SECURITIES AND EXCHANGE COMMISSION

Form 10-K

(Mark One)

[ X ]	Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended:   January 29, 2000        OR
[   ]	Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from:               to

Commission file number:  333-57011

Iron Age Corporation

Robinson Plaza Three, Suite 400, Pittsburgh, Pennsylvania 15205

Securities registered pursuant to Section 12(b) 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              

Applicable only to registrants involved in bankruptcy proceedings during the preceding five years: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes          No                 Not Applicable.

(Applicable only to corporate registrants:) On April 18, 2000, all of the voting stock of Iron Age Corporation was held by Iron Age Holdings Corporation (“Holdings”), a Delaware corporation.

As of April 18, 2000, 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 (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part II of this Form 10-K or any amendment to this Form 10-K. [X]

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FORM 10-K INDEX

      Reference in this Annual Report on Form 10-K is made to the Iron Age®, Knapp® and Grabber®trademarks, which are owned by Iron Age Holdings Corporation or its subsidiaries.

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Part I

Item 1.  Business

      Iron Age Corporation (the “Company” or “Iron Age”) is a leading distributor of safety shoes in the United States. The Company’s primary business is the specialty distribution of safety, work and uniform related shoes under the Iron Age®, Knapp® and Grabber ® brand names, which comprised 94% of fiscal 2000 sales. The Company also distributes footwear directly to retail and wholesale customers through its wholesale division and manufacturing subsidiary Falcon Shoe Mfg. Co. (“Falcon”). In addition, the Company began distribution of prescription safety eyewear, on a limited basis, in conjunction with the acquisition of a regional distributor in April 1998. The Company distributes directly to its customers over 300 styles of footwear under the Iron Age, Knapp and Grabber brand names. The Iron Age, Knapp and Grabber products and services are marketed principally to industrial, service and government employers, most of which require safety shoes to be worn at the workplace and provide purchase subsidies under employer safety programs to the end-user employee.

Company History

      The Company, a wholly-owned subsidiary of Iron Age Holdings Corporation (“Holdings”), was founded in 1817 and has specialized in safety footwear since the popularization of steel toe shoes during the 1940s. On February 26, 1997, Fenway Partners Capital Fund, L.P. (“Fenway”), together with certain investors, in partnership with certain members of management, formed Holdings in order to effect the acquisition of all of the outstanding stock of the predecessor to Holdings for an aggregate purchase price of $143.6 million (the “Fenway Acquisition”).

      Concurrent with the Fenway Acquisition, (i) Holdings and the Company entered into a syndicated senior bank loan facility (the “Old Credit Facility”), (ii) the Company issued its 12.5% Senior Subordinated Notes due 2006 (the “Old Subordinated Notes”) in the amount of $14.55 million, (iii) Holdings issued shares of Series A Preferred Stock (the “Holdings Series A Preferred Stock”) for $14.9 million, (iv) Holdings issued shares of Common Stock for approximately $32.2 million, (v) Holdings issued warrants to acquire Common Stock of Holdings for $0.1 million, and (vi) management rolled over certain options and were granted additional options to acquire shares of Common Stock of Holdings.

      On April 24, 1998, (i) Holdings issued its 12 1/8% Senior Discount Notes due 2009 (the “Discount Notes”) in an aggregate principal amount at maturity of $45.14 million, (ii) the Company issued its 9 7/8% Senior Subordinated Notes due 2008 (the “Senior Subordinated Notes”) in an aggregate principal amount of $100.0 million, and (iii) Holdings and the Company entered into a new credit facility (the “New Credit Facility”) that, as amended, provides for a $61.6 million senior secured credit facility consisting of a $30.0 million revolving working capital facility and a $31.6 million revolving acquisition facility. Holdings and the Company used excess cash and net proceeds from the Discount Notes, the Senior Subordinated Notes and the New Credit Facility to repay the Old Credit Facility, repay the Old Subordinated Notes and redeem the Holdings Series A Preferred Stock. The transactions described in this paragraph are collectively referred to herein as the “April 1998 Transactions.”

Industry Overview

      The work shoe market consists of men’s and women’s work, safety, uniform and non-slip shoes and boots. In the United States, the safety shoe sector of the work shoe market is comprised of three types of customers—industrial or commercial, government and mass merchandising retail. The Company estimates that sales to industrial and government customers represent over 60% of the safety shoe market. End-user safety shoe customers include workers in the primary metals, chemical and petroleum, automotive, paper, mining, utilities, electronics, aerospace, food service, hospitality and entertainment, pharmaceutical, biomedical, agriculture, construction and retail and wholesale trade industries.

      A significant factor influencing the demand for safety shoes is the increasing concern regarding workplace safety that is derived from the employer’s desire to reduce employee costs from on-the-job injury and to reduce

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      In order to satisfy the criteria set forth in OSHA regulations, protective footwear must comply with standards (the “ANSI Standards”) established by the American National Standards Institute (“ANSI”). There are six ANSI categories for foot protection: impact and compression, metatarsal footwear, conductive footwear, electrical hazard footwear, sole puncture resistance footwear and electro-static dissipative footwear. These OSHA regulations, stricter regulatory enforcement and increased consumer awareness of the regulations have heightened the focus on safety in the workplace.

      Within the service sector of the work shoe market, a growing category of safety footwear is non-slip footwear. Uniform shoes with non-slip soles are used increasingly by customers in the food service, hotel, gaming and resort industries. Fueling the demand are some of the same factors influencing traditional safety shoe users including the increasing concern regarding workplace safety. In addition, employers in these industries require consistency and uniformity in the performance and appearance of their employees’ footwear.

      In the industrial sector of the work shoe market, sales are made primarily between the distributor and employer, which generally maintain safety departments that monitor compliance with overall safety requirements and provide safety shoe purchase subsidies. Distributors of safety shoes to industrial customers typically provide a range of services, including advice with respect to assessment of workplace safety requirements, recommendations as to appropriate product selection, coordination of employer safety subsidy programs, worksite delivery and fitting of shoes and feedback and follow-up with corporate employers.

      Government sales, which include armed forces, penal institutions, federal, state, and local municipal employees or civilian employees, are made to two primary purchasers: GSA-contracted vendors and the military. GSA-contracted purchases of safety shoes include retail sales to GSA-contracted vendors through store and shoemobile service and catalog operations. These orders are made for a variety of purposes and activities and involve a wide range of products. Suppliers bid for these orders on the basis of product style and quality, distribution capability and customer service. Sales to the military consist of price-sensitive, large-volume orders that are designed to strict specifications and are generally bid directly by the manufacturers. Style selection is minimal and geared towards a specific purpose.

      The retail/mass merchandiser sector includes large retail chain stores, specialty retailers and other retail outlets. This is a source of low-end, protective footwear, the buyers of which include workers whose employers do not have company-sponsored programs as well as self-employed individuals, occupational users and agricultural workers.

      Safety prescription eyewear is a related product that the Company has recently entered into distribution through its subsidiary, IA Vision Acquisition Co. (“IA Vision”). Eye protection is another element of personal protective equipment that is regulated by OSHA. Many of the same customers to whom the Company currently sells safety footwear have similar requirements for safety eyewear.

Sales and Distribution

      Substantially all shoes sourced for distribution by the Company are transported to its central distribution facility in Penn Yan, New York. From Penn Yan, the Company distributes its product to end-users through its multi-pronged distribution network. The Company also distributes its products through catalog operations and channels associated with consumer brands, which include wholesale merchandising, independent sales representatives and third-party vendors.

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      Mobile and Store Centers. Each “mobile and store center” consists of a retail store for its products and generally one or more affiliated shoemobiles. Each shoemobile acts as a mobile selling vehicle for the Company’s products, operating generally within a 150-mile radius of its affiliated retail store. This sector of the Company’s business has grown as its customers have become more demanding and have required a higher level of customer service. Through the retail store channel, the Company is able to service corporate and individual customers generally located within a 40-mile radius of a given store.

      The Company operates its fleet of shoemobiles throughout the United States, Canada and Mexico. Shoemobiles vary in size—transporting from 900 to 1,600 pairs of shoes—and each contains a display area and a fitting room. The shoemobile driver/salesperson is responsible for the fitting of footwear and processing of orders.

      Catalog Direct and E-Commerce. The Company reaches both large and small customers with its safety shoe catalogs and web site. These sectors of the Company’s business provides direct service to certain customers who are either too small or do not require direct shoemobile service or who are remotely located. Sales are promoted through a combination of the product catalogs, the web site, the Company’s field sales force and trade advertising.

      In-Plant Stores. To add further flexibility to its distribution capabilities, the Company offers large-volume customers an in-plant store program, which provides the customer with a base stock of inventory and a sales staff to manage the store on-site at the customer’s manufacturing facility. The customer provides the Company with the necessary store space and all utilities.

      Wholesale and Consumer Channels. The Company markets branded products to select third-party retail customers. The Company also markets primarily Knapp branded product directly to consumers through a Direct Mail and Counselor (independent sales representatives) business unit.

      Falcon Manufacturing. Through its Falcon subsidiary, the Company manufactures private label footwear for such well known customers as New Balance Athletic Shoe, Inc., Browning Arms Company, L.L. Bean, Inc., Cabela’s Inc. and H.S. Trask & Co.

      IA Vision. The Company markets safety prescription eyewear to its existing industrial customer base through distribution methods identical to its safety footwear distribution. Mobile service is utilized to bring the product on site for the customer, where the selection, fitting and sale may be consummated utilizing a mobile point-of-sale (“POS”) system designed specifically for prescription eyewear.

Products

      The Company’s product line addresses a full range of protective footwear applications covering all six ANSI categories and non-slip footwear in styles for both men and women in both steel and non-metallic toe caps. Product categories include work, athletic, hikers, metatarsal, dress/casual and rubber footwear and consist of over 300 individual styles ranging in price from $15.00 for an inexpensive steel PVC boot to a $185.00 waterproof boot. The Company’s safety footwear is manufactured in more than 300 length and width combinations, ranging in sizes from 5 to 17. Sales of Iron Age products are concentrated in traditional, well-established styles, with sales of new styles representing less than 16% of net sales in fiscal 1998 and fiscal 1999 and less than 11% in fiscal 2000. All the Company’s work and safety shoes and boots are designed, manufactured and laboratory tested to meet or exceed applicable ANSI Standards. Through its long-standing relationship with users of safety footwear, the Company has assembled a product line that is widely regarded as the industry’s most complete. In addition to the Iron Age product line, the Company distributes work, service oxfords, non-slip and high-end work and hunting boots under the Knapp and Grabber brand names. In 1997, the Company acquired and successfully integrated Knapp Shoes, Inc. (“Knapp”), an underperforming competitor with a strong franchise in the uniform and service sector market (the “Knapp Acquisition”). On August 31, 1998, the Company sold the Dunham® trademark and related trademarks for $2.0 million and on-hand Dunham inventory for approximately $0.6 million to New Balance Athletic Shoe, Inc. and New Balance Trading Company, Ltd. (together, “New Balance”). In connection therewith, the Company agreed to manufacture for New Balance certain products which New Balance will continue to sell under the Dunham brand name. Net sales of Dunham products in fiscal 1998, the last full fiscal year of ownership, were $4.0 million. This

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      The Company has successfully expanded its product line to meet new customer demands and substantially increased the categories and types of footwear offered. As the safety shoe market has diversified, the Company has expanded its product line, moving from the basic heavy-duty styles toward casual, lightweight safety footwear that meet the needs of professional, light industrial and service sector employees.

Manufacturing

      Company Facilities. As a result of its strategic acquisitions of Falcon and Knapp, the Company operated two manufacturing facilities in Lewiston, Maine. Work shoes are manufactured in the Falcon facility in Lewiston primarily for sale by the Company under the Iron Age brand name. In addition, the Company sells work shoes manufactured at the Falcon facility directly to third parties, including New Balance, Browning Arms Company, L.L. Bean, Inc., Cabela’s Inc. and H.S. Trask & Co. The Company manufactured the Knapp product line at its other Lewiston facility. As of March 1999 the Company has consolidated the Knapp manufacturing operations into the Falcon facility as originally intended at the time of the Knapp Acquisition. Falcon manufactures approximately 22% of total pairs of shoes sold by the Company.

      Outside Suppliers. As a result of its market leadership position and long operating history, the Company has developed key supply arrangements with 22 leading footwear manufacturers in seven countries: the United States, China, Korea, Canada, Taiwan, Maylasia and the Netherlands. Although in fiscal 2000 one supplier in China manufactured approximately 29% of the pairs of shoes sold by the Company, the Company does not believe that it is dependent upon any specific supplier for its product manufacturing. In fiscal 2000, 55% of its total pairs sold were produced by foreign suppliers. In addition, 42% of its total pairs sold in fiscal 2000 were produced in China. The Company has not experienced any material adverse effects as a result of any economic downturn in Asia. However, the economic climate could have an adverse effect on the Company’s suppliers located in Asia. The Company believes that it could find alternative manufacturing sources for those products it currently sources from Asia, including its largest supplier in China, through its existing relationships with independent third-party manufacturing facilities located outside of Asia. However, the loss of a substantial portion of this manufacturing capacity or the inability of Asian suppliers to provide products on schedule or on terms satisfactory to the Company, could have a material adverse effect on the Company’s business, financial condition or results of operations during the transition to alternative manufacturing facilities.

      Transportation/ Freight. The Company utilizes its own trucks as well as common carriers to deliver product orders from its Falcon manufacturing subsidiary and to its mobile and store centers.

Competition

      The work shoe market is highly competitive. Management believes that competition in the industry is based on distribution capabilities, retail presence, brand name recognition, corporate relationships, systems, service, product characteristics, product quality and price. The Company’s major competitors in the safety shoe sector of the work shoe industry are Lehigh (a subsidiary of U.S. Industries, Inc.), Hy-Test (a subsidiary of Wolverine World Wide, Inc.) and Red Wing Shoe Co. Some of the Company’s competitors have greater financial and other resources than the Company. In addition, the work shoe market is a mature industry that could experience limited growth.

Environmental Matters

      The Company’s operations, primarily manufacturing, are subject to federal, state, local, and foreign laws and regulations relating to the storage, handling, generation, treatment, emission, release, transportation, discharge and disposal of certain substance and waste materials. Permits are required for certain of the Company’s manufacturing operations, and these permits are subject to revocation, modification and renewal by issuing authorities. Governmental authorities have the power to enforce compliance with their regulations, and violations may result in the payment of fines or the entry of injunctions, or both. The Company does not believe it will be required under existing environmental laws and enforcement policies to expend amounts that will have a material adverse effect on its results of operations or

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Employees

      As of January 29, 2000, the Company employed approximately 980 people in sales and distribution, manufacturing and administration. None of the Company’s employees are presently covered by collective bargaining agreements. Management considers its employee relations to be good.

Item 2.  Properties.

      The Company’s executive offices are located in Pittsburgh, Pennsylvania. All of the Company’s properties are maintained on a regular basis and are adequate for the Company’s present requirements.

      The following table identifies, as of January 29, 2000, the principal properties utilized by the Company.

Item 3.  Legal Proceedings.

      The Company is a party to various legal actions arising in the ordinary course of its business. The Company believes that the resolution of these legal actions will not have a material adverse effect on the Company’s business, results of operations and financial condition.

Item 4.  Submission of Matters to a Vote of Security Holders.

      The Company did not submit any matters during the fourth quarter of the fiscal year covered by this report to a vote of security holders through the solicitation of proxies or otherwise.

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Part II

Item 5.  Market for Registrant’s Common Equity and Related Stockholder Matters.

      As of April 18, 2000, the Company had 1,000 authorized shares of common stock, par value $1.00, all of which were issued and outstanding and held by Holdings. There is no established public trading market for the Company’s common stock. The Company’s ability to pay dividends is limited under an indenture dated as of April 24, 1998 between the Company and The Chase Manhattan Bank, as trustee (the “Indenture”).

Item 6.  Selected Financial Data.

      The following table sets forth selected historical consolidated financial data of the Company and its predecessors for the five-year period ended January 29, 2000, which was derived from audited consolidated financial statement of the Company and its predecessors. The following table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and consolidated financial statements of the Company and accompanying notes thereto included in Item 8 of this Annual Report on Form 10-K.

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(6)	The Holdings Series A Preferred Stock is included in the Company’s consolidated financial statements for financial reporting purposes since the Company paid a dividend of $13,700 to Holdings from the proceeds of the Transactions that was used to redeem a portion of the Holdings Series A Preferred Stock.
(7)	The Holdings Series B Preferred Stock is included in the Company’s consolidated financial statements for financial reporting purposes since the proceeds of the Holdings Series B Preferred Stock was used to retire a portion of the Company’s Senior Subordinated Notes.

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 29, 2000 (“fiscal 2000”), January 30, 1999 (“fiscal 1999”) and January 31, 1998 (“fiscal 1998”). 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, uniform and non-slip related shoes directly to end users under the Iron Age, Knapp and Grabber brand names, which comprised 94% of fiscal 2000 sales. The Company also distributes footwear directly to retail and wholesale customers through its wholesale division and its manufacturing subsidiary Falcon. Falcon manufactures approximately 22% of total pairs of shoes sold by the Company. In addition, the Company began distributing prescription safety eyewear, on a limited basis, in conjunction with the acquisition of a regional distributor in April 1998. The Company’s net sales decreased by 3.2% in fiscal 2000. The decrease in net sales was due primarily to decreased wholesale sales due in part to the Dunham Sale, a decrease in net sales related to the Company’s safety and medical products business line which was sold in May 1999 and store closures in fiscal 2000. The Company’s net sales growth has averaged 6.6% over the last three fiscal years, excluding the impact of an 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 2000, the Company’s net sales and EBITDA have increased at a compound annual growth rate (“CAGR”) of 12.8% and 19.0%, respectively.

September 1999 Transaction

      On September 22, 1999, the Company purchased $9.0 million in principal amount of its Senior Subordinated Notes for $7.13 million. The purchase was funded by $4.7 million of borrowings under the New Credit Facility and the issuance of $2.375 million of Series B Preferred Stock of Holdings (the “Holdings Series B Preferred Stock”) to Holdings’ majority stockholder, Fenway. The Company recorded an extraordinary gain of $0.88 million, net of unamortized deferred financing costs of $0.35 million, and income taxes of $0.64 million. Following the purchase, such principal amount of the Senior Subordinated Notes was retired. The Company may, under favorable market conditions, repurchase additional Senior Subordinated Notes.

July 1999 Transaction

      On July 20, 1999, the Company purchased $9.64 million in principal amount of the Senior Subordinated Notes for $7.66 million. The purchase was funded by $5.1 million of borrowings under the New Credit Facility and the issuance of $2.563 million of Holdings Series B Preferred Stock to Holdings’ majority stockholder, Fenway. The Company recorded an extraordinary gain of $0.92 million, net of unamortized deferred financing costs of $0.38 million, and income taxes of $0.67 million. Following the repurchase, such principal amount of the Senior Subordinated Notes was retired.

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Acquisitions and Capital 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 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 $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 $328 per share.

      The Knapp Acquisition occurred on March 14, 1997. 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 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, 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, 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 $61.6 million senior secured credit facility consisting of a $30.0 million revolving working capital facility and a $31.6 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 its subsidiary IA Vision, acquired the stock of Safety Supplies & Service Co., Inc. (“Safety Supplies”) and the Company acquired certain assets and assumed certain liabilities of Safety Depot Ltd., ACT Safety, Inc. and J. Mars Knapp Shoes (the “First Quarter 1999 Acquisitions”). The combined purchase price for the First Quarter 1999 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 1999 Acquisition”). The First Quarter 1999 Acquisitions and the Second Quarter 1999 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 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 1999 Acquisitions and

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Divestitures

      On May 25, 1999, the Company sold the assets of its safety and medical products line, a component of Safety Supplies’ business, which consisted primarily of inventory, with a carrying value of approximately $0.4 million to Stratford Safety Products, Inc. for $0.5 million. The sale resulted in a gain of $0.1 million, which was reflected as a reduction of goodwill that was recorded in connection with the acquisition of Safety Supplies. The Company’s net income from the safety and medical products line was not material from the date of the acquisition to the date of sale.

      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. 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.

Results of Operations

      The following table sets forth for the periods indicated certain historical income statement data derived from the consolidated statement of income of the Company and its predecessor. The application of the purchase method of business combinations resulted in a presentation of the results of operations for fiscal 1998 in two periods: a one-month period prior to the Fenway Acquisition and an 11-month period following the date of the Fenway Acquisition.

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Fiscal 2000 Compared to Fiscal 1999

      Net Sales. Net sales for fiscal 2000 were $120.4 million compared to $124.3 million for fiscal 1999, a decrease of $3.9 million, or 3.2%. The decrease in fiscal 2000 was primarily attributable to decreased wholesale sales of $2.9 million, or 2.3%, including a decrease in Dunham wholesale sales related to the Dunham Sale and a decrease in sales to the Company’s other wholesale customers. In addition, $0.9 million, or 0.7%, of the decrease was due to the sale of the Company’s safety and medical products business line and $0.8 million, or 0.6%, of the decrease was related to store closings in fiscal 2000. The decrease in net sales was partially offset by increased sales of $0.2 million in the Company’s primary footwear distribution business line and increased sales of $0.5 million, or 0.4%, relating to increased sales in the Company’s vision products business line.

      Gross Profit. Gross profit for fiscal 2000 was $60.8 million compared to $61.1 million for fiscal 1999, a decrease of $0.3 million, or 0.5%. Total gross profit percentage increased 1.4% to 50.5% in fiscal 2000 compared to fiscal 1999. Gross profit percentage increased in the Company’s primary footwear distribution business line by 0.6% in fiscal 2000. The increase in gross profit percentage was also attributable to a decrease in sales related to the lower gross profit margin wholesale and safety and medical product business lines.

      Selling, General and Administrative Expenses. Selling, general and administrative expenses for fiscal 2000 were $41.5 million compared to $46.9 million for fiscal 1999, a decrease of $5.4 million, or 11.5%. Excluding the effect of $2.2 million of compensation payments to certain members of management in connection with the April 1998 Transactions, selling, general and administrative expenses decreased by $3.2 million, or 7.2%, due primarily to the effect of cost containment initiatives which included the consolidation of the Knapp division into the Company’s primary footwear distribution business line, store closings and the sale of the Company’s safety and medical products business line. In addition, selling, general and administrative expenses for fiscal 1999 included a $0.2 million charge related to store closings and $0.2 million of recruitment fees.

      Operating Income. Operating income for fiscal 2000 was $13.9 million, or 11.5% of net sales, compared to $9.0 million, or 7.2% of net sales, for fiscal 1999. The increase was attributable to the decreased selling, general and administrative expenses as discussed above.

      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 2000 was $12.2 million compared to $12.4 million for fiscal 1999, a decrease of $0.2 million, or 1.6%. The decrease in interest expense was primarily attributable to decreased indebtedness of the Company related to the repurchase of a portion of the Senior Subordinated Notes in the July 1999 Transaction and the September 1999 Transaction.

      Income Tax Expense. Income tax expense for fiscal 2000 was $1.4 million compared to income tax benefit of $0.07 million for fiscal 1999. Income tax expense for fiscal 2000 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, $0.2 million of which was offset against state income tax liabilities in fiscal 2000.

      The Company needs to generate $8.0 million of state taxable income to realize this benefit before expiration of the net operating loss carryforward periods, which begin in fiscal 2002 through fiscal 2019. The Company evaluates the adequacy of the valuation reserve and the realization of the deferred tax benefit on an ongoing basis. Management believes that future taxable income will more likely than not allow the Company to realize this benefit.

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      Extraordinary Item. For fiscal 2000, the Company recorded an extraordinary gain of $1.8 million, net of a $1.3 million tax expense, due to the repurchase, at a discount, and subsequent retirement of a portion of the Senior Subordinated Notes in the July 1999 Transaction and the September 1999 Transaction. 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 the April 1998 Transactions.

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 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.

      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 1999 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.

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      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 1999 Acquisitions and the Second Quarter 1999 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.

      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.

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 $8.7 million in fiscal 2000, as compared to net cash provided by operating activities of $1.0 million in fiscal 1999 and net cash used in operating activities of $0.5 million in fiscal 1998. The increase in cash provided by operating activities in fiscal 2000 is primarily the result of improved operating results and overall reductions in working capital. The increase in cash provided by operating activities in fiscal 1999 was the result of overall reductions in working capital.

      The Company’s investing activities for fiscal 2000 consisted of capital expenditures of approximately $1.8 million for improvements in footwear and vision retail stores, vision vans, information technology equipment and the remaining cost of the Falcon and Knapp factory integration and expenditures of approximately $1.3 million related to the acquisition of software for internal use. 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. 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 hardware in stores and trucks acquired in connection with the First Quarter 1999 Acquisitions and the Second Quarter 1999 Acquisition.

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      The Company used approximately $6.0 million from financing activities in fiscal 2000, which consisted of net working capital payments of approximately $5.5 million, excluding the July 1999 Transaction and the September 1999 Transaction. The Company’s financing activities also included a borrowing of $5.1 million on the New Credit Facility in July 1999 and a borrowing of $4.7 million in September 1999. The proceeds were used to pay for the repurchase of a portion of the Senior Subordinated Notes in the July 1999 Transaction and the September 1999 Transaction. The remaining portion of the repurchase was provided by a $4.938 million aggregate equity contribution from Holdings. The amount of such equity contribution was provided to Holdings by a $4.938 million aggregate equity contribution from Holdings’ majority stockholder, Fenway, for which Fenway received Holdings Series B Preferred Stock. Excluding cash paid for regional distributor acquisitions and proceeds from the divestiture, 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.

      The Company’s total working capital as of January 29, 2000 was $44.6 million. At January 30, 1999, working capital was $48.0 million. The primary reason for the decrease to working capital was a reduction in inventory and the receipt of an income tax refund related to the April 1998 Transactions.

      Cash flow from operations for fiscal 2000 was sufficient to cover debt service requirements under the New 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 29, 2000 the Company’s debt consisted of the Senior Subordinated Notes, the New Credit Facility and certain other debt. As of January 29, 2000, the New Credit Facility, as amended, consisted of a $31.6 million multiple draw acquisition term loan facility (the “Acquisition Credit Facility”) and approximately $30.0 million in revolving credit loans, letters of credit and swing line loans (the “Revolving Credit Facility”). The Company’s other debt of $0.9 million consisted of capital leases and other notes. As of January 29, 2000, approximately $21.1 million of the Acquisition Credit Facility and approximately $5.9 million of the Revolving Credit Facility were outstanding, and the Company had additional borrowing availability under the Acquisition Credit Facility of $10.5 million and under the Revolving Credit Facility of approximately $24.1 million. The Acquisition Credit Facility matures in quarterly installments from July 2001 until final payment in April 2004. The 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 29, 2000, none of the Company’s Domestic Restricted Subsidiaries was a Material Subsidiary, and therefore no Subsidiary Guaranty was in force or effect.

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Subsequent Event

      On February 7, 2000, subsequent to fiscal 2000, Fenway purchased Discount Notes in the market. The purchase results in a gain to Holdings for income tax purposes only and a corresponding income tax liability to Holdings of approximately $1.3 million which is payable in May 2000. In order to mitigate any financial impact to Holdings, Fenway has agreed to make an equity contribution of approximately $1.3 million to Holdings, concurrent with the payment of Holdings’ first quarter income tax installment.

Amendments to the New Credit Facility

      On February 26, 1999, the New Credit Facility was amended to (i) amend the definition of “EBITDA” for fiscal 2000 for certain purposes of the New Credit Facility, (ii) add as a condition to drawing on the Acquisition Credit Facility prior to April 2000 certain required interest coverage ratios and leverage ratios, (iii) amend required interest coverage ratios applicable to fiscal 2000, and (iv) add to the financial covenants applicable to fiscal 2000 certain required senior coverage ratios.

      On June 23, 1999, the New Credit Facility was amended to (i) permit the use of up to $13,300,000 of the Acquisition Credit Facility to repurchase Senior Subordinated Notes at or below par value; provided that no more than two-thirds of the purchase price of such Senior Subordinated Notes comes from borrowings under the Acquisition Credit Facility; (ii) amend the definition of “Fixed Charge Coverage Ratio” to eliminate the tax effect of any permitted repurchases of the Senior Subordinated Notes; (iii) add as a permitted use of proceeds of the Acquisition Credit Facility the permitted repurchases of the Senior Subordinated Notes; (iv) reduce the borrowing base availability under the Revolving Credit Facility by $3,000,000 from the time the Company first borrows under the Acquisition Credit Facility to repurchase Senior Subordinated Notes until the lenders consent to terminate such restriction on availability; (v) amend the required interest coverage ratios applicable to fiscal year 2000; and (vi) amend the required senior leverage ratios applicable to fiscal 2000.

      On March 17, 2000, the New Credit Facility was amended to (i) permit the use of up to $1,500,000 of the Acquisition Credit Facility to repurchase Discount Notes at or below par value; (ii) extend the right to purchase the Senior Subordinated Notes and the Discount Notes through August 31, 2000; (iii) amend the definition of “Fixed Charge Coverage Ratio” to eliminate the tax effect of any permitted repurchases of the Discount Notes; (iv) add as a permitted use of proceeds of the Acquisition Credit Facility the permitted repurchases of the Discount Notes; and (v) reinstate the borrowing base availability under the Revolving Credit Facility by $3,000,000.

Year 2000 Issue

      The Company completed its Year 2000 readiness plan in the fourth quarter of fiscal 2000. As a result of its planning and implementation efforts, the Company has not experienced any Year 2000 problems. The Company will continue to monitor its mission critical computer applications and those of its vendors and suppliers through fiscal 2001, to ensure that any Year 2000 matters that may arise are properly addressed. The total cost expended in the Year 2000 readiness plan was approximately $0.06 million. Certain portions of these expenditures included the replacement of systems which were capitalized as new hardware and software, in accordance with EITF 96-14.

Recently Issued Accounting Standards

      In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (the “Statement”). As amended by FASB Statement No. 137, Deferral of the Effective Date of FASB Statement No. 133, the Statement is required to be adopted for all fiscal quarters in years beginning after June 15, 2000. The Statement permits early adoption as of the beginning of any fiscal quarter after its issuance. The Company expects to adopt the Statement effective with the first fiscal quarter of fiscal year 2002. 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 fair value of the hedged asset, liability or firm commitment through earnings, or recognized in other comprehensive

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      In December 1999, the Staff of the Securities and Exchange Commission released Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition,” to provide guidance on the recognition, presentation and disclosure of revenues in financial statements. The Company’s revenue recognition practices are in conformity with SAB No. 101.

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.

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk.

      The Company is exposed to market risk primarily from changes in interest rates and foreign exchange rates.

      The following discussion of the Company’s exposure to various market risks contains “forward looking statements” that are subject to risks and uncertainties. These projected results have been prepared utilizing certain assumptions considered reasonable in the circumstances and in light of information currently available to us. Nevertheless, because of the inherent unpredictability of interest rates and foreign currency translation rates, actual results could differ materially from those projected in such forward looking statements.

Interest Rates

      At January 29, 2000, the Company had fixed-rate debt totaling $82.2 million in principal amount and having a fair value of $59.4 million. These instruments bear interest at a fixed rate and, therefore, do not expose the Company to the risk of earnings loss due to changes in market interest rates. However, the fair value of these instruments would decrease by approximately $4.4 million if interest rates were to increase by 10% from their levels at January 29, 2000 (i.e., an increase from the weighted average interest rate of 9.9% to a weighted average interest rate of 10.9%). At January 30, 1999, the Company had fixed-rate debt totaling $101.1 million in principal amount and having a fair value of $76.0 million, which would have decreased to $70.3 million had interest rates increased 10% from January 30, 1999 levels.

      At January 29, 2000, the Company had variable-rate long-term debt totaling $27.0 million in principal amount and having a fair value of $27.0 million. These instruments are entered into for purposes other than trading.

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      The Company has entered into interest rate swap agreements with a combined notional amount of $50.0 million to reduce its exposure to adverse fluctuations in interest rates relating to this floating-rate debt, rather than for trading purposes. The Company has not entered into any derivative financial instruments for trading purposes. If floating rates were to increase by 10% from their levels at January 29, 2000 and January 30, 1999, the Company would incur additional interest expense of approximately $0.1 million after taking into account the effect of the interest rate swap agreements.

Foreign Exchange Rates

      A substantial majority of the Company’s sales, expenses and cash flows are transacted in U.S. dollars. For the fiscal year ended January 29, 2000, sales denominated in currencies other than U.S. dollars (primarily Mexican peso and the Canadian dollar) totaled $7.4 million, or approximately 6.2% of total sales. Net loss denominated in currencies other than U.S. dollars totaled $0.1 million, or approximately 42% of total net income before extraordinary item. An adverse change in exchange rates of 10% would have resulted in a decrease in sales of $0.7 million and an immaterial increase in net loss for the year ended January 29, 2000. The Company’s subsidiaries that operate in Mexico and Canada have certain accounts receivable and payable accounts in their home currencies which further mitigate the impact of foreign exchange rate changes. The Company has no foreign currency exchange contracts.

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Item 8.  Financial Statements and Supplementary Data.

Iron Age Corporation

Financial Statements

Years ended January 29, 2000 and January 30, 1999

Contents

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REPORT OF INDEPENDENT AUDITORS

Board of Director

      We have audited the accompanying consolidated balance sheets of Iron Age Corporation (a wholly owned subsidiary of Iron Age Holdings Corporation) (the “Company”) as of January 29, 2000 and January 30, 1999, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for the years ended January 29, 2000 and January 30, 1999, the period February 27, 1997 through January 31, 1998 and the period January 26, 1997 through February 26, 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 auditing standards generally accepted in the United States. 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 at January 29, 2000 and January 30, 1999, and the consolidated results of their operations and their cash flows for the years ended January 29, 2000 and January 30, 1999, the period February 27, 1997 through January 31, 1998 and the period January 26, 1997 through February 26, 1997, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

Ernst & Young LLP

Pittsburgh, Pennsylvania

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Iron Age Corporation

Consolidated Balance Sheets

      See accompanying notes.

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Iron Age Corporation

Consolidated Statements of Income

      See accompanying notes.

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Iron Age Corporation

Consolidated Statements of Stockholders’ Equity and Comprehensive Income

      See accompanying notes.

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Iron Age Corporation

Consolidated Statements of Cash Flows

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Consolidated Statements of Cash Flows (continued)

      See accompanying notes.

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Iron Age Corporation

Notes to Consolidated Financial Statements

January 29, 2000 and January 30, 1999

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. (“Fenway”). Holdings was acquired by Fenway 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 “April 1998 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.

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1.  Organization and Significant Accounting Policies (continued)

Fiscal Year

      The Company’s fiscal year ends on the last Saturday in January. The 1999 and 2000 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% of inventories at January 29, 2000 and January 30, 1999 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 $789,000 and $766,000 of unamortized catalog costs at January 29, 2000 and January 30, 1999, respectively. For the years ended January 29, 2000 and January 30, 1999, and the periods February 27, 1997 through January 31, 1998 and January 26, 1997 through February 26, 1997, advertising expense recorded by the Company was $2,126,000, $2,455,000, $1,801,000, and $110,000, 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:

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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 in purchase business combinations. 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 of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The Company capitalized approximately $1,277,000 and $233,000 related to internal use software costs for the fiscal years ended January 29, 2000 and January 30, 1999, respectively. Internal use software costs are being amortized by the straight-line method over three to five 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 (loss).” 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.

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1.  Organization and Significant Accounting Policies (continued)

Financial Instruments

      The Company periodically enters into interest rate swap agreements to moderate its exposure to interest rate changes. The Company has effectively converted $25 million of its 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 $(190,000) and $225,000 at January 29, 2000 and January 30, 1999, respectively. Approximately 46% or $50 million of the Company’s outstanding long-term debt was subject to interest rate swap agreements at January 29, 2000.

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 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.

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1.  Organization and Significant Accounting Policies (continued)

Use of Estimates

      The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

2.  Acquisitions and Divestitures

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 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 Fenway 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 values of the net assets acquired has been proportionately reduced by approximately $1,963,000 with such amount being charged against the gross stockholders’ equity of $36,100,000. The adjustment to stockholders’ 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 include the Predecessor’s operations from the date of acquisition.

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2.  Acquisitions and Divestitures (continued)

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 work and 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.

Other Acquisitions

      During the year ended January 30, 1999, the Company acquired the stock of Safety Supplies & Service Co., Inc. (“Safety Supplies”), 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.

Divestitures

      On May 25, 1999, the Company sold the assets of its safety and medical products line, a component of Safety Supplies’ business, which consisted primarily of inventory, with a carrying value of approximately $0.4 million to Stratford Safety Products, Inc. for $0.5 million. The sale resulted in a gain of $0.1 million, which was reflected as a reduction of goodwill that was recorded in connection with the acquisition of Safety Supplies. The Company’s net income from the safety and medical products line was not material from the date of the acquisition to the date of sale.

      On September 9, 1998, the Company announced the sale of the Dunham trademark 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 $2.0 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 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 $444,000 and $275,000 as of January 29, 2000 and January 30, 1999, respectively. The Company does not require collateral for its trade accounts receivable. Management continually evaluates its accounts receivable and adjusts its allowance for doubtful

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4.  Inventories

      The major components of inventories are as follows:

5.  Property and Equipment

      Property and equipment consist of the following: