option Plan (the "Option Plan") provides for the granting of
either incentive stock options or nonqualified stock options to purchase shares
of Holdings common stock and for other stock-based awards to officers,
directors, key employees, consultants and advisors who, in the opinion of
Holdings' Board of Directors are in a position to make a significant
contribution to the success of Holdings and its subsidiaries. The Option Plan
authorized the issuance of options to purchase up to an aggregate of 20,245
shares of Holdings common stock; 11,528 of which shall be for Series A Options
and 8,717 of which shall be for Series B Options.
Nonqualified Series A Options of 11,528 were granted to certain officers of the
Company in connection with the Fenway Acquisition effective February 26, 1997 in
exchange for options to acquire shares of the Predecessor to Holdings. The
exercise price of Series A Options is approximately $36 per share and represents
the difference between the fair market value of Holdings' common stock at the
date of grant and the total fair value of the exchanged options which was
recognized as a capital contribution to Holdings of approximately $3,772,700, or
approximately $328 per share. The total fair value of the exchanged options was
recognized as a capital contribution to Holdings because the exchanged options
represented a portion of the purchase price of Holdings. The basis used to
determine the fair market value of Holdings common stock was the purchase price
paid by the Fenway Fund as of the date of the Fenway Acquisition, which was the
date of grant of the Series A Options. The Series A Options are fully vested and
exercisable as of January 30, 1999 and January 31, 1998.
Nonqualified Series B Options of 8,567 were granted in August 1997 in connection
with the Fenway Acquisition to certain officers of the Company. Approximately
65% of the options become exercisable ("Series B Basic"), subject to the
achievement of certain target earnings and continued employment, at the rate of
20% per year commencing with the Company's fiscal year ended January 31, 1998.
The remaining 35% of Series B Options ("Series B Extra") vest upon a change of
Company control and the attainment of certain internal rate of return objectives
by Holdings' stockholders as defined in the Option Plan. The exercise price of
Series B Options granted in August 1997 was approximately $364 per share at the
time such Series B Options were granted. On April 24, 1998, in connection with
the Transactions, the exercise price of Series B Options that were not vested as
of April 24, 1998 was reduced. The exercise price of (i) Series B Options of
7,465 that were not vested (as such term is defined in the Option Plan) as of
April 24, 1998 is approximately $186 per share and (ii) Series B Options of
1,102 that were vested (as such term is defined in the Option Plan) as of April
24, 1998 is approximately $364 per share. Holdings will recognize compensation
expense related to the Series B Options based upon the difference between the
estimated fair value of Holdings' common stock and the exercise prices of $186
or $364, respectively, upon the achievement of certain target earnings and
continued employment as defined in the Option Plan. No additional Series B
options vested during the year ended January 30, 1999.
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option plan.
At January 31, 1998 and January 30, 1999, no compensation cost has been
recognized in the Company's financial statements.
-42-
<PAGE>
13. Stock Options (continued)
Successor (continued)
Had compensation cost for the Company's stock option plan been determined based
on the fair value of such awards at the grant date, consistent with the methods
of Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation, the Company's total net income would have been as
follows:
<TABLE>
<CAPTION>
February 27 1997
Year ended January through January 31
30 1999 1998
----------------------------------------
(In Thousands)
<S> <C> <C>
Net income:
As reported $(5,605) $1,957
Pro forma (5,683) 1,801
</TABLE>
The fair values of options granted in February and August 1997 were estimated
using the minimum value option-pricing model based on the following assumptions:
Risk-free interest rate 6.0
Dividend yield 0.0
Expected life 3 years
Volatility Not applicable
A summary of the status of the shares under the Company's stock option plan is
as follows:
<TABLE>
<CAPTION>
February 27 1997
Year ended January through January 31
30 1999 1998
----------------------------------------
<S> <C> <C>
Outstanding, beginning of year 20,245 -
Granted - 20,245
Expired and forfeited (1,107) (1) -
----------------------------------------
Outstanding, end of year 19,138 20,245
========================================
Options exercisable at end of year 12,560 12,660
========================================
</TABLE>
(1) Subject to re-vesting in fiscal 2000.
-43-
<PAGE>
13. Stock Options (continued)
Successor (continued)
Additional information regarding stock options granted in connection with the
1997 stock option plan is outlined below:
<TABLE>
<CAPTION>
February 27, 1997 through
Year ended January 30, 1999 January 31, 1998
-------------------------------------- ---------------------------------------
Series B Series B Series B Series B
Series A Basic Extra Series A Basic Extra
------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Weighted average fair value of
options at grant date 5 51 26 5 51 26
Weighted average exercise price of
all outstanding options 36 228 186 36 364 364
Weighted average exercise price of
options exercisable 36 364 - 36 364 -
Weighted average exercise price of
expired and forfeited options - 186 - - - -
Weighted average remaining
contractual life of options
outstanding 8.1 8.1 8.1 9.1 9.1 9.1
Options outstanding at end of year 11,528 4,552 3,058 11,528 5,659 3,058
Options exercisable at end of year 11,528 1,032 - 11,528 1,132 -
</TABLE>
Predecessor
The Predecessor had an option plan (the "Prior Plan") for eligible officers and
key management personnel. The Prior Plan authorized the issuance of up to 12,212
shares of Predecessor's Class A common stock. A summary of Predecessor's stock
option activity and related information for the period January 26, 1997 through
February 26, 1997 and the fiscal year ended January 25, 1997 is as follows:
<TABLE>
<CAPTION>
January 26, 1997
through Year ended
February 26, 1997 January 25, 1997
----------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
----------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 12,212 $ 62 11,595 $ 62
Granted - 617 62
Exercised 12,212 62 -
------------- -------------
Outstanding, end of year - 12,212
============= =============
Exercisable, end of year - 9,536
============= =============
Weighted average fair value of options granted during the year $ 611
</TABLE>
-44-
<PAGE>
13. Stock Options (continued)
Predecessor (continued)
For the period January 26, 1997 through February 26, 1997 and the year ended
January 25, 1997, the Predecessor recognized compensation expense of $1,054,000
and $1,065,000, respectively for vesting of stock options and warrants issued to
employees in accordance with APB Opinion No. 25, based on the intrinsic value
between the exercise prices of performance-based and fixed options grants and
the fair value of the Predecessor's common stock at the measurement dates.
Had compensation expense for the Prior Plan been determined based on the fair
value of stock option awards at the grant date, consistent with the methods of
Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation, Predecessor's net income on a pro forma basis for the
period January 26, 1997 through February 26, 1997 and the year ended January 25,
1997, would have been as follows:
<TABLE>
<CAPTION>
January 26 1997
through Year ended
February 26 1997 January 25 1997
-----------------------------------
(In Thousands)
<S> <C> <C>
Net (loss) income before stock options and warrants $ (195) $ 5,589
Recorded APB No. 25 compensation expense (1,054) (1,065)
Pro forma compensation expense from stock options and warrants:
Fiscal year ended January 27, 1996 grant 108 108
Fiscal year ended January 25, 1997 grant - 355
===================================
Pro forma net income $ 751 $ 6,191
===================================
</TABLE>
The fair value of options granted under the Prior Plan were estimated using the
minimum value option-pricing model based on the following assumptions for all
periods presented:
Risk-free interest rate 6.0
Dividend yield 0.0
Expected life 3 years
Volatility Not applicable
-45-
<PAGE>
14. Related Party Transactions
Fenway provides management services to Holdings and the Company pursuant to an
amended and restated management agreement (the "Management Agreement") among
Holdings, the Company and Fenway. Fenway is an affiliate of the Fenway Fund, the
principal stockholder of Holdings. Pursuant to the Management Agreement, Fenway
provides Holdings and the Company with general management, advisory and
consulting services with respect to the Company's business and with respect to
such other matters as the Company may reasonably request from time to time,
including, without limitation, strategic planning, financial planning, business
acquisition and general business development services. Prior to the Fenway
Acquisition, a similar agreement was in effect with Butler Capital Corporation.
The Company paid management fees of $250,000, $250,000, $0, and $132,000, in the
fiscal years ended January 30, 1999, and the periods February 27, 1997 through
January 31, 1998 and January 26, 1997 through February 26, 1997, and the year
ended January 25, 1997, respectively, for management and other advisory
services. In addition, the Company has reimbursed Fenway for certain related
expenses incurred in connection with rendering such services in an amount equal
to $16,000 for the year ended January 30, 1999 and $80,000 for the 11 months
ended January 31, 1998.
In connection with the Fenway Acquisition and the Knapp Acquisition, the Company
paid $2,070,000 and $200,000, respectively, to Fenway for financial advisory
fees.
Holdings, the Fenway Fund, the Outside Investors, Company management and all of
the other stockholders and option holders of Holdings are party to a
stockholders' agreement (the "Stockholders' Agreement") that, among other
things, provides for tag-along rights, take-along, rights, registration rights,
restrictions on the transfer of shares held by parties to the Stockholders'
Agreement, certain rights of first refusal for Holdings and certain preemptive
rights for certain stockholders. The Stockholders' Agreement also provides that
the parties thereto will vote their shares in the same manner as the Fenway Fund
in connection with certain transactions and that the Fenway Fund will be
entitled to fix the number of directors of Holdings. Pursuant to the
Stockholders' Agreement, the Fenway Fund is entitled to designate a sufficient
number of directors to maintain a majority of the board of directors of Holdings
and Donald R. Jensen is entitled to designate one director.
-46-
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
IRON AGE CORPORATION
January 30, 1999
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- --------------------------------- --------------- ----------------------------- --------------------------------------
Additions
-----------------------------
Charged to
Balance at Charged to Other
Beginning of Costs and Accounts- Deductions- Balance at End
Descriptions Period Expenses Describe Describe Of Period
- --------------------------------- --------------- -------------- -------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Year ended January 30, 1999:
Deducted from assets accounts:
Allowance for doubtful
accounts.................... $ 382,000 $ 151,000 - $ 258,000 (1) $ 275,000
Year ended January 31, 1998:
Deducted from assets accounts:
Allowance for doubtful
accounts.................... $ 352,000 $ 40,000 - $ 10,000 (2) $ 382,000
Year ended January 25, 1997:
Deducted from assets accounts:
Allowance for doubtful
accounts..................... $ 307,000 $ 45,000 - - $ 352,000
</TABLE>
(1) Uncollectible accounts written off, net of recoveries and adjustments
related to the Dunham Sale.
(2) Uncollectible accounts written off, net of recoveries.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
-47-
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth certain information regarding the Company's
directors and executive officers, including their respective ages, as of April
26, 1999.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Donald R. Jensen.......... 61 Chairman and Director
William J. Mills.......... 39 Chief Executive Officer, President and Director
Keith A. McDonough........ 40 Executive Vice President and Chief Financial Officer
Theodore C. Johanson...... 61 President and Chief Executive Officer, Falcon Shoe Mfg. Co.
Peter Lamm................ 47 Director
Andrea Geisser............ 56 Director
John B. Ayer.............. 37 Director
Reza R. Satchu 29 Director
</TABLE>
Donald R. Jensen has been Chairman of the Company since 1994 and a director
of the Company since 1990. Mr. Jensen retired as Chief Executive Officer of the
Company on February 1, 1999. He joined the Company as President and Chief
Executive Officer in 1986. Prior to that time, Mr. Jensen worked in the
automotive parts supply business from 1960 to 1970 and held various positions
with Endicott Johnson Corporation from 1970 to 1985, beginning as a territory
salesman. At Endicott Johnson Corporation, he served as Vice President in charge
of the product development, importing, athletic footwear and rubber footwear
divisions and became Executive Vice President in 1985.
William J. Mills became Chief Executive Officer of the Company on February
1, 1999. Immediately prior to this date, Mr. Mills was President and Chief
Operating Officer of the Company. Mr. Mills became a director of the Company in
1995. Mr. Mills joined the Company in 1987 as a District Manager before moving
on to manage all national accounts and assume the position of National Sales
Manager. He was promoted to regional Vice President of Sales in 1991 and to
Executive Vice President in 1994. Prior to 1987, he held various positions at
Endicott Johnson in product development, sales, importing and sales management.
Keith A. McDonough is Executive Vice President and Chief Financial Officer
of the Company. Mr. McDonough joined the Company in 1981. He was appointed to
Executive Vice President of the Company in May 1997 and has been the Company's
Chief Financial Officer since 1990. Mr. McDonough is responsible for all
corporate financial matters, including financial reporting, banking and banking
relationships, subsidiary financial oversight and information technology. Mr.
McDonough also manages acquisition forecast development and financial
accountability implementation.
Theodore C. Johanson joined Iron Age as President and Chief Executive
Officer of Falcon in August 1994 when Falcon was acquired by the Company. Mr.
Johanson, the founder and President of Falcon since 1963, brings management and
manufacturing expertise to the Iron Age Team. He served Eagle Shoe Manufacturing
Co. as a machine operator, Industrial Engineer, Assistant Factory Superintendent
and Salesman from 1954 until founding Falcon. Mr. Johanson currently serves as a
director of KSB Bancorp, Inc.
-48-
<PAGE>
Peter Lamm became a director of the Company in 1997. Mr. Lamm is Chairman and
Chief Executive Officer of Fenway, a New York-based direct investment firm for
institutional investors with a primary objective of acquiring leading
middle-market companies. From February 1982 to April 1994, Mr. Lamm was a member
of Butler Capital Corporation, a private investment firm, most recently as
Senior Direct Investment Officer and Managing Director. Mr. Lamm currently
serves as a director of Aurora Foods, Inc., Simmons Company, Delimex, CT Farm &
Country and Blue Capital.
Andrea Geisser became a director of the Company in 1997. Mr. Geisser has
been a Managing Director of Fenway since its formation in 1994. From February
1989 to June 1994, Mr. Geisser was a Managing Director of Butler Capital
Corporation. From 1986 to 1989, Mr. Geisser served as a Managing Director of
Onex Investment Corporation, the largest Canadian leveraged buyout company. Mr.
Geisser currently serves as a director of Aurora Foods, Inc., Simmons Company,
Decorative Concepts, New Creative Enterprises and Valley Recreation Products.
John B. Ayer became a director of the Company in February 1999. Mr. Ayer
has been a Principal of Fenway since February 1998. Prior to that time, Mr. Ayer
was a partner at the law firm of Ropes & Gray, Boston, Massachusetts from
November 1996 until January 1998, and an associate at that firm from September
1987 until October 1996.
Reza R. Satchu became a director of the Company in April 1999. Mr. Satchu
has been a Vice President of Fenway since December 1997 and was an Associate of
Fenway from May 1996 until November 1997. Prior to that time, Mr. Satchu was a
financial analyst in the high yield finance and restructuring group at Merrill
Lynch & Co.
All directors are elected and serve until a successor is duly elected and
qualified or until the earlier of his death, resignation or removal. There are
no family relationships between any of the directors or executive officers of
Holdings or Iron Age. The executive officers of the Company are elected by and
serve at the discretion of the Board of Directors.
-49-
<PAGE>
Item 11. Executive Compensation.
The following table sets forth information concerning the compensation
earned for the fiscal years ended January 30, 1999 and January 31, 1998 by Mr.
Jensen, the Company's Chairman, and the four other most highly compensated
executive officers of the Company (collectively, the "Named Executive
Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term All Other
Annual Compensation Compensation($) Compensation($)
--------------------------------------------------------------
Number of
Securities
Underlying
Name and Position Year (1) Salary ($) Bonus($) Options(2)
<S> <C> <C> <C> <C> <C>
Donald R. Jensen (3).................... 1998 404,740 554,900(5) 9,351.60 9,956(7)
Chairman 1999 397,961 1,488,774(6) - 23,307(8)
William J. Mills (4).................... 1998 167,857 237,200(9) 3,189.75 9,956(7)
President and Chief Executive Officer 1999 172,780 431,394(10) - 11,085(11)
Keith A. McDonough...................... 1998 118,269 224,760(9) 3,129.75 7,464(13)
Executive Vice President and 1999 122,777 416,495(12) - 10,437(14)
Chief Financial Officer
William J. Taaffe (15).................. 1998 99,176 206,100(9) 1,617.89 6,301(17)
President and Chief Operating Officer of 1999 101,842 160,116(16) - 10,609(18)
Knapp Division
Theodore C. Johanson.................... 1998 193,123 20,000(19) 200.00 5,075(21)
President and Chief Executive Officer, 1999 191,361 39,079(20) - 4,485(22)
Falcon
</TABLE>
(1) 1999: Fiscal year ended January 30, 1999. 1998: Fiscal year ended January
31, 1998.
(2) Options to acquire common stock of Holdings.
(3) In addition to serving as Chairman of the Company, Mr. Jensen also served
as the Company's's Chief Executive Officer until February 1, 1999.
(4) Prior to February 1, 1999, Mr. Mills served as President and Chief
Operating Officer of the Company.
(5) Includes $275,000 bonus paid by Iron Age in connection with the
Fenway Acquisition.
(6) Includes $1,202,966 bonus paid by Iron Age in connection with the April
1998 Transactions.
(7) Includes Iron Age allocations of $9,309 under defined contribution plan for
the plan year ended December 31, 1997 and group term life insurance
premiums of $647 paid by Iron Age during the plan year ended December 31,
1997.
(8) Includes Iron Age allocations of $6,020 under defined contribution plan for
the plan year ended December 31, 1998 and group term life insurance
premiums of $3,510 paid by Iron Age during the plan year ended December 31,
1998.
(9) Includes $175,000 bonus paid by Iron Age in connection with the Fenway
Acquisition.
(10) Includes $367,881 bonus paid by Iron Age in connection with
the April 1998 Transactions.
(11) Includes Iron Age allocations of $6,020 under defined contribution plan for
the plan year ended December 31, 1998 and group term life insurance
premiums of $330 paid by Iron Age during the plan year ended December 31,
1998.
(12) Includes $365,685 bonus paid by Iron Age in connection with the April
1998 Transactions.
(13) Includes Iron Age allocations of $6,948 under defined contribution plan for
the plan year ended December 31, 1997 and group term life insurance
premiums of $516 paid by Iron Age during the plan year ended December 31,
1997.
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<PAGE>
(14) Includes Iron Age allocations of $6,020 under defined contribution plan for
the plan year ended December 31, 1998 and group term life insurance
premiums of $386 paid by Iron Age during the plan year ended December 31,
1998.
(15) Mr. Taaffe resigned effective January 13, 1999.
(16) Includes $128,360 bonus paid by Iron Age in connection with the April 1998
Transactions.
(17) Includes Iron Age allocations of $5,865 under defined contribution plan for
the plan year ended December 31, 1997 and group term life insurance
premiums of $436 paid by Iron Age during the plan year ended December 31,
1997.
(18) Includes Iron Age allocations of $5,632 under defined contribution plan for
the plan year ended December 31, 1998 and group term life insurance
premiums of $310 paid by Iron Age during the plan year ended December 31,
1998.
(19) Includes $20,000 bonus paid by Iron Age in connection with the Fenway
Acquisition.
(20) Includes $7,321 bonus paid by Iron Age in connection with the April 1998
Transactions.
(21) Represents Falcon allocations under defined contribution plan for the plan
year ended December 31, 1997.
(22) Represents Falcon allocations under defined contribution plan for the year
ended December 31, 1998.
Aggregated Fiscal Year-End Option Values
The following table sets forth information concerning the value of
unexercised stock options at the end of fiscal 1999 for the Named Executive
Officers.
Aggregated Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of
Unexercised Unexercised
Options at In-the-Money
Fiscal Year End(#)(1) Options
at Fiscal Year
End($)(2)
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
<S> <C> <C>
Donald R. Jensen
Series A................... 6,404.83/0 1,188,224/0
Series B--Basic B........... 339.60/1,018.40 0/0
Series B--Extra B........... 0/1,248.77 0/0
William J. Mills
Series A................... 1,929.75/0 358,007/0
Series B--Basic B........... 132/396 0/0
Series B--Extra B........... 0/600 0/0
Keith A. McDonough
Series A................... 1,929.75/0 358,007/0
Series B--Basic B........... 120/360 0/0
Series B--Extra B........... 0/600 0/0
William J. Taaffe
Series A................... 617.89/0 114,631/0
Series B--Basic B........... 100/300 0/0
Series B--Extra B........... 0/500 0/0
Theodore C. Johanson
Series B--Basic B........... 40/120 0/0
</TABLE>
(1) Options to acquire common stock of Holdings.
(2) Value based on assumed value at January 30, 1999 of $185.52 per share.
-51-
<PAGE>
Compensation of Directors
The Company pays no compensation to its independent directors and pays no
additional remuneration to its employees or to executives of the Company for
serving as directors.
Employment Agreements
Mr. Jensen is currently employed as Chairman of the Board of Directors
of the Company pursuant to an agreement dated February 26, 1997. Under this
agreement, Mr. Jensen is entitled to receive an annual salary of $250,000. In
addition, Mr. Jensen is eligible for an annual bonus of up to $100,000
determined by the Company's achievement of EBITDA targets. If Mr. Jensen is
terminated other than for cause or resigns voluntarily for good reason, he is
entitled to receive continued salary until December 31, 2001 and continued
coverage under group health plans for himself and his spouse until his 65th
birthday, or until his spouse's 65th birthday if he dies prior to age 65. If Mr.
Jensen's employment is terminated by reason of his death and he is survived by
his spouse, his surviving spouse is entitled to receive a continuation of his
salary until the month of his 62nd birthday and continued coverage under group
health plans until her 65th birthday. If Mr. Jensen's employment is terminated
by reason of his incapacity, Mr. Jensen is entitled to receive continued salary
less amounts received by him under group disability plans and social security
disability benefits until earlier of his death or his 65th birthday and
continued coverage under group health plans for him and his spouse until his
65th birthday if he dies prior to age 65.
Mr. Mills is currently employed by the Company pursuant to an agreement
dated November 20, 1995. Under this agreement, which is extended from year to
year in the absence of a notice of non-renewal given at least 90 days prior to
end of each fiscal year, Mr. Mills receives an annual salary of $210,000,
subject to annual increases, and is eligible for a bonus of not less than
$75,000 based upon the Company's achievement of EBITDA targets. If Mr. Mills is
terminated other than for cause or resigns voluntarily for good reason, he is
entitled to receive continued salary for 18 months and continued coverage under
group health plans for one year following his termination or resignation. If Mr.
Mills' employment is terminated by reason of his death and he is survived by his
spouse, his surviving spouse is entitled to receive continued coverage under
group health plans until the earlier of her 65th birthday or January 31, 2000.
If Mr. Mills' employment is terminated by reason of his incapacity, Mr. Mills is
entitled to receive continued coverage under group health plans until January
31, 2000.
Mr. McDonough is currently employed by the Company pursuant to an
agreement dated November 20, 1995. Under this agreement, which is extended from
year to year in the absence of a notice of non-renewal given at least 90 days
prior to end of each fiscal year, Mr. McDonough receives an annual salary of
$127,500, subject to annual increases, and is eligible for a bonus of not less
than $50,000 based upon the Company's achievement of EBITDA targets. If Mr.
McDonough is terminated other than for cause or resigns voluntarily for good
reason, he is entitled to receive continued salary for 18 months and continued
coverage under group health plans for one year following his termination or
resignation. If Mr. McDonough's employment is terminated by reason of his death
and he is survived by his spouse, his surviving spouse is entitled to receive
continued coverage under group health plans until the earlier of her 65th
birthday or January 31, 2000. If Mr. McDonough's employment is terminated by
reason of his incapacity, Mr. McDonough is entitled to receive continued
coverage under group health plans until January 31, 2000.
Mr. Johanson is currently employed by Falcon pursuant to an agreement
dated August 1, 1994. Under this agreement, Mr. Johanson receives an annual
salary or $190,000 and is eligible for a bonus of 25-35% of base salary
determined by Falcon's achievement of operating income targets. If Mr. Johanson
is terminated other than for cause or resigns voluntarily for good reason, he is
entitled to receive continued salary, reduced by one-half of any compensation
received by Mr. Johanson from other employment, and continued coverage under
group health, disability and life insurance plans, to the extent such benefits
are not provided as a result of other employment, until January 31, 2000. If Mr.
Johanson's employment is terminated by reason of physical or mental disability,
Mr. Johanson is entitled to receive continued coverage under group health and
life insurance plans until January 31, 2000 and payments under Falcon's
disability income plan.
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<PAGE>
Mr. Taaffe resigned from his executive officer position with the Company
effective January 13, 1999 and from his employment with the Company effective
June 30, 1999. Pursuant to a Severance Agreement dated January 13, 1999, Mr.
Taaffe is on a terminal leave of absence until June 30, 1999 during which time
he will continue to receive his current salary, will remain fully covered by the
Company's benefits plans except to the extent he becomes covered by a medical
plan of another employer and will continue to participate in the Company's
profit sharing retirement plan. In addition, Mr. Taaffe has the right to
exercise any of his vested options under the Option Plan until such options
terminate on July 30, 1999. Pursuant to an Agreement and General Release dated
January 13, 1999, and in consideration for the payments and other benefits set
forth in the Severance Agreement, Mr. Taaffe agreed to release all present and
future claims against Iron Age and its affiliates, including past and present
officers, directors and employees of the Company.
Compensation Committee Interlocks and Insider Participation
The Company does not have a compensation committee. Compensation decisions
regarding the Company's executive officers are made by Holdings' Compensation
Committee. Messrs. Lamm, Geisser and Jensen were appointed to Holdings'
Compensation Committee by Holdings' Board of Directors on September 15, 1998.
Mr. Jensen is an executive officer of Holdings and the Company. Mr. Jensen's
compensation for fiscal 1999 was previously established by the terms of his
employment agreement.
-53-
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
All of the Company's issued and outstanding capital stock is owned by
Holdings. As of April 26, 1999, the outstanding capital stock of Holdings
consisted of 99,624.89 shares of common stock, par value $0.01 per share.
The following table sets forth certain information as of April 26, 1999
regarding the beneficial ownership of (i) each class of voting securities of
Holdings by each person known to Holdings to own more than 5% of any class of
outstanding voting securities of Holdings and (ii) the equity securities of
Holdings by each director of the Company, each Named Executive Officer of the
Company, and the directors and executive officers of the Company as a group. To
the knowledge of the Company, each such stockholder has sole voting and
investment power as to the shares owned unless otherwise noted. Beneficial
ownership of the securities listed in the table has been determined in
accordance with the applicable rules and regulations promulgated under the
Securities Exchange Act of 1934, as amended.
<TABLE>
<CAPTION>
Shares Beneficially Owned(1)
Common Stock
------------------------------
Number of Percentage of
Name and Address Shares Class
- ------------------------------------------------------------------------------ ------------ ----------------
<S> <C> <C>
Principal Stockholders:
Fenway Partners Capital Fund, L.P.(2)........................................ 88,431.57 88.76%
152 West 57th Street
New York, New York 10019
New York Life Insurance Company(3)........................................... 11,187.21 10.73
51 Madison Avenue
New York, NY 10010
American Home Assurance Company(4)........................................... 5,593.61 5.49
c/o AIG Global Investment Co.
200 Liberty Street
New York, NY 10281
Directors and Executive Officers:
Donald R. Jensen(5)........................................................... 6,744.43 6.34
William J. Mills(6)........................................................... 2,061.75 2.03
Keith A. McDonough(7)......................................................... 2,049.75 2.02
William J. Taaffe(8).......................................................... 717.89 *
Theodore C. Johanson(9)....................................................... 40.00 *
Peter Lamm(10)................................................................ -- --
Andrea Geisser(10)............................................................ -- --
John B. Ayer(10).............................................................. -- --
Reza R. Satchu(10)............................................................ -- --
All directors and executive officers as a group, including the above named
persons.................................................................... 11,613.82 10.44
</TABLE>
* Less than one percent.
(1) As used in this table, beneficial ownership means the sole or shared power
to vote, or to direct the voting of a security, or the sole shared power to
dispose, or direct the disposition, of a security and includes options and
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<PAGE>
warrants exercisable within 60 days.
(2) Includes shares of common stock held by the Fenway Fund and its affiliated
entities FPIP, LLC and FPIP Trust, LLC .
(3) Includes 4,641.66 shares of common stock subject to acquisition from
Holdings at a purchase price of $185.52 per share pursuant to a warrant
that expires on February 26, 2007.
(4) Includes 2,320.83 shares of common stock subject to acquisition from
Holdings at a purchase price of $185.52 per share pursuant to a warrant
that expires on February 26, 2007.
(5) Includes 6,404.83 shares of common stock that may be acquired upon the
exercise of outstanding Series A Options at an exercise price of $36.36 per
share and 339.60 shares that may be acquired upon the exercise of
outstanding Series B Options at an exercise price of $363.60 per share
pursuant to the Option Plan (as defined) of Holdings. See "Management
Equity Arrangements."
(6) Includes 1,929.75 shares of common stock that may be acquired upon the
exercise of outstanding Series A Options at an exercise price of $36.36 per
share and 132 shares that may be acquired upon the exercise of outstanding
Series B Options at an exercise price of $363.60 per share pursuant to the
Option Plan of Holdings. See "Management Equity Arrangements."
(7) Includes 1,929.75 shares of common stock that may be acquired upon the
exercise of outstanding Series A Options at an exercise price of $36.36 per
share and 120 shares that may be acquired upon the exercise of outstanding
Series B Options at an exercise price of $363.60 per share pursuant to the
Option Plan of Holdings. See "Management Equity Arrangements."
(8) Includes 617.89 shares of common stock that may be acquired upon the
exercise of outstanding Series A Options at an exercise price of $36.36 per
share and 100 shares that may be acquired upon the exercise of outstanding
Series B Options at an exercise price of $363.60 per share pursuant to the
Option Plan of Holdings. See "Management Equity Arrangements."
(9) Represents 40 shares of common stock that may be acquired upon the exercise
of outstanding Series B Options at an exercise price of $363.60 per share
pursuant to the Option Plan of Holdings. See "Management Equity
Arrangements."
(10) Includes shares of common stock owned by the Fenway Fund and its affiliated
entities, FPIP, LLC and FPIP Trust, LLC. Messrs. Lamm, Geisser, Ayer and
Satchu are limited partners of Fenway Partners, L.P., the general partner
of the Fenway Fund. Accordingly, Messrs, Lamm, Geisser, Ayer and Satchu may
be deemed to beneficially own shares owned by the Fenway Fund. Messrs.
Lamm, Geisser, Ayer and Satchu are members of FPIP, LLC and FPIP Trust, LLC
and, accordingly, may be deemed to beneficially own shares owned by such
funds. Messrs. Lamm, Geisser, Ayer and Satchu disclaim beneficial ownership
of any such shares in which they do not have pecuniary interests. The
business address of each of the foregoing is c/o Fenway Partners, Inc., 152
West 57thStreet, New York, New York 10019.
-55-
<PAGE>
Item 13. Certain Relationships and Related Transactions.
Management Equity Arrangements
Holdings adopted a Stock Option Plan (the "Option Plan") for the benefit of
directors, executive officers, other employees, consultants and advisors of
Holdings and its subsidiaries on February 26, 1997. The Plan provides for
issuance of Series A options ("Series A Options") and Series B options ("Series
B Options"). Series B Options are designated as either "Series B-Basic B
Options" or "Series B-Extra B Options." Series A Options vest immediately in
full on the date such options are granted, Series B-Basic B Options are subject
to certain time and performance vesting restrictions and Series B-Extra B
Options vest only in connection with the consummation by the Fenway Fund of a
sale, other than to one of its affiliates, of its entire equity interest in
Holdings and the attainment of certain internal rate of return objectives.
Holdings has reserved 20,244.70 shares of Holdings common stock for issuance
under the Option Plan, 11,527.78 of which shares are reserved for Series A
Options and 8,716.92 of which shares are reserved for Series B Options.
In February 1997, Holdings granted Series A Options to certain management
employees to purchase an aggregate of 11,527.78 shares of common stock at an
exercise price of $36.36 per share. These Series A Options were issued in
exchange for existing options for shares of the parent of the predecessor in
connection with the Fenway Acquisition. The Series A Options granted expire on
February 28, 2007. In August 1997, Holdings granted to certain management
employees Series B-Basic B Options to purchase an aggregate of 5,508 shares of
common stock and Series B-Extra B Options to purchase an aggregate of 3,058.77
shares of common stock. All of the Series B Options granted expire on February
28, 2007. The exercise price of Series B Options granted in August 1997 (i) that
were not vested (as such term is defined in the Option Plan) as of April 24,
1998 is $185.52 per share and (ii) that were vested (as such term is defined in
the Option Plan) as of April 24, 1998 is $363.60 per share. None of the options
granted under the Option Plan has been exercised. See also "Management--Option
Grants."
In connection with the April 1998 Transactions, members of management of
the Company holding vested options received aggregate payments of $2,245,000
which reflects the decrease in the equity value of the Company as a result of
the cash distribution to the stockholders of Holdings in the April 1998
Transactions.
Stockholders Agreement
Holdings, the Fenway Fund and all of the other stockholders and
optionholders of Holdings entered into a stockholders agreement (the
"Stockholders Agreement") that, among other things, provides for tag-along
rights, take-along rights, registration rights, restrictions on the transfer of
shares held by parties to the Stockholders Agreement, certain rights of first
refusal for Holdings and certain preemptive rights for certain stockholders. The
Stockholders Agreement also provides that the parties thereto will vote their
shares in the same manner as the Fenway Fund in connection with certain
transactions and that the Fenway Fund will be entitled to fix the number of
directors of Holdings. Pursuant to the Stockholders Agreement, the Fenway Fund
is entitled to designate a sufficient number of directors to maintain a majority
of the board of directors of Holdings and Donald R. Jensen is entitled to
designate one director.
Management Agreement
Holdings and the Company are party to the amended and restated management
agreement (the "Management Agreement") with Fenway pursuant to which Fenway
agreed to provide management and advisory services to Holdings and the Company.
In exchange for such services, Holdings and the Company agreed to pay Fenway (i)
annual management fees equal to $250,000 for fiscal 1999 and fiscal 1998,
$275,000 for fiscal 2000, $300,000 for fiscal 2001 and, for each subsequent
fiscal year, 0.25% of the net sales for the immediately preceding fiscal year
which annual management fees shall be increased by an amount to be negotiated in
good faith in the event of an acquisition of a business with an enterprise value
in excess of $50 million, (ii) fees in connection with the negotiation and
consummation by Fenway of senior financing for any acquisition transactions,
which fees shall not
-56-
<PAGE>
exceed the greater of $1 million or 1.5% of the aggregate transaction value and
(iii) certain fees and expenses, including legal and accounting fees and any
out-of-pocket expenses incurred by Fenway in connection with providing services
to Holdings and the Company. Holdings and the Company also agreed to indemnify
Fenway under certain circumstances. In addition, pursuant to the Management
Agreement, Fenway received $2,070,000 in connection with the structuring of the
Fenway Acquisition and the related senior secured financing. The Company
believes that the fees payable pursuant to the Management Agreement are
comparable to fees payable to unaffiliated third parties for similar services.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) Financial Statements
See Index to Financial Statements appearing at page 17.
(a)(2) Financial Statement Schedules
The following Financial Statement Schedule is included at page 47:
Schedule II - Valuation and Qualifying Accounts.
Information required by other schedules called for under Regulation S-X
is either not applicable or is included in the consolidated financial
statements or notes thereto.
(a)(3) Exhibit Index
3.1* Iron Age Certificate of Incorporation, as amended.
3.2* Iron Age By-laws.
4.1* Indenture dated as of April 24, 1998.
10.1* Credit Agreement dated as of April 24, 1998.
10.2* Security Agreement dated April 24, 1998.
10.3* Intellectual Property Security Agreement dated April 24, 1998.
10.4* Canadian Security Agreement dated April 24, 1998.
10.5* Mortgage, Assignment of Leases and Rents, Fixture Filing, Security
Agreement and Financing Statement dated February 26, 1997, as
amended April 24, 1998.
10.6* Intercompany Subordination agreement dated April 24, 1998.
10.7* Subsidiary Guaranty dated April 24, 1998.
10.8* Iron Age Trademark License Agreement with W.L Gore & Associates, Inc.
dated August 15, 1994.
10.9* Falcon Trademark License Agreement with W.L. Gore & Associates, Inc.
dated July 25, 1994.
10.10* Falcon Manufacturing Certification Agreement with W.L Gore &
Associates, Inc. dated July 25, 1994.
10.11* General Services Administration Contract effective July 26, 1994,
as modified May 24, 1995.
10.12* Amended and Restated Management Agreement dated as of
February 26, 1997.
10.13* Stockholders Agreement dated as of February 26, 1997.
10.14* Amendment No. 1 to Stockholders Agreement dated as of March 25, 1997.
10.15* American Home Assurance Company Joinder to the Stockholders Agreement
dated as of March 25, 1997. 10.16* Banque Nationale de Paris Joinder to
the Stockholders Agreement dated as of March 25, 1997.
10.17* Stock Option Plan dated February 26, 1997.
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<PAGE>
10.18* Securities Purchase Agreement dated February 26, 1997.
10.19* Stock Purchase Agreement dated as of December 26, 1996.
10.20* Amendment No. 1 to the Stock Purchase Agreement dated as of
February 26, 1997.
10.21* Pittsburgh, Pennsylvania Lease Agreement dated March 1, 1993, as
amended June 2, 1994, as amended June 12, 1996, as amended
December 10, 1997.
10.22* Jerusalem, New York Lease Agreement dated December 9, 1992, as amended
January 1, 1994, as amended April 1997.
10.23* Jerusalem, New York Lease Agreement dated June 20, 1997, as amended
January 9. 1998.
10.24* Lewiston, Maine Lease Agreement dated January 14, 1994.
10.25* Lewiston, Maine Lease Agreement dated November 30, 1990,
as amended June 8,1994.
10.26* Ontario, Canada Lease Agreement dated June 11, 1991, as amended
November 23, 1995.
10.27* Jensen Employment Agreement dated February 26, 1997.
10.28* Mills Employment Agreement dated November 20, 1995.
10.29* McDonough Employment Agreement dated November 20, 1995.
10.30* Johanson Employment Agreement date August 1, 1994.
10.31* Johanson Non-Competition Agreement dated August 1, 1994.
10.32 Taaffe Severance Agreement dated January 13, 1999.
10.33 Taaffe Agreement and General Release dated January 13, 1999.
10.34 Letter Waiver to Banque Nationale de Paris Credit
Agreement dated August 28, 1998.
10.35 Amendment No. 2 and Waiver to Banque Nationale de Paris Credit
Agreement dated February 26, 1999.
10.36 Election to reduce Acquisition Commitment to Banque National de
Paris Credit Agreement dated March 5, 1999.
21.1* Subsidiaries of Iron Age.
27.1 Financial Data Schedules.
- --------------
* Incorporated by reference to the similarly numbered exhibit in the Company's
Registration Statement on Form S-4, No. 333-57011, filed June 17, 1998.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of the
fiscal year ended January 30, 1999.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Iron Age Corporation
Dated: April 26, 1999 By:/S/KEITH A. MCDONOUGH
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/S/DONALD R. JENSEN Chairman and Director April 26, 1999
Donald R. Jensen
/S/WILLIAM J. MILLS Chief Executive Officer, President April 26, 1999
William J. Mills and Director (principal executive officer)
/S/KEITH A. MCDONOUGH Executive Vice President, Chief April 26, 1999
Keith A. McDonough Financial Officer (principal
financial and accounting officer)
/S/PETER LAMM Director April 26, 1999
Peter Lamm
/S/ANDREA GEISSER Director April 26, 1999
Andrea Geisser
/S/JOHN B. AYER Director April 26, 1999
John B. Ayer
/S/REZA R. SATCHU Director April 26, 1999
Reza R. Satchu
</TABLE>
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<PAGE>
EXHIBIT A TO AGREEMENT AND GENERAL RELEASE
Exhibit 10.32
SEVERANCE AGREEMENT
-------------------
By and between WILLIAM J. TAAFFE ("Mr. Taaffe"), a resident of New York and
IRON AGE CORPORATION, a Delaware corporation ("Iron Age")
WITNESSETH:
-----------
1. Mr. Taaffe hereby resigns as President and Chief Operating Officer of
Knapp Consumer Brands Division of Iron Age Corporation as of the date hereof.
2. Mr. Taaffe shall begin a terminal leave of absence effective as of the
date hereof, subject to the following terms and conditions:
(i) Mr. Taaffe shall continue to receive his current gross salary of
$4,038.46 payable bi-weekly through July 1, 1999.
(ii) Mr. Taaffe shall be released of all further duties and shall not
report to work on and after the date hereof.
(iii) Mr. Taaffe shall remain fully covered by all Company benefits plans
as in effect from time to time from the date hereof through July 1, 1999;
provided, however, that if Mr. Taaffe becomes covered by a medical plan of
another employer his medical coverage with Iron Age shall cease as of such date.
(iv) Mr. Taaffe shall continue to participate in the Iron Age Corporation
Profit Sharing Retirement Plan through July 1, 1999 and on such date shall be
deemed to have completed 1,000 Hours of Service during the Plan Year ended
December 31, 1999. It is the
<PAGE>
intent of this paragraph that Mr. Taaffe shall be fully vested in his entire
account in the Profit Sharing Retirement Plan on July 1, 1999.
(v) Mr. Taaffe shall have the right to exercise any or all of his vested
options under the Iron Age Holdings Corporation 1997 Stock Option Plan through
and until July 30, 1999 at which time all his nonexercised options shall be
deemed terminated and canceled.
3. Mr. Taaffe shall return to the Company all proprietary information,
including trade secrets, relating to the Company or any of its affiliated
companies currently in his possession, including original agreements and any
copies thereof.
4. Mr. Taaffe shall keep confidential and shall not disclose to any third
party other than his attorneys or other personal advisors any proprietary
information, including trade secrets, relating to the Company or any of its
affiliated companies which he obtained during his employment with the Company.
5. It is understood and agreed that any violation by Mr. Taaffe of this
Severance Agreement shall entitle the Company to terminate and cancel this
Severance Agreement without any further liability to Mr. Taaffe.
IN WITNESS WHEREOF, and intending to be legally bound hereby, each of the
parties hereto has caused this Severance Agreement to be executed as of the
dates indicated.
IRON AGE CORPORATION
Date: _____________________ By:_______________________
Chairman and CEO
/s/
Date: _____________________ __________________________
WILLIAM J. TAAFFE
-2-
<PAGE>
Exhibit 10.33
AGREEMENT and GENERAL RELEASE
-----------------------------
This AGREEMENT and GENERAL RELEASE ("Agreement") is entered into by and
between
Iron Age Corporation and its subsidiaries and affiliates ("Iron Age")
and
William J. Taaffe ("Mr. Taaffe")
WHEREAS, Mr. Taaffe is employed as President and Chief Operating Officer of
Knapp Consumer Brands Division; and
WHEREAS, the parties have agreed that it is in their mutual best interest
that Mr. Taaffe resign his employment; and
WHEREAS, Mr. Taaffe and Iron Age wish to resolve all issues arising from
Mr. Taaffe's employment and termination of employment.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and intending to be legally bound thereby, the parties agree as follows:
1. This Agreement shall constitute Mr. Taaffe's letter of resignation as
President and Chief Operating Officer effective immediately and from his
employment effective June 30, 1999.
2. Until June 30, 1999, Mr. Taaffe will be on paid terminal leave of
absence in accordance with the provisions of Exhibit A to this Agreement.
<PAGE>
3. Mr. Taaffe acknowledges that by signing this Agreement and accepting the
benefits of it, that he is giving up forever the right to seek any relief from
Iron Age or any person associated with Iron Age for any event occurring prior to
the execution of this Agreement by all parties. Pursuant to that understanding
and as consideration for the payments set forth in Paragraph 2, Mr. Taaffe
irrevocably and unconditionally releases, remits, acquits, and discharges Iron
Age, its corporate affiliates, its present and former officers, directors,
agents, employees, contractors, successors and assigns (separately and
collectively "Releasees"), jointly and individually, from any and all claims,
known or unknown, which Mr. Taaffe, his heirs or assigns have or may have
against Releasees, and any and all liability which the Releasees may have to
him, whether called claims, demands, causes of action, obligations, damages or
liabilities arising from any and all basis, however called, including but not
limited to claims of breach of contract or discrimination under any federal,
state or local law, rule, or regulation. This Release relates to claims arising
prior to and during Mr. Taaffe's employment by Iron Age, whether those claims
are past or present, whether they arise from common law, contract or statute,
whether they arise from labor laws, discrimination laws, or any other law, rule
or regulation, provided, however, that this Release does not apply to any
employment rights or claims that may arise after this Agreement is executed by
all of the parties. Mr. Taaffe specifically acknowledges that this Release is
applicable to any claim under the Age Discrimination in Employment Act, the
Civil Rights Act of 1964 and the Americans With Disabilities Act. This Release
is for any relief, no matter how called, including but not limited to
reinstatement, wages, back pay, front pay, severance pay, compensatory damages,
punitive damages, damages for pain and suffering, or attorneys' fees. Mr. Taaffe
agrees he will not be entitled to any benefit from any claim or proceeding filed
by him or on his behalf with any agency or court. Mr. Taaffe further agrees that
-2-
<PAGE>
he is waiving any right to seek future employment with Iron Age, and if he
should do so, Iron Age will deny employment and such denial shall not be the
basis of any claim whatsoever.
Mr. Taaffe further agrees that if he should initiate any court action
against Iron Age which is successfully defended by Iron Age, Mr. Taaffe shall
reimburse Iron Age for all costs and attorney fees incurred in defending such
action.
4. Mr. Taaffe further agrees that he will not seek unemployment
compensation based upon his resignation, and agrees that if Iron Age is required
to submit a separation report, Mr. Taaffe will not contest that his resignation
was without good cause.
5. Mr. Taaffe agrees that he will not divulge to anyone any information
regarding Iron Age's records, ideas, plans or any other aspect of Iron Age's
operations and any information obtained by Mr. Taaffe during his employment
shall be deemed confidential. This obligation of confidentiality shall not
apply to information which prior to any disclosure by Mr. Taaffe has become
publicly available information.
6. The parties agree that the execution of this Agreement is in compromise
and final settlement between the parties of all disputed matters, whether
asserted or not, constitutes full satisfaction of all claims made or which could
be made, and does not in any way admit liability or wrongdoing by any entity or
individual.
7. The parties intend this Agreement to be legally binding upon and inure
to the benefit of each of them and their respective heirs, successors and
assigns.
8. The Parties agree that the terms of this Agreement shall be kept
confidential, except as necessary for the administration or enforcement of this
Agreement.
-3-
<PAGE>
9. This Agreement is the complete agreement between the parties, and there
are no written or oral understandings, promises or agreements directly or
indirectly related to this Agreement that are not incorporated herein in full.
10. Mr. Taaffe states that he has carefully read the within and foregoing
Agreement, that he has been advised prior to execution of this Agreement to seek
the advice of an attorney, that he knows and understands the contents of this
Agreement, that he has been given adequate time to consider whether to execute
the Agreement, that he executes this Agreement knowingly and voluntarily as his
own free act and deed, and that this Agreement was freely entered into without
fraud, duress or coercion.
11. Mr. Taaffe acknowledges that he was given at least twenty-one (21) days
in which to consider whether to execute this Agreement before being required to
make a decision. Mr. Taaffe further acknowledges that he may revoke the
Agreement for a period of seven (7) days from the date that he executed the
Agreement.
12. This Agreement shall be and remain in effect despite any alleged breach
of this Agreement or the discovery or existence of any new or additional fact,
or any fact different from that which Iron Age or Mr. Taaffe now know or believe
to be true. Notwithstanding the foregoing, nothing in this Agreement shall be
construed as or constitute a release of any party's rights to enforce the terms
of this Agreement.
IN WITNESS WHEREOF, and intending to be legally bound, each of the parties
hereto has caused this Agreement to be executed as of the dates indicated.
-4-
<PAGE>
IRON AGE CORPORATION
Date: By:
-------------------- ----------------------------------
Chairman and CEO
/s/ William J. Taaffe
Date: -------------------------------------
-------------------- WILLIAM J. TAAFFE
-5-
<PAGE>
Exhibit 10.34
EXECUTION COPY
LETTER WAIVER
Dated as of August 28, 1998
To the banks, financial institutions
and other institutional lenders
(collectively, the "Lenders")
-------
parties to the Credit Agreement
referred to below and to Banque Nationale
de Paris, as agent (the "Agent") for the Lenders
-----
Ladies and Gentlemen:
We refer to the Credit Agreement dated as of April 24, 1998, (as
amended, supplemented or otherwise modified through the date hereof, the "Credit
------
Agreement") among the undersigned and you. Capitalized terms not otherwise
- ---------
defined in this Letter Waiver have the same meanings as specified in the Credit
Agreement.
Pursuant to an Asset Purchase Agreement dated as of August 31, 1998
(the "Asset Purchase Agreement") among the Borrower and its subsidiary, Falcon
------------------------
Shoe Mfg. Co. ("Falcon"), as sellers (the "Sellers"), and New Balance Athletic
------ -------
Shoe, Inc. ("NBAS") and New Balance Trading Company, Ltd., as buyers (the
----
"Buyers"), the Sellers intend to sell certain of their assets (which assets are
- -------
associated with the Sellers' "Dunham" trademark; the "Dunham Property"),
---------------
including inventory and intellectual property, to the Buyers (the "Dunham
------
Sale"). The Sellers will receive a total consideration of no greater than
$2,800,000 to be comprised of (i) a $1,600,000 cash payment (for the Dunham
trademark) to be paid at the closing of the Asset Purchase Agreement, (ii) a
$400,000 Promissory Note (the "Buyers' Note") from NBAS payable to the order of
------------
Falcon (also for the Dunham trademark) payable August 31, 1999 and (iii) a cash
payment expected to be approximately $700,000, but in any event no greater than
$800,000 (for an initial on-hand bulk Dunham inventory sale) to be paid within
10 days after the closing of the Asset Purchase Agreement (each, individually, a
"Payment" and collectively, the "Payments").
------- --------
We have reviewed the Credit Agreement and note that the following
provisions will restrict our ability to consummate the Dunham Sale:
1. Section 2.06(b)(ii) requires mandatory prepayment of the
Acquisition Facility upon receipt of the Net Cash Proceeds from
each Payment;
<PAGE>
2. Section 2.01(d) provides that amounts prepaid under Section 2.06
may not be reborrowed;
3. Section 2.05(b)(iv) will require automatic and permanent
reduction of the Acquisition Facility on the date of the
mandatory prepayment required by Section 2.06(b)(ii);
4. Section 5.02(e)(iv) permits a sale of assets for less than
$3,000,000 only if such sale is not "a bulk sale of Inventory and
a sale of Receivables other than delinquent accounts for
collection purposes only"; and
5. Section 5.02(f) does not permit the Sellers to invest in the
Buyers' Note as a Payment.
Accordingly, we hereby request that you waive, solely with respect to
the Payments and solely to the extent necessary to consummate the Dunham Sale,
the following provisions of the Credit Agreement:
1. Section 2.01(d), which prevents reborrowing of prepaid
Acquisition Advances;
2. Section 2.05(b)(iv), which automatically and permanently reduces
the amount of the Acquisition Facility;
3. Section 5.02(e)(iv), which does not permit bulk sales of
inventory; and
4. Section 5.02(f), which does not permit investment in the Buyers'
Note.
This Letter Waiver shall become effective as of the date first above
written when, and only when, the Agent shall have received counterparts of this
Letter Waiver executed by us and the Required Lenders or, as to any of the
Lenders, advice satisfactory to the Agent that such Lender has executed this
Letter Waiver, and the consent attached hereto executed by each Guarantor and
each Grantor. The effectiveness of this Letter Waiver is conditioned upon the
accuracy of the factual matters described herein. This Letter Waiver is subject
to the provisions of Section 9.01 of the Credit Agreement.
The Credit Agreement, the Notes and each of the other Loan Documents,
except to the extent of the waiver specifically provided above, are and shall
continue to be in full force and effect and are hereby in all respects ratified
and confirmed. Without limiting the generality of the foregoing, the Collateral
Documents and all of the Collateral described therein do and shall continue to
secure the payment of all Obligations of the Loan Parties under the Loan
Documents. The execution, delivery and effectiveness of this Letter Waiver
shall not, except as expressly provided herein, operate as a waiver of any
right, power or remedy of any Lender or the Agent under any of the Loan
Documents, nor constitute a waiver of any provision of any of the Loan
Documents.
<PAGE>
If you agree to the terms and provisions of this Letter Waiver, please
evidence such agreement by executing and returning a counterpart of this Letter
Waiver to Philip R. Strauss at telecopier number (212) 848-7179 and at least
four executed originals to Philip R. Strauss at Shearman & Sterling, 599
Lexington Avenue, New York, NY 10022.
[The remainder of this page left intentionally blank.]
<PAGE>
This Letter Waiver may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement. Delivery of an executed counterpart of a
signature page to this Letter Waiver by telecopier shall be effective as
delivery of a manually executed counterpart of this Letter Waiver.
This Letter Waiver shall be governed by, and construed in accordance
with, the laws of the State of New York.
Very truly yours,
IRON AGE CORPORATION
By
--------------------------------
Title:
IRON AGE HOLDINGS CORPORATION
By
--------------------------------
Title:
Agreed as of the date first above written:
BANQUE NATIONALE DE PARIS,
as Agent, Swing Line Bank,
Issuing Bank and as Lender
By
---------------------------------
Title:
By
---------------------------------
Title:
<PAGE>
KEYBANK NATIONAL ASSOCIATION
By
---------------------------------
Title:
PNC BANK, NATIONAL ASSOCIATION
By
---------------------------------
Title:
FIRST BANK NATIONAL ASSOCIATION
By
---------------------------------
Title:
SWISS BANK CORPORATION,
NEW YORK BRANCH
By
---------------------------------
Title:
By
---------------------------------
Title:
<PAGE>
CONSENT
Dated as of August 28, 1998
Each of the undersigned, as a Loan Party party to certain of the Loan
Documents (as defined in the Credit Agreement referred to in the foregoing
Letter Waiver), hereby consents to such Letter Waiver and hereby confirms and
agrees that (a) notwithstanding the effectiveness of such Letter Waiver, each
Loan Document to which it is a party is, and shall continue to be, in full force
and effect and is hereby ratified and confirmed in all respects, except that, on
and after the effectiveness of such Letter Waiver, each reference in such Loan
Document to the "Credit Agreement", "thereunder", "thereof" or words of like
import shall mean and be a reference to the Credit Agreement, as amended by such
Letter Waiver, and (b) the Collateral Documents to which such Loan Party is a
party and all of the Collateral described therein do, and shall continue to,
secure the payment of all of the Secured Obligations (in each case, as defined
therein).
IRON AGE HOLDINGS CORPORATION
By
---------------------------------
Title:
IRON AGE INVESTMENT COMPANY
By
---------------------------------
Title:
FALCON SHOE MFG. CO.
By
---------------------------------
Title:
<PAGE>
Exhibit 10.35
AMENDMENT NO. 2 AND WAIVER
TO THE CREDIT AGREEMENT
Dated as of February 26, 1999
AMENDMENT NO. 2 AND WAIVER TO THE CREDIT AGREEMENT among Iron Age
Corporation, a Delaware corporation (the "Borrower"), Iron Age Holdings
--------
Corporation, a Delaware corporation (the "Parent Guarantor"), the banks,
----------------
financial institutions and other institutional lenders parties to the Credit
Agreement referred to below (collectively, the "Lenders") and Banque Nationale
-------
de Paris, as agent (the "Agent") for the Lenders, initial issuing bank and swing
-----
line bank.
PRELIMINARY STATEMENTS:
(1) The Borrower, the Lenders and the Agent have entered into a Credit
Agreement dated as of April 24, 1998, and a Letter Waiver thereto dated as of
August 28, 1998 (such Credit Agreement, as so amended, the "Credit Agreement").
----------------
Capitalized terms not otherwise defined in this Amendment No. 2 and Waiver have
the same meanings as specified in the Credit Agreement.
(2) The Borrower and the Required Lenders have agreed to amend the
Credit Agreement as hereinafter set forth.
SECTION 1. Amendments to Credit Agreement. The Credit Agreement is,
------------------------------
effective as of the date hereof and subject to the satisfaction of the
conditions precedent set forth in Section 3 hereof, hereby amended as follows:
(a) The definition of "EBITDA" in Section 1.01 is amended by deleting
the proviso and substituting therefor the following:
"; provided that, for purposes of Section 5.04 and Schedule IV for
--------
each month ending during Fiscal Year 2000 included in any Rolling
Period, EBITDA shall be the amount for such month as set forth on
Schedule V hereto".
(b) Section 3.02(iii) is amended in its entirety to substitute
therefor the following:
"(iii) for each Acquisition Borrowing, (a) such Borrowing shall
be in compliance with the terms set forth in Section 5.02(f)(xi),
5.02(f)(xvi) or 5.02(f)(xvii), as applicable, and, if requested by the
Agent or the Required Lenders, the Borrower will provide the Lender
Parties
<PAGE>
with certificates and letters of the type referred to in Section
3.01(k)(xv) after giving effect to the application of proceeds from
such Borrowing and (b) with respect to each Acquisition Borrowing
occurring prior to April 30, 2000, the Parent Guarantor shall also be
in compliance, before and after giving effect to the Investment
related to such Acquisition Borrowing, with the financial covenants
set forth in Schedule IV hereto; and"
(e) Section 5.01(d) is amended in its entirety as follows:
"(d) Maintenance of Insurance. Maintain, and cause each of
------------------------
their Subsidiaries to maintain, insurance with responsible and
reputable insurance companies or associations in such amounts and
covering such risks as is customarily carried by companies engaged in
similar businesses as the Borrower and owning similar properties in
the same general areas in which the Borrower, the Parent Guarantor or
such Subsidiary operates; and, prior to April 30, 1999, obtain and
thereafter maintain, key man life insurance on William J. Mills in an
amount not less than $6,000,000 (which amount may be reduced by
$2,000,000 on April 27, 2000 and on each anniversary thereafter), for
the period from the date such insurance was obtained until the earlier
of (i) the Termination Date or (ii) the date that William J. Mills
ceases to be an employee of the Borrower of the Parent Guarantor, with
an insurance carrier and pursuant to an insurance policy reasonably
satisfactory to the Agent, which policy shall at all times be subject
to an Assignment of Life Insurance Policy to the Agent for the benefit
of the Secured Parties."
(d) Section 5.04(c) is amended by deleting the amounts set opposite
the following dates and substituting therefor the amount set forth below
opposite each such date:
<TABLE>
<CAPTION>
Rolling Period Ending Closest To Ratio
---------------------------------- -----------
<S> <C>
January 31, 1999 1.50 : 1.00
April 30, 1999 1.40 : 1.00
July 31, 1999 1.40 : 1.00
October 31, 1999 1.40 : 1.00
January 31, 2000 1.50 : 1.00
</TABLE>
(e) Section 5.04 is amended by adding at the end thereof a new Section
5.04(e), to read as follows:
(e) Senior Leverage Ratio. Maintain a Senior Leverage Ratio for
---------------------
each Rolling Period set forth below of not more than the amount set
forth below for such Rolling Period:
<PAGE>
<TABLE>
<CAPTION>
Rolling Period Ending Closest To Ratio
- ---------------------------------- -----------
<S> <C>
January 31, 1999 1.30 : 1.00
April 30, 1999 1.25 : 1.00
July 31, 1999 1.25 : 1.00
October 31, 1999 1.20 : 1.00
January 31, 2000 1.10 : 1.00
</TABLE>
(f) A new Schedule IV to the Credit Agreement is added to the Credit
Agreement in the form attached hereto as Annex A.
SECTION 2. Waiver. The Required Lenders hereby waive, subject to the
------
satisfaction of the conditions precedent set forth in Section 3 hereof, the
requirements of Section 5.04(a) solely with respect to the Rolling Periods
ending closest to January 31, 1999, April 30, 1999, July 31, 1999, October 31,
1999 and January 31, 2000.
SECTION 3. Conditions of Effectiveness. This Amendment No. 2 and
---------------------------
Waiver shall become effective as of the date first above written when, and only
when, the Agent shall have received counterparts of this Amendment No. 2 and
Waiver executed by the Borrower and the Required Lenders or, as to any of the
Lenders, advice satisfactory to the Agent that such Lender has executed this
Amendment No. 2 and Waiver and the consent attached hereto executed by the
Parent Guarantor and the Subsidiary Guarantors. The effectiveness of this
Amendment No. 2 and Waiver is conditioned upon the accuracy of the factual
matters described herein. This Amendment No. 2 and Waiver is subject to the
provisions of Section 9.01 of the Credit Agreement.
SECTION 4. Representations and Warranties of the Borrower. The
----------------------------------------------
Borrower represents and warrants as follows:
(a) Each Loan Party is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction indicated in the
recital of parties to this Amendment No. 2 and Waiver.
(b) The execution, delivery and performance by the Borrower of this
Amendment No. 2 and Waiver and the Loan Documents, as amended hereby, to
which it is or is to be a party, are within the Borrower's corporate
powers, have been duly authorized by all necessary corporate action and do
not (i) contravene the Borrower's charter or by-laws, (ii) violate any law
(including, without limitation, the Securities Exchange Act of 1934, as
amended, and the Racketeer Influenced and Corrupt Organizations Chapter of
the Organized Crime Control Act of 1970), rule or regulation (including,
without limitation, Regulation X of the Board of Governors of the Federal
Reserve System), or any order, writ, judgment, injunction, decree,
determination or award, binding on or affecting the Borrower or any of its
Subsidiaries or any of their properties, (iii) conflict with or result in
the breach of, or constitute a default under, any contract, loan agreement,
indenture, mortgage, deed of trust, lease or other instrument binding on or
affecting the Borrower, any of its Subsidiaries or any of their properties
or (iv) except for the Liens created under the Collateral Documents, result
in or require the
<PAGE>
creation or imposition of any Lien upon or with respect to any of the
properties of the Borrower or any of its Subsidiaries.
(c) No authorization or approval or other action by, and no notice to
or filing with, any governmental authority or regulatory body or any other
third party is required for the due execution, delivery or performance by
the Borrower of this Amendment No. 2 and Waiver or any of the Loan
Documents, as amended hereby, to which it is or is to be a party.
(d) This Amendment No. 2 and Waiver has been duly executed and
delivered by the Borrower. This Amendment No. 2 and Waiver and each of the
other Loan Documents, as amended hereby, to which the Borrower is a party
is the legal, valid and binding obligation of the Borrower, enforceable
against the Borrower in accordance with its terms.
(e) There is no action, suit, investigation, litigation or proceeding
affecting the Borrower or any of its Subsidiaries (including, without
limitation, any Environmental Action) pending or threatened before any
court, governmental agency or arbitrator that (i) could be reasonably
likely to have a Material Adverse Effect or (ii) purports to affect the
legality, validity or enforceability of this Amendment No. 2 and Waiver or
any of the other Loan Documents, as amended hereby.
SECTION 5. Reference to and Effect on the Credit Agreement and the
-------------------------------------------------------
Loan Documents. (a) On and after the effectiveness of this Amendment No. 2 and
- --------------
Waiver, each reference in the Credit Agreement to "this Agreement", "hereunder",
"hereof" or words of like import referring to the Credit Agreement, and each
reference in each of the other Loan Documents to "the Credit Agreement",
"thereunder", "thereof" or words of like import referring to the Credit
Agreement, shall mean and be a reference to the Credit Agreement, as amended by
this Amendment No. 2 and Waiver.
<PAGE>
(b) The Credit Agreement and each of the other Loan Documents, as
specifically amended by this Amendment No. 2 and Waiver, are and shall continue
to be in full force and effect and are hereby in all respects ratified and
confirmed.
(c) The execution, delivery and effectiveness of this Amendment No. 2
and Waiver shall not, except as expressly provided herein, operate as a waiver
of any right, power or remedy of any Lender or the Agent under any of the Loan
Documents, nor constitute a waiver of any provision of any of the Loan
Documents.
SECTION 6. Costs and Expenses. The Borrower agrees to pay on demand
------------------
all costs and expenses of the Agent in connection with the preparation,
execution, delivery and administration, modification and amendment of this
Amendment No. 2 and Waiver and the other instruments and documents to be
delivered hereunder (including, without limitation, the reasonable fees and
expenses of counsel for the Agent) in accordance with the terms of Section 9.04
of the Credit Agreement.
SECTION 8. Execution in Counterparts. This Amendment No. 2 and
-------------------------
Waiver may be executed in any number of counterparts and by different parties
hereto in separate counterparts, each of which when so executed shall be deemed
to be an original and all of which taken together shall constitute but one and
the same agreement. Delivery of an executed counterpart of a signature page to
this Amendment No. 2 and Waiver by telecopier shall be effective as delivery of
a manually executed counterpart of this Amendment No. 2 and Waiver.
SECTION 9. Governing Law. This Amendment No. 2 and Waiver shall be
-------------
governed by, and construed in accordance with, the laws of the State of New
York.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No.
2 and Waiver to be executed by their respective officers thereunto duly
authorized, as of the date first above written.
By
-----------------------------------
Title:
BANQUE NATIONALE DE PARIS,
as Agent, Swing Line Bank,
Issuing Bank and as Lender
By
-----------------------------------
Title:
By
-----------------------------------
<PAGE>
Title:
KEYBANK NATIONAL ASSOCIATION
By
-----------------------------------
Title:
PNC BANK, NATIONAL ASSOCIATION
By
-----------------------------------
Title:
FIRST BANK NATIONAL ASSOCIATION
By
-----------------------------------
Title:
UBS AG, STAMFORD BRANCH
By
-----------------------------------
Title:
By
-----------------------------------
Title:
<PAGE>
CONSENT
Dated as of February __, 1999
Each of the undersigned, as a Loan Party party to certain of the Loan
Documents (as defined in the Credit Agreement referred to in the foregoing
Amendment No. 2 and Waiver), hereby consents to such Amendment No. 2 and Waiver
and hereby confirms and agrees that (a) notwithstanding the effectiveness of
such Amendment No. 2 and Waiver, each Loan Document to which it is a party is,
and shall continue to be, in full force and effect and is hereby ratified and
confirmed in all respects, except that, on and after the effectiveness of such
Amendment No. 2 and Waiver, each reference in such Loan Document to the "Credit
Agreement", "thereunder", "thereof" or words of like import shall mean and be a
reference to the Credit Agreement, as amended by such Amendment No. 2 and
Waiver, and (b) the Collateral Documents to which such Loan Party is a party and
all of the Collateral described therein do, and shall continue to, secure the
payment of all of the Secured Obligations (in each case, as defined therein).
IRON AGE HOLDINGS CORPORATION
By
-----------------------------------
Title:
IRON AGE INVESTMENT COMPANY
By
-----------------------------------
Title:
FALCON SHOE MFG. CO.
By
-----------------------------------
Title:
<PAGE>
Annex A
SCHEDULE IV
A. The Parent Guarantor shall maintain an Interest Coverage Ratio for
each Rolling Period set forth below of not less than the amount set forth below
for such Rolling Period:
<TABLE>
<CAPTION>
Rolling Period Ending Closest To Ratio
-------------------------------- -----
<S> <C>
January 31, 1999 1.60 : 1.00
April 30, 1999 1.60 : 1.00
July 31, 1999 1.75 : 1.00
October 31, 1999 1.75 : 1.00
January 31, 2000 1.75 : 1.00
</TABLE>
B. The Parent Guarantor shall maintain a Leverage Ratio for each Rolling
Period set forth below of not less than the amount set forth below for such
Rolling Period:
<TABLE>
<CAPTION>
Rolling Period Ending Closest To Ratio
-------------------------------- -----
<S> <C>
January 31, 1999 6.25 : 1.00
April 30, 1999 6.25 : 1.00
July 31, 1999 6.25 : 1.00
October 31, 1999 6.25 : 1.00
January 31, 2000 6.00 : 1.00
</TABLE>
<PAGE>
Annex B
SCHEDULE V
EBITDA Schedule - To be supplied by the Company
<PAGE>
Exhibit 10.36
March 5, 1999
Mr. Mitch Green
Banque Nationale De Paris
499 Park Avenue
New York, NY 10022-1278
Dear Mr. Green,
Pursuant to Section 2.05 (a) of the Credit Agreement Dated as of April 24, 1998
among Iron Age Corporation as Borrower and Banque Nationale de Paris as Agent,
the Borrower has elected to reduce Acquisition Commitments from $35,000,000 to
$22,000,000. Therefore, please reduce the Unused Acquisition Commitments from
$23,300,000 to $10,300,000.
Sincerely,
IRON AGE CORPORATION
Keith A. McDonough
Executive VP/CFO
KAM/al
c: Reza Satchu Fenway Partners, Inc.
Alan Mustacchi Banque National De Paris
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-30-1999
<CASH> 508
<SECURITIES> 0
<RECEIVABLES> 17,730
<ALLOWANCES> (275)
<INVENTORY> 36,681
<CURRENT-ASSETS> 59,938
<PP&E> 14,709
<DEPRECIATION> (3,701)
<TOTAL-ASSETS> 179,228
<CURRENT-LIABILITIES> 11,985
<BONDS> 123,130
0
0
<COMMON> 1
<OTHER-SE> 37,868
<TOTAL-LIABILITY-AND-EQUITY> 179,228
<SALES> 124,294
<TOTAL-REVENUES> 124,294
<CGS> 63,228
<TOTAL-COSTS> 63,228
<OTHER-EXPENSES> 50,218
<LOSS-PROVISION> 151
<INTEREST-EXPENSE> 12,354
<INCOME-PRETAX> (1,657)
<INCOME-TAX> (67)
<INCOME-CONTINUING> (1,590)
<DISCONTINUED> 0
<EXTRAORDINARY> (4,015)
<CHANGES> 0
<NET-INCOME> (5,605)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
