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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(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:
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to
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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.
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(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 (Section 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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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 in the amount of
$14.55 million (net of a $0.45 million discount), (iii) Holdings issued 1,500
shares of the Holdings Series A Preferred Stock for an aggregate consideration
of $14.9 million, (iv) Holdings issued 88,625 shares of Common Stock for an
aggregate consideration of approximately $32.2 million, (v) Holdings issued
warrants to acquire approximately 7,000 shares of Common Stock of Holdings at an
exercise price of $185.52 per share for an aggregate consideration of $0.1
million, and (vi) management rolled over certain options to acquire
approximately 6,000 shares of the predecessor company at an exercise price of
$62 per share into options to acquire approximately 11,500 shares of Common
Stock of Holdings at an exercise price of $36.36 per share and were granted
additional options to acquire shares of Common Stock of Holdings at an exercise
price of $363.60 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 for Holdings. The Fenway Acquisition
was accounted for by the purchase method and the purchase price has been
allocated to the Company's assets and liabilities based on fair market value.
The Fenway Acquisition resulted in goodwill of approximately $84.1 million,
which is being amortized over 40 years. The exercise price of the options which
were rolled over by management 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 Company acquired Knapp Shoes, Inc. ("Knapp") on March 14, 1997 (the
"Knapp Acquisition"). As part of the Knapp Acquisition, Holdings contributed an
additional $4.0 million of common equity. The Knapp Acquisition was accounted
for under the purchase method for business combinations and, accordingly, the
results of
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operations for Knapp are included in the Company's financial statements only
from the date of the Knapp Acquisition.
On April 24, 1998 in the April 1998 Transactions, (i) Holdings
consummated the sale of the Discount Notes, its 12 1/8% Senior Discount Notes
due 2009, in an aggregate principal amount at maturity of $45.14 million, in a
transaction exempt from the registration requirements of the Securities Act,
(ii) the Company issued the Senior Subordinated Notes, its 9 7/8% Senior
Subordinated Notes due 2008, in an aggregate principal amount of $100 million in
a transaction exempt from the registration requirements of the Securities Act,
and (iii) Holdings and the Company entered into the New Credit Facility, which,
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 and the Old
Subordinated Notes, to make compensation payments to certain members of
management and to pay a dividend to Holdings to allow Holdings to redeem the
Holdings Series A Preferred Stock.
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 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 trademark and
related trademarks with no carrying value to New Balance for $2.0 million and
recorded a gain of $1.7 million, net of certain transaction costs (the "Dunham
Sale"). Dunham wholesale sales were $3.1 million in fiscal 1999, consisting of
Dunham sales of $1.3 million prior to the Dunham Sale, sales of on-hand
inventory to New Balance for approximately $0.6 million in conjunction with the
Dunham Sale and sales of Dunham products of $1.2 million to New Balance after
the Dunham Sale. In conjunction with the Dunham Sale, Falcon agreed to
manufacture for New Balance certain products which New Balance will continue to
sell under the Dunham brand name pursuant to a two year supply agreement with
New Balance.
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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.
<TABLE>
<CAPTION>
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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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<S> <C> <C> <C> <C>
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 wholesale sales, including a $0.9 million which related to a
decrease in Dunham wholesale sales. Dunham wholesale sales were $3.1 million in
fiscal 1999, consisting of Dunham sales of $1.3 million prior to the Dunham
Sale, sales of on-hand inventory to New Balance for approximately $0.6 million,
in conjunction with the Dunham Sale and sales of Dunham products of $1.2 million
to New Balance after the Dunham Sale, compared to Dunham wholesale sales of $4.0
million in fiscal 1998.
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 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. Gross
profit on Dunham product sales decreased $0.5 million in fiscal 1999 compared to
fiscal 1998. The decrease primarily related to decreased Dunham wholesale sales
as discussed above and lower gross profit margin on sales in conjunction with
the Dunham Sale.
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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 2000 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.
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.
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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 Acquisition.
INTEREST EXPENSE. Interest expense was $9.9 million in the period
February 27, 1997 through January 31, 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.
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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 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
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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.
The Senior Subordinated Notes are fully and unconditionally guaranteed on an
unsecured, senior subordinated basis by each Domestic Restricted Subsidiary that
is a Material Subsidiary (as such terms are defined in the indenture for the
Senior Subordinated Notes (the "Senior Subordinated Notes Indenture")) (whether
currently existing, newly acquired or created). Each such subsidiary guaranty (a
"Subsidiary Guaranty") will provide that the subsidiary guarantor, as primary
obligor and not merely as surety, will irrevocably and unconditionally guarantee
on an unsecured, senior subordinated basis the performance and punctual payment
when due, whether at stated maturity, by acceleration or otherwise, of all
obligations of the Company under the Senior Subordinated Notes Indenture and the
Senior Subordinated Notes, whether for payment of principal or of interest on
the Senior Subordinated Notes, expenses, indemnification or otherwise. As of
January 30, 1999, none of the Company's Domestic Restricted Subsidiaries was a
Material Subsidiary, and therefore no Subsidiary Guaranty was in force or
effect.
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 replace, 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, in accordance with EITF 96-14.
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
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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 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.
-9-
<PAGE> 10
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
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Report of Independent Auditors ......................... 11
Audited Financial Statements
Consolidated Balance Sheets ............................ 12
Consolidated Statements of Income ...................... 13
Consolidated Statements of Stockholders' Equity......... 14
Consolidated Statements of Cash Flows .................. 15
Notes to Consolidated Financial Statements ............. 17
</TABLE>
-10-
<PAGE> 11
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 the year ended January 30, 1999, the period February 27, 1997 through
January 31, 1998, the period January 26, 1997 through February 26, 1997 and the
year ended January 25, 1997. 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 the year ended
January 30, 1999, the period February 27, 1997 through January 31, 1998, the
period January 26, 1997 through February 26, 1997 and the year ended January 25,
1997., 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
-11-
<PAGE> 12
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.
-12-
<PAGE> 13
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.
-13-
<PAGE> 14
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) (LOSS) INCOME TOTAL
------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR
Balance at January 27, 1996 1,000 $ 1 $ 35,761 $ 6,296 $ (244) $ 41,814
Comprehensive income:
Net income -- -- -- 5,589 -- 5,589
Foreign currency translation adjustment,
net of tax -- -- -- -- 21 21
---------
Comprehensive income 5,610
Capital contribution -- -- 2,441 -- -- 2,441
Dividends paid on common stock -- -- -- (2,718) -- (2,718)
Stock-based compensation -- -- 1,065 -- -- 1,065
------------------------------------------------------------------------------------
Balance at January 25, 1997 1,000 1 39,267 9,167 (223) 48,212
Comprehensive loss:
Net loss -- -- -- (195) -- (195)
Foreign currency translation adjustment,
net of tax -- -- -- -- (22) (22)
---------
Comprehensive loss (217)
Stock-based compensation -- -- 1,054 -- -- 1,054
------------------------------------------------------------------------------------
Balance at February 26, 1997 1,000 $ 1 $ 40,321 $ 8,972 $ (245) $ 49,049
====================================================================================
SUCCESSOR
Balance at February 27, 1997 -- $ -- $ -- $ -- $ -- $ --
Comprehensive income:
Net income -- -- -- 1,957 -- 1,957
Foreign currency translation adjustment,
net of tax -- -- -- -- (65) (65)
---------
Comprehensive income 1,892
Capital contribution 1,000 1 38,086 -- -- 38,087
Dividend accrued on preferred stock -- -- -- (2,131) -- (2,131)
------------------------------------------------------------------------------------
Balance at January 31, 1998 1,000 1 38,086 (174) (65) 37,848
Comprehensive loss:
Net loss -- -- -- (5,605) -- (5,605)
Foreign currency translation adjustment,
net of tax -- -- -- -- (121) (121)
---------
Comprehensive loss (5,726)
Capital contribution -- -- 6,380 -- -- 6,380
Dividend paid on preferred stock -- -- -- (633) -- (633)
------------------------------------------------------------------------------------
Balance at January 30, 1999 1,000 $ 1 $ 44,466 $ (6,412) $ (186) $ 37,869
====================================================================================
</TABLE>
See accompanying notes.
-14-
<PAGE> 15
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>
-15-
<PAGE> 16
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)
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
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.
-16-
<PAGE> 17
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.
-17-
<PAGE> 18
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
-18-
<PAGE> 19
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.
INTERNAL USE SOFTWARE COSTS
Effective February 1, 1998, the Company adopted Statement 98-1 "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use." The
Company capitalized approximately $233,000 related to internal use software
costs for the fiscal year ended January 30, 1999. Internal use software costs
are being amortized by the straight-line method over 3 years.
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.
-19-
<PAGE> 20
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 its
New Credit Facility to a fixed rate basis and $25 million of its Senior
Subordinated Notes to a floating rate basis. The interest rate swap agreement
related to the New Credit Facility has a notional amount of $25 million and
involves the payment of amounts at a fixed rate of 6.225% in exchange for
floating rate interest payments computed at the LIBOR rate through March 14,
2000. The interest rate swap agreement related to the Senior Subordinated Notes
has a notional amount of $25 million and involves the payment of floating rate
amounts computed at 4.16% above the LIBOR rate in exchange for fixed interest
payments at a rate of 9.875% through May 1, 2003. Interest payment amounts are
exchanged over the lives 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 interest rate swap agreements are not
recognized in the financial statements. The fair value of the interest rate swap
agreements are $225,000 and $(702,000) at January 30, 1999 and January 31, 1998,
respectively. Approximately 33% 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.
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
-20-
<PAGE> 21
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
-21-
<PAGE> 22
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.
-22-
<PAGE> 23
DIVESTITURE
On September 9, 1998, the Company announced the sale of the Dunham trademarks
and related trademarks with no carrying value 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, net of certain
transaction costs (the "Dunham Sale"). Dunham wholesale sales were $3.1 million
in fiscal 1999, consisting of Dunham sales of $1.3 million prior to the Dunham
Sale, sales of on-hand inventory to New Balance for approximately $0.6 million
in conjunction with the Dunham Sale and sales of Dunham products of $1.2 million
to New Balance after the Dunham Sale. In conjunction with the sale, the
Company's Falcon manufacturing subsidiary agreed to manufacture products which
New Balance will continue to sell under the Dunham brand name pursuant to a
two-year supply agreement with New Balance . The supply agreement does not
contain a minimum purchase quantity and prices under the supply agreement are
based upon the volume purchased annually by New Balance.
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
</TABLE>
-23-
<PAGE> 24
<TABLE>
<S> <C> <C>
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>
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).
-24-
<PAGE> 25
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.
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.
-25-
<PAGE> 26
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.
The Senior Subordinated Notes are fully and unconditionally guaranteed on an
unsecured, senior subordinated basis by each Domestic Restricted Subsidiary that
is a Material Subsidiary (as such terms are defined in the indenture for the
Senior Subordinated Notes (the "Senior Subordinated Notes Indenture")) (whether
currently existing, newly acquired or created). Each such subsidiary guaranty (a
"Subsidiary Guaranty") will provide that the subsidiary guarantor, as primary
obligor and not merely as surety, will irrevocably and unconditionally guarantee
on an unsecured, senior subordinated basis the performance and punctual payment
when due, whether at stated maturity, by acceleration or otherwise, of all
obligations of the Company under the Senior Subordinated Notes Indenture and the
Senior Subordinated Notes, whether for payment of principal or of interest on
the Senior Subordinated Notes, expenses, indemnification or otherwise. As of
January 30, 1999, none of the Company's Domestic Restricted Subsidiaries was a
Material Subsidiary, and therefore no Subsidiary Guaranty was in force or
effect.
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.
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
-26-
<PAGE> 27
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.
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.
-27-
<PAGE> 28
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):
<TABLE>
<CAPTION>
<S> <C>
2000 $ 544
2001 226
2002 2,760
2003 3,574
2004 4,400
Thereafter 112,170
--------
$123,674
========
</TABLE>
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 swap agreements-The carrying amounts of the
Company's borrowings under its new credit facility and old credit facility
approximate their fair value because the new credit facility and the old credit
facility are variable rate debt instruments. The fair values of the Company's
senior subordinated notes are estimated based upon quoted market prices. The
fair values of the Company's old subordinated notes, capital lease obligations,
other notes and interest rate swap agreements are estimated using discounted
cash flow analysis, based on the Company's current incremental borrowing rates
for similar types of borrowing arrangements.
-28-
<PAGE> 29
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) -- -- 14,550 14,550
Other notes 178 178 208 208
Interest rate swap agreements -- 225 -- (702)
Capital lease obligations 796 802 754 761
</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.
-29-
<PAGE> 30
10. INCOME TAXES
Income tax expense consisted of the following:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
-------------------------------------------------------------------------
FEBRUARY 27 JANUARY 26
YEAR ENDED 1997 THROUGH 1997 THROUGH YEAR ENDED
JANUARY 30 1999 JANUARY 31 1998 FEBRUARY 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 JANUARY 26
YEAR ENDED 1997 THROUGH 1997 THROUGH YEAR ENDED
JANUARY 30 1999 JANUARY 31 1998 FEBRUARY 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>
-30-
<PAGE> 31
10. INCOME TAXES (CONTINUED)
The components of the net deferred tax asset and liability are as follows:
<TABLE>
<CAPTION>
SUCCESSOR
--------------------------
JANUARY 30 JANUARY 31
1999 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.
-31-
<PAGE> 32
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 OPERATING
LEASES 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.
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.
-32-
<PAGE> 33
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. Holdings' Series A Preferred stock was reflected in the
financial statements of the Company prior to its redemption because the Company
is a wholly-owned subsidiary of Holdings and a portion of the Series A Preferred
Stock was redeemed with a portion of the Company's proceeds from the April 1998
transactions.
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.
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.
-33-
<PAGE> 34
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 ("Series B Basic) become exercisable, subject to the
achievement of certain target earnings by Holdings and continued employment of
the optionholders, at the rate of 20% per year commencing with the Company's
fiscal year ended January 31, 1998. Holdings is deemed to have achieved the
target earnings in a given fiscal year if Holdings' net income before interest,
taxes, depreciation, amortization, extraordinary or unusual gains or losses,
management fees payable to Fenway, directors fees and expenses payable to Fenway
representatives and fees and expenses associated with acquisitions equals or
exceeds the target amount set in the Option Plan or by the Board of Directors
for such fiscal year. The remaining 35% of Series B Options ("Series B Extra")
vest upon a change of control of Holdings 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. Upon the vesting of the Series B options as defined in the Option Plan,
Holdings will recognize compensation expense related to the Series B Options
based upon the difference, if any, between the estimated fair value of Holdings'
common stock at the time such options vest and the exercise prices of $186 or
$364, respectively. 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.
-34-
<PAGE> 35
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
YEAR ENDED 1997 THROUGH
JANUARY 30 1999 JANUARY 31 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:
<TABLE>
<S> <C>
Risk-free interest rate 6.0
Dividend yield 0.0
Expected life 3 years
Volatility Not applicable
</TABLE>
A summary of the status of the shares under the Company's stock option plan is
as follows:
<TABLE>
<CAPTION>
FEBRUARY 27
YEAR ENDED 1997 THROUGH
JANUARY 30 1999 JANUARY 31 1998
------------------------------------
(In Thousands)
<S> <C> <C>
Outstanding, beginning of year 20,095 --
Granted 100 20,095
Forfeited (100) --
------------------------------------
Outstanding, end of year 20,095 20,095
====================================
Options exercisable at end of year 12,610 12,630
====================================
</TABLE>
-35-
<PAGE> 36
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 5,508 3,059 11,528 5,508 3,059
Options exercisable at end of year 11,528 1,082 -- 11,528 1,102 --
</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>
-36-
<PAGE> 37
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 JANUARY 25
1997 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:
<TABLE>
<S> <C>
Risk-free interest rate 6.0
Dividend yield 0.0
Expected life 3 years
Volatility Not applicable
</TABLE>
-37-
<PAGE> 38
14. RELATED PARTY TRANSACTIONS
In connection with the April 1998 Transactions, members of management of Iron
Age 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
distributed to the stockholders of Holdings in the April 1998 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 $200,000, respectively, to Fenway for financial advisory
fees.
Holdings, the Fenway Fund, the Outside Investors, Company management and all of
the other stockholders and option holders of Holdings are party to a
stockholders' agreement (the "Stockholders' Agreement") that, among other
things, provides for tag-along rights, take-along, rights, registration rights,
restrictions on the transfer of shares held by parties to the Stockholders'
Agreement, certain rights of first refusal for Holdings and certain preemptive
rights for certain stockholders. The Stockholders' Agreement also provides that
the parties thereto will vote their shares in the same manner as the Fenway Fund
in connection with certain transactions and that the Fenway Fund will be
entitled to fix the number of directors of Holdings. Pursuant to the
Stockholders' Agreement, the Fenway Fund is entitled to designate a sufficient
number of directors to maintain a majority of the board of directors of Holdings
and Donald R. Jensen is entitled to designate one director.
-38-
<PAGE> 39
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth information concerning the compensation
earned for the fiscal years ended January 30, 1999 and January 31, 1998 by Mr.
Jensen, the Company's Chairman, and the four other most highly compensated
executive officers of the Company (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM ALL OTHER
------------------- COMPENSATION($) 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 1999 101,842 160,116(16) -- 10,609(18)
of 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 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
-39-
<PAGE> 40
and group term life insurance premiums of $516 paid by Iron Age during the
plan year ended December 31, 1997.
(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 $7,321 bonus paid by Iron Age in connection with the April 1998
Transactions.
(21) Represents Falcon allocations under defined contribution plan for the plan
year ended December 31, 1997.
(22) Represents Falcon allocations under defined contribution plan for the year
ended December 31, 1998.
AGGREGATED FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the value of
unexercised stock options at the end of fiscal 1999 for the Named Executive
Officers.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR END(#)(1) AT FISCAL YEAR END($)(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.............................. 339.60/1,358.40 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 ............................. 132/528 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 ............................. 120/480 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 ............................. 100/400 0/0
Series B-Extra B ............................. 0/500 0/0
Theodore C. Johanson
Series B-Basic B ............................. 40/160 0/0
</TABLE>
- ----------
(1) Options to acquire common stock of Holdings.
(1) Value based on assumed value at January 30, 1999 of $185.52 per share.
-40-
<PAGE> 41
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.
-41-
<PAGE> 42
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.
-42-
<PAGE> 43
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>
-43-
