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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period
ended: October 28,
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
(Exact name of registrant as specified in its charter)
Delaware | 25-1376723 | |
(State or other jurisdiction incorporation or organization |
(I.R.S. Employer Identification Number) |
Robinson Plaza Three, Suite 400,
Pittsburgh, Pennsylvania 15205
(Address of principal executive offices)
(Zip Code)
(412) 787-4100
(Registrants telephone number, including area code)
Not
Applicable.
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether 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 ISSUERS 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 ISSUERS
Indicate the number of shares outstanding of each of the issuers classes of common stock as of the latest practicable date. Not Applicable.
PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements.
The following financial statements are presented herein:
Condensed Consolidated Balance Sheets as of October 28, 2000 and January 29, 2000 |
Condensed Consolidated Statements of Income for the three months
and nine months ended October 28, 2000 and October 30, 1999 |
Condensed Consolidated Statements of Cash Flows for the nine months
ended October 28, 2000 and October 30, 1999 |
Notes to Condensed Consolidated Financial Statements |
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Iron Age Corporation
Condensed Consolidated Balance Sheets
October 28 | January 29 | ||||||||
2000 | 2000 | ||||||||
(unaudited) | |||||||||
(Dollars in Thousands) | |||||||||
Assets Current assets: |
|||||||||
Cash and cash equivalents | $ | 1,195 | $ | 260 | |||||
Accounts receivable, net | 19,048 | 17,747 | |||||||
Inventories (Note 2) | 32,957 | 34,410 | |||||||
Prepaid expenses | 1,309 | 1,593 | |||||||
Deferred income taxes | 870 | 875 | |||||||
Total current assets | 55,379 | 54,885 | |||||||
Notes receivable and other assets | 2,816 | 1,537 | |||||||
Property and equipment, net | 10,048 | 10,463 | |||||||
Intangible assets, net | 99,585 | 103,079 | |||||||
Total assets | $ | 167,828 | $ | 169,964 | |||||
Liabilities and stockholders equity Current liabilities: |
|||||||||
Current maturities of long-term debt | $ | 3,614 | $ | 458 | |||||
Accounts payable | 3,172 | 2,573 | |||||||
Accrued expenses | 8,699 | 7,216 | |||||||
Total current liabilities | 15,485 | 10,247 | |||||||
Long-term debt, less current maturities | 94,262 | 108,725 | |||||||
Other noncurrent liabilities | 392 | 430 | |||||||
Deferred income taxes | 5,574 | 5,641 | |||||||
Total liabilities | 115,713 | 125,043 | |||||||
Commitments and contingencies | | | |||||||
Series B redeemable preferred stock (Note 4) | 6,350 | 5,361 | |||||||
Series C subscribed redeemable preferred stock (Note 7) | 4,830 | | |||||||
Stockholders equity: | |||||||||
Common stock, $1 par value; 1,000 shares authorized, issued and outstanding | 1 | 1 | |||||||
Additional paid-in capital | 44,466 | 44,466 | |||||||
Accumulated deficit | (3,281 | ) | (4,783 | ) | |||||
Other comprehensive loss | (251 | ) | (124 | ) | |||||
Total stockholders equity | 40,935 | 39,560 | |||||||
Total liabilities and stockholders equity | $ | 167,828 | $ | 169,964 | |||||
See accompanying notes.
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Iron Age Corporation
Condensed Consolidated Statements of Income (Unaudited)
Three months ended | Nine months ended | |||||||||||||||
October 28 | October 30 | October 28 | October 30 | |||||||||||||
2000 | 1999 | 2000 | 1999 | |||||||||||||
(Dollars in Thousands) | ||||||||||||||||
Net sales | $ | 30,504 | $ | 29,641 | $ | 91,605 | $ | 91,026 | ||||||||
Cost of sales | 14,624 | 14,635 | 44,288 | 45,151 | ||||||||||||
Gross profit | 15,880 | 15,006 | 47,317 | 45,875 | ||||||||||||
Selling, general and administrative | 10,928 | 10,474 | 32,584 | 31,555 | ||||||||||||
Depreciation | 434 | 472 | 1,231 | 1,391 | ||||||||||||
Amortization of intangible assets | 990 | 908 | 2,946 | 2,709 | ||||||||||||
Operating income | 3,528 | 3,152 | 10,556 | 10,220 | ||||||||||||
Interest expense | 3,053 | 2,829 | 8,777 | 9,333 | ||||||||||||
Income before income taxes and extraordinary item | 475 | 323 | 1,779 | 887 | ||||||||||||
Income tax expense | 452 | 343 | 1,504 | 1,064 | ||||||||||||
Income (loss) before extraordinary item | 23 | (20 | ) | 275 | (177 | ) | ||||||||||
Extraordinary gain, net of tax effect (Note 3) | 2,285 | 880 | 2,285 | 1,804 | ||||||||||||
Net income | $ | 2,308 | $ | 860 | $ | 2,560 | $ | 1,627 | ||||||||
See accompanying notes.
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Iron Age Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended | Nine months ended | ||||||||||
October 28 | October 30 | ||||||||||
2000 | 1999 | ||||||||||
(Dollars in Thousands) | |||||||||||
Operating activities Net income |
$ | 2,560 | $ | 1,627 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Extraordinary gain, net of tax | (2,285 | ) | (1,804 | ) | |||||||
Depreciation and amortization | 4,532 | 4,462 | |||||||||
Amortization of deferred financing fees included in interest | 441 | 644 | |||||||||
Provision for losses on accounts receivable | 433 | 89 | |||||||||
Deferred income taxes | (62 | ) | (111 | ) | |||||||
Changes in operating assets and liabilities: | |||||||||||
Accounts receivable | (1,734 | ) | (40 | ) | |||||||
Inventories | 1,453 | 661 | |||||||||
Prepaid expenses | 284 | 2,626 | |||||||||
Other assets | (172 | ) | (218 | ) | |||||||
Accounts payable | 599 | (1,067 | ) | ||||||||
Accrued expenses | (172 | ) | 578 | ||||||||
Payment of other noncurrent liabilities | (38 | ) | | ||||||||
Net cash provided by operating activities | 5,839 | 7,447 | |||||||||
Investing activities Capitalization of internal-use software costs |
(1,376 | ) | (830 | ) | |||||||
Purchases of property and equipment | (1,171 | ) | (1,071 | ) | |||||||
Net cash used in investing activities | (2,547 | ) | (1,901 | ) | |||||||
Financing activities Borrowings under revolving credit agreement |
40,850 | 18,050 | |||||||||
Issuance of redeemable preferred stock subscriptions | 4,761 | | |||||||||
Issuance of redeemable preferred stock | | 4,938 | |||||||||
Principal payments on debt | (47,511 | ) | (28,485 | ) | |||||||
Payment of financing costs | (183 | ) | (187 | ) | |||||||
Principal payments on capital leases,net | (147 | ) | (252 | ) | |||||||
Net cash used in financing activities | (2,230 | ) | (5,936 | ) | |||||||
Effect of exchange rate changes on cash and cash equivalents | (127 | ) | 46 | ||||||||
Increase (decrease) in cash and cash equivalents | 935 | (344 | ) | ||||||||
Cash and cash equivalents at beginning of period | 260 | 508 | |||||||||
Cash and cash equivalents at end of period | $ | 1,195 | $ | 164 | |||||||
Supplemental schedule of noncash investing
and financing activities Dividends and accretion on preferred stock |
$ | 1,058 | $ | 126 |
See accompanying notes.
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Iron Age Corporation
Notes to Condensed Consolidated
Financial Statements (Unaudited)
October 28, 2000
1. Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ended October 28, 2000 are not necessarily indicative of the results that may be expected for the fiscal year ended January 27, 2001. For further information, refer to Iron Age Corporations (Iron Age or the Company) consolidated financial statements and footnotes thereto for the fiscal year ended January 29, 2000.
2. Inventory
Inventories consist of the following:
October 28 | January 29 | |||||||
2000 | 2000 | |||||||
(Dollars in Thousands) | ||||||||
Raw materials | $ | 2,010 | $ | 2,602 | ||||
Work-in-process | 678 | 745 | ||||||
Finished goods | 30,269 | 31,063 | ||||||
$ | 32,957 | $ | 34,410 | |||||
3. Extraordinary Gain
On July 20, 1999, the Company purchased $9.64 million in principal amount of its 9 7/8% Senior Subordinated Notes due 2008 (the Senior Subordinated Notes) for $7.66 million. The purchase was funded by $5.1 million of borrowings under the Companys $61.6 million senior secured credit facility (as amended, the New Credit Facility) and the issuance of $2.563 million of Holdings Series B non-voting, redeemable preferred stock with a par value of $0.01 per share (the Holdings Series B Preferred Stock) to Holdings majority stockholder, Fenway Partners Capital Fund, L.P. (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 purchase, such principal amount of the Senior Subordinated Notes was retired.
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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 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.
On October 20, 2000, the Company purchased $16.36 million in principal amount of its Senior Subordinated Notes for $11.861 million. The purchase was funded by $7.1 million of borrowings under the New Credit Facility and an equity contribution of $4.761 million from Fenway Partners Capital Fund II, L.P. (Fenway II), an affiliate of Holdings majority stockholder, Fenway, for which Fenway II will receive shares of Series C non-voting, redeemable preferred stock of Holdings (the Holdings Series C Preferred Stock). The Company recorded an extraordinary gain of $2.285 million, net of unamortized deferred financing costs of $0.56 million, and income taxes of $1.655 million. Following the purchase, such principal amount of the Senior Subordinated Notes was retired.
4. Series B Redeemable Preferred Stock
On December 29, 1999, the Companys sole stockholder, Iron Age Holdings Corporation (Holdings), authorized 2,500 shares of Holdings Series B Preferred Stock. Holdings issued 1,000 shares of Holdings Series B Preferred Stock to Holdings majority stockholder, Fenway, for approximately $4.9 million, with a liquidation preference of $4,938 per share plus an additional amount of $2,044,325 divided by the total number of outstanding and accrued shares of Holdings Series B Preferred Stock as of the event of liquidation. A sale of all or substantially all of Holdings assets, merger or other change of control constitutes a liquidation. Dividends are cumulative at an annual rate of $953.97 per share and are payable in-kind, semi annually in arrears on February 21 and August 21, beginning February 21, 2000. The Holdings Series B Preferred Stock ranks junior to outstanding shares of Holdings Series A Preferred Stock, if any, and is senior to Holdings common stock in dividends and liquidation. The Holdings Series B Preferred Stock is redeemable upon a change of control or a public offering, as defined in the indenture governing the Companys Senior Subordinated Notes. The redemption price will be equal to the amount that would be paid to the Holdings Series B Preferred Stock under a liquidation. The difference between the carrying value and redemption amount is being accreted as a charge to retained earnings using the interest method. Holdings Series B Preferred Stock is reflected in the financial statements of the Company because the Company is a wholly-owned subsidiary of Holdings and the proceeds of Holdings Series B Preferred Stock were used to retire a portion of the Companys Senior Subordinated Notes.
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5. Comprehensive Income
Three Months Ended | Nine Months Ended | |||||||||||||||
October 28, | October 30, | October 28, | October 30, | |||||||||||||
2000 | 1999 | 2000 | 1999 | |||||||||||||
(Dollars in Thousands) | ||||||||||||||||
Net income | $ | 2,308 | $ | 860 | $ | 2,560 | $ | 1,627 | ||||||||
Foreign currency translation (loss) gain | (78 | ) | 17 | (127 | ) | 46 | ||||||||||
Total comprehensive income | $ | 2,230 | $ | 877 | $ | 2,433 | $ | 1,673 | ||||||||
6. Divestiture
On May 25, 1999, the Company sold the assets of its safety and medical products line, a component of its wholly owned subsidiary, Safety Supplies and Service Co., Inc. (Safety Supplies), 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 Companys net income from the safety and medical products line was not material from the date of the acquisition to the date of sale.
7. Series C Subscribed Redeemable Preferred Stock
In connection with the repurchase of the Senior Subordinated Notes on October 20, 2000 as described in Note 3, Fenway II made an equity contribution of $4.761 million. Fenway II will be issued an aggregate of 1,000 shares of Holdings Series C Preferred Stock for its equity contribution. The Holdings Series C Preferred Stock will have a price per share of $4,761 and will have a per share liquidation preference of $4,761 plus an additional amount equal to $2,332,066 divided by the total number of outstanding and accrued shares of Holdings Series C Preferred Stock as of the event of liquidation. On liquidation, the Holdings Series C Preferred Stock will receive all accrued and unpaid dividends, payable as additional shares of Holdings Series C Preferred Stock. A sale of all or substantially all of Holdings assets, merger or other change of control will constitute a liquidation. Dividends will be cumulative at an annual rate of $985.42 per share and will be payable in-kind, semi-annually in arrears on April 13 and October 13, beginning April 13, 2001. The Holdings Series C Preferred Stock will rank junior to outstanding shares of Holdings Series A Preferred Stock, if any, pari passu with the Holdings Series B Preferred Stock and senior to Holdings common stock in dividends and liquidation. The Holdings Series C Preferred Stock will be redeemable upon a change of control or a public offering, as defined in the indenture governing the Companys Senior Subordinated Notes, at a redemption price equal to the amount that would be paid to the Holdings Series C Preferred Stock
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in the event of a liquidation. The difference between the carrying value and redemption amount is being accreted as a charge to retained earnings using the interest method. Holdings Series C Preferred Stock is reflected in the financial statements of the Company because the Company is a wholly-owned subsidiary of Holdings and the amount subscribed for Holdings Series C Preferred Stock was used to retire a portion of the Companys Senior Subordinated Notes.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations.
General
The following discussions should be read in conjunction with the accompanying Condensed Consolidated Financial Statements for the period ended October 28, 2000, and the Companys audited consolidated financial statements and Annual Report on Form 10-K for the fiscal year ended January 29, 2000.
Related Party Transactions
On February 7, 2000, Fenway purchased Holdings 12 1/8% Senior Discount Notes due 2009 (the Discount Notes) with a face value of approximately $10.0 million for approximately $1.9 million. The purchase resulted in an income tax liability to Holdings of approximately $1.3 million. In May 2000, Fenway funded the income tax liability through a capital contribution.
On August 29, 2000, Fenway II purchased Discount Notes with a face value of approximately $7.3 million for approximately $1.4 million. The purchase resulted in an income tax liability to Holdings of approximately $0.9 million. In October 2000, Fenway II funded the income tax liability through a capital contribution.
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 July 1999 Transaction). 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 purchase, such principal amount of the Senior Subordinated Notes was retired. The Company may, under favorable market conditions, purchase additional Senior Subordinated Notes.
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 September 1999 Transaction). The purchase was funded by $4.7 million of borrowings under the New Credit Facility and the issuance of $2.375 million of 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.
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October 2000 Transaction
On October 20, 2000, the Company purchased $16.36 million in principal amount of its Senior Subordinated Notes for $11.861 million (the October 2000 Transaction). The purchase was funded by $7.1 million of borrowings under the New Credit Facility and an equity contribution of $4.761 million from Fenway II, for which Fenway II will receive Holdings Series C Preferred Stock. The Company recorded an extraordinary gain of $2.285 million, net of unamortized deferred financing costs of $0.56 million, and income taxes of $1.655 million. Following the purchase, such principal amount of the Senior Subordinated Notes was retired.
Results of Operations
Three Months ended October 28, 2000 compared to
Three Months ended October 30, 1999
Net Sales for the three months ended October 28, 2000 (third quarter 2001) were $30.5 million compared to $29.6 million for the comparable three month period ended October 30, 1999 (third quarter 2000), an increase of $0.9 million, or 3.0%. The increase in net sales was primarily attributable to a $0.7 million, or 2.6%, increase in the Companys primary footwear distribution business line and an increase in net sales in the Companys vision products business line of $0.2 million.
Gross Profit for third quarter 2001 was $15.9 million compared to $15.0 million for third quarter 2000, an increase of $0.9 million, or 6.0%. As a percentage of net sales, gross profit for third quarter 2001 increased to 52.1%, an increase of 1.5% from third quarter 2000. The increase in gross profit margin percentage was attributable to an increase in gross profit percentage in the Companys primary footwear distribution business line and vision products business line.
Selling, General and Administrative Expenses for third quarter 2001 were $10.9 million compared to $10.5 million for third quarter 2000, an increase of $0.4 million, or 3.8%, due primarily to the effect of general inflationary increases in operating expenses, including rising fuel prices that affected Shoemobile and Opti-Van operating costs and the adverse effect of changes in foreign exchange rates.
Operating Income for third quarter 2001 was $3.5 million compared to $3.2 million for third quarter 2000, an increase of $0.3 million, or 9.4%. As a percentage of net sales, operating income was 11.5% of net sales for third quarter 2001 compared to 10.8% of net sales for third quarter 2000. The increase was primarily attributable to the increase in gross profit as discussed above.
Interest Expense for third quarter 2001 was $3.1 million compared to $2.8 million for third quarter 2000, an increase of $0.3 million, or 10.7%. The increase in interest expense was attributable to
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increased indebtedness under the New Credit Facility and an increase in interest rates for third quarter 2001 compared to third quarter 2000.
Income Tax Expense for third quarter 2001 was an income tax expense of $0.5 million compared to an income tax expense of $0.3 million for third quarter 2000. Income tax expense for third quarter 2001 and income tax expense for third quarter 2000 differ from that of the statutory income tax rate due primarily to nondeductible goodwill amortization.
Extraordinary Item for third quarter 2001 was an extraordinary gain of $2.285 million, net of a $1.655 million tax expense, due to the repurchase of a portion of the Senior subordinated Notes in the October 2000 Transaction. Extraordinary item for third quarter 2000 was an extraordinary gain of $0.88 million, net of a $0.64 million tax expense, due to the repurchase of a portion of the Senior Subordinated Notes in the September 1999 Transaction.
Nine Months ended October 28, 2000 compared to
Nine Months ended October 30, 1999
Net Sales for the nine months ended October 28, 2000 (first three quarters 2001) were $91.6 million compared to $91.0 million for the comparable nine month period ended October 30, 1999 (first three quarters 2000), an increase of $0.6 million, or 0.7%. The increase in net sales was primarily attributable a $1.4 million, or 1.6%, increase in the Companys primary footwear distribution business line and an increase in net sales in the Companys vision products business line of $0.3 million. The increase in net sales was partially offset by a decrease of $0.5 million, or 0.5%, related to the sale of the Companys safety and medical business products line in May 1999 and a decrease in net sales to non-affiliated customers in the Companys manufacturing subsidiary of $0.6 million, or 21.3% of net sales in that subsidiary.
Gross Profit for first three quarters 2001 was $47.3 million compared to $45.9 million for first three quarters 2000, an increase of $1.4 million, or 3.1%. As a percentage of net sales, gross profit for first three quarters 2001 increased to 51.7%, an increase of 1.3% from first three quarters 2000. The increase is generally attributable to improved gross profit margins in the Companys primary footwear distribution business. The increase in gross margin percentage was also attributable to a decrease in sales related to the lower gross profit margin safety and medical products business line.
Selling, General and Administrative Expenses for first three quarters 2001 were $32.6 million compared to $31.6 million for first three quarters 2000, an increase of $1.0 million, or 3.2%, due primarily to the effect of general inflationary increases in operating expenses, including rising fuel prices that affected Shoemobile and Opti-Van operating costs and the adverse effect of changes in foreign exchange rates.
Operating Income for first three quarters 2001 was $10.6 million compared to $10.2 million for first three quarters 2000, an increase of $0.4 million, or 3.9%. As a percentage of net sales, operating income was 11.6% of net sales for first three quarters 2001 compared to 11.2% of net sales for first
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three quarters 2000. The increase was primarily attributable to the increase in gross profit as discussed above.
Interest Expense for first three quarters 2001 was $8.8 million compared to $9.3 million for first three quarters 2000, a decrease of $0.5 million, or 5.4%. The decrease in interest expense was attributable to decreased indebtedness of the Company related to the repurchase of a portion of the Senior Subordinated Notes in the July 1999 Transaction, the September 1999 Transaction and the October 2000 Transaction, partially offset by increased indebtedness under the New Credit Facility and an increase in interest rates.
Income Tax Expense for first three quarters 2001 was $1.5 million compared to an income tax expense of $1.1 million for first three quarters 2000. Income tax expense for first three quarters 2001 and for first three quarters 2000 differ from that of the statutory income tax rate due primarily to nondeductible goodwill amortization.
Extraordinary Item for first three quarters 2001 was an extraordinary gain of $2.285 million, net of a $1.655 million tax expense, due to the repurchase of a portion of the Senior Subordinated Notes in the October 2000 Transaction. Extraordinary item for first three quarters 2000 was an extraordinary gain of $1.8 million, net of a $1.3 million tax expense, due to the repurchase of a portion of the Senior Subordinated Notes in the July 1999 Transaction and the September 1999 Transaction.
Liquidity and Capital Resources
The Companys 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 the Companys credit facilities.
Net cash provided by operating activities was $5.8 million for first three quarters 2001, a decrease of $1.6 million as compared to net cash provided by operating activities of $7.4 million in first three quarters 2000. The decrease in cash from operating activities is primarily the result of income tax prepayments for first three quarters 2001 and overall increases in certain working capital items.
The Companys investing activities for first three quarters 2001 consisted of capital expenditures of approximately $1.2 million for improvements in footwear and vision retail stores, shoemobiles and equipment and approximately $1.4 million for the acquisition of software for internal use. Capital expenditures of approximately $1.9 million for first three quarters 2000 included capital expenditures of approximately $1.1 million for improvements in footwear and vision retail stores, shoemobiles and equipment and approximately $0.8 million for the acquisition of software for internal use.
The Company used approximately $2.2 million for financing activities for first three quarters 2001, which included net working capital payments of $1.9 million, excluding the October 2000 Transaction. The Companys financing activities in first three quarters 2001 also included a
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borrowing of $7.1 million on the New Credit Facility in October 2000. The proceeds were used to pay for a portion of the repurchase of Senior Subordinated Notes in the October 2000 Transaction. The remaining portion of the repurchase was provided by a $4.761 million equity contribution from Holdings. The amount of such equity contribution was provided to Holdings by a $4.761 million equity contribution from Fenway II, an affiliate of Holdings majority stockholder, Fenway, for which Fenway II will receive shares of Holdings Series C Preferred Stock. The Company used approximately $5.9 million from financing activities for first three quarters 2000 which included net working capital payments of approximately $5.4 million, excluding the July 1999 Transaction and the September 1999 Transaction. The Companys financing activities in first three quarters 2000 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 a portion of the repurchase of 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 equity contribution from Holdings. The amount of such equity contribution was provided to Holdings by a $4.938 million equity contribution from Holdings majority stockholder, Fenway, for which Fenway received Holdings Series B Preferred Stock.
The Companys total working capital as of October 28, 2000 was $39.9 million. At January 29, 2000, working capital was $44.6 million. The primary reason for the decrease to working capital was an increase in current liabilities related to current maturities of long-term debt of the New Credit Facility.
Cash flow from operations for first three quarters 2001 was sufficient to cover debt service requirements under the New Credit Facility. The Companys ability to make scheduled payments of principal, or to pay the interest or premium (if any) on, or to refinance, its indebtedness, 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 Companys 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 Companys 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.
The Companys debt consists of the Senior Subordinated Notes, the New Credit Facility and certain other debt. The New Credit Facility, as amended, consists of a $31.6 million multiple draw acquisition term loan facility (the Acquisition Credit Facility) and $30.0 million in revolving credit loans, letters of credit and swing line loans (the Revolving Credit Facility). The Companys other debt of $0.7 million consists of capital leases and other notes. As of October 28, 2000, approximately $21.1 million of the Acquisition Credit Facility and approximately $11.1 million of the Revolving Credit Facility were outstanding. The Company has additional borrowing availability of $10.5 million under the Acquisition Credit Facility and approximately $18.9 million under the
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Revolving Credit Facility. 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 October 28, 2000, none of the Companys Domestic Restricted Subsidiaries was a Material Subsidiary, and therefore no Subsidiary Guaranty was in force or effect.
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 year 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 year 2000, and (iv) add to the financial covenants applicable to fiscal year 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 year 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
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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.
On September 15, 2000, the New Credit Facility was amended to (i) permit the use of up to $10,800,000 of the Revolving Credit Facility, on or prior to April 24, 2001, to repurchase Senior Subordinated Notes at or below a price equal to 80% of par value; provided that no more than 60% of the purchase price of such Senior Subordinated Notes, after September 1, 2000, comes from borrowings under the Revolving 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) eliminate as a permitted use of proceeds of the Acquisition Credit Facility the repurchase of Discount Notes; and (iv) amend the definition of Permitted Issuance to provide that the equity securities sold to Fenway shall not be less than its pro rata share of such sale or issuance.
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 income until the hedged item is recognized in earnings. The ineffective portion of a derivatives change in fair value will be immediately 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.
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 Companys revenue recognition practices are in conformity with SAB No. 101.
Inflation and Changing Prices
The Companys 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 Companys results of operations.
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Forward Looking Statements
When used in this quarterly report, 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 Companys actual results and could cause the Companys actual results to differ materially from those expressed in any forward 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 Companys relationships with its major suppliers, including the Companys largest supplier in China and (x) inability to grow by acquisition of additional safety shoe distributors or to effectively consolidate operations of businesses acquired.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
There have been no material changes in the Companys exposure to market risk since January 29, 2000.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit Index.
3.1* | Iron Age Certificate of Incorporation, as amended. | |||
3.2* | Iron Age By-laws. | |||
4.1* | Indenture dated as of April 24, 1998. | |||
10.1* | Credit Agreement dated as of April 24, 1998. | |||
10.2* | Security Agreement dated April 24, 1998. | |||
10.3* | Intellectual Property Security Agreement dated April 24, 1998. | |||
10.4* | Canadian Security Agreement dated April 24, 1998. | |||
10.5* | Mortgage, Assignment of Leases and Rents, Fixture Filing, Security Agreement and Financing Statement dated February 26, 1997, as amended April 24, 1998. | |||
10.6* | Intercompany Subordination Agreement dated April 24, 1998. | |||
10.7* | Subsidiary Guaranty dated April 24, 1998. | |||
10.8* | Iron Age Trademark License Agreement with W.L Gore & Associates, Inc. dated August 15, 1994. |
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10.9* | Falcon Trademark License Agreement with W.L. Gore & Associates, Inc. dated July 25, 1994. | |||
10.10* | Falcon Manufacturing Certification Agreement with W.L. Gore & Associates, Inc. dated July 25, 1994. | |||
10.11* | General Services Administration Contract effective July 26, 1994, as modified May 24, 1995. | |||
10.12* | Amended and Restated Management Agreement dated as of February 26, 1997. | |||
10.13* | Stockholders Agreement dated as of February 26, 1997. | |||
10.14* | Amendment No. 1 to Stockholders Agreement dated as of March 25, 1997. | |||
10.15* | American Home Assurance Company Joinder to the Stockholders Agreement dated as of March 25, 1997. | |||
10.16* | Banque Nationale de Paris Joinder to the Stockholders Agreement dated as of March 25, 1997. | |||
10.17* | Stock Option Plan dated February 26, 1997. | |||
10.18* | Securities Purchase Agreement dated February 26, 1997. | |||
10.19* | Stock Purchase Agreement dated as of December 26, 1996. | |||
10.20* | Amendment No. 1 to the Stock Purchase Agreement dated as of February 26, 1997. | |||
10.21* | Pittsburgh, Pennsylvania Lease Agreement dated March 1, 1993, as amended June 2, 1994, as amended June 12, 1996, as amended December 10, 1997. | |||
10.22* | Jerusalem, New York Lease Agreement dated December 9, 1992, as amended January 1, 1994, as amended April 1997. | |||
10.23* | Jerusalem, New York Lease Agreement dated June 20, 1997, as amended January 9, 1998. | |||
10.24* | Lewiston, Maine Lease Agreement dated January 14, 1994. | |||
10.25* | Lewiston, Maine Lease Agreement dated November 30, 1990, as amended June 8, 1994. | |||
10.26* | Ontario, Canada Lease Agreement dated June 11, 1991, as renewed November 23, 1995. | |||
10.27* | Jensen Employment Agreement dated February 26, 1997. | |||
10.28* | Mills Employment Agreement dated November 20, 1995. | |||
10.29* | McDonough Employment Agreement dated November 20, 1995. | |||
10.30* | Johanson Employment Agreement dated August 1, 1994. | |||
10.31* | Johanson Non-Competition Agreement dated August 1, 1994. | |||
10.32** | Taaffe Severance Agreement dated January 13, 1999. | |||
10.33** | Taaffe Agreement and General Release dated January 13, 1999. | |||
10.34** | Letter Waiver to Banque Nationale de Paris Credit Agreement dated August 28, 1998. | |||
10.35** | Amendment No. 2 and Waiver to Banque Nationale de Paris Credit Agreement dated February 26, 1999. | |||
10.36** | Election to reduce Acquisition Commitment of Banque Nationale de Paris Credit Agreement dated March 5, 1999. | |||
10.37*** | Amendment No. 3 to Banque Nationale de Paris Credit Agreement dated June 23, 1999. | |||
10.38**** | Amendment No. 4 to Banque Nationale de Paris Credit Agreement dated March 17, 2000. |
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10.39**** | Amendment No. 1 to Stock Option Plan dated April 8, 1999. | |||
10.40**** | Amendment No. 2 to Stock Option Plan dated January 29, 2000. | |||
10.41**** | Johanson Consulting Agreement dated February 1, 2000. | |||
10.42**** | Certificate of Designation, Preferences and Rights of the Series B Preferred Stock of Iron Age Holdings Corporation dated December 29, 1999. | |||
10.43 | Amendment No. 5 to Banque Nationale de Paris Credit Agreement dated September 15, 2000. | |||
27.1 | Financial Data Schedules. |
* | Incorporated by reference to the similarly numbered exhibit in the Companys Registration Statement on Form S-4, No. 333-57011, filed June 17, 1998. | |
** | Incorporated by reference to the similarly numbered exhibit in the Companys Annual Report on Form 10-K, filed April 30, 1999. | |
*** | Incorporated by reference to the similarly numbered exhibit in the Companys Quarterly Report on Form 10-Q, filed September 14, 1999. | |
**** | Incorporated by reference to the similarly numbered exhibit in the Companys Annual Report on Form 10-K, filed April 18, 2000. |
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the third quarter ended October 28, 2000.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
IRON AGE CORPORATION | |||
By: /s/ Keith A.
McDonough Name: Keith A. McDonough Title: Executive Vice President Chief Financial Officer (Principal financial and accounting officer) |
Dated: December 11, 2000
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