<PAGE>
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 31, 1998
--------------------------
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: 333-57009
----------------
Iron Age Holdings Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3349775
----------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
incorporation or organization 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 issuer's classes of
common stock as of the latest practicable date. Not Applicable.
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements.
The following financial statements are presented herein:
Condensed Consolidated Balance Sheets as of October 31, 1998 and
January 31, 1998
Condensed Consolidated Statements of Income for the three months and
nine months ended October 31, 1998 and October 25, 1997
Condensed Consolidated Statements of Cash Flows for the nine months
ended October 31, 1998 and October 25, 1997
Notes to Condensed Consolidated Financial Statements
-2-
<PAGE>
Iron Age Holdings Corporation
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
October 31 January 31
1998 1998
(unaudited) (Note)
Assets (Dollars in Thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 607 $ 2,069
Accounts receivable, net 17,618 15,996
Inventories (Note 2) 36,624 36,841
Prepaid expenses 5,219 1,640
Deferred income taxes 647 640
-------- --------
Total current assets 60,715 57,186
Notes receivable and other assets 436 290
Property and equipment, net 10,726 10,479
Intangible assets, net 109,413 106,846
-------- --------
Total assets $181,290 $174,801
======== ========
Liabilities and stockholder's equity
Current liabilities:
Current maturities of long-term debt $ 584 $ 3,699
Accounts payable 3,526 3,510
Accrued expenses 9,916 7,272
-------- --------
Total current liabilities 14,026 14,481
Long-term debt, less current maturities 147,011 97,976
Accrued pension liability 516 516
Deferred income taxes 6,737 6,949
-------- --------
Total liabilities 168,290 119,922
Commitments and contingencies - -
Redeemable preferred stock - 17,031
Stockholder's equity:
Common stock, $.01 par value; 200,000 shares
authorized, 99,625 issued and outstanding 1 1
Additional paid-in capital 38,086 38,086
Retained earnings (24,810) (174)
Comprehensive income (277) (65)
-------- --------
Total stockholder's equity 13,000 37,848
-------- --------
Total liabilities and stockholder's equity $181,290 $174,801
======== ========
</TABLE>
Note: The balance sheet at January 31, 1998 has been derived from the audited
financial statements at that date but does not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
-3-
<PAGE>
Iron Age Holdings Corporation
Condensed Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Successor Successor Successor Predecessor Successor
---------- ---------- ----------- ------------ ------------
Nine months January 26 February 27
Three months ended Ended 1997 through 1997 through
October 31 October 25 October 31 February 26 October 25
1998 1997 1998 1997 1997
---------- ---------- ----------- ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Net sales $32,592 $30,811 $93,871 $10,937 $76,245
Cost of sales 17,070 15,256 47,918 5,610 38,265
------- ------- ------- ------- -------
Gross profit 15,522 15,555 45,953 5,327 37,980
Selling, general and administrative 11,320 10,325 35,399 5,120 25,965
Depreciation 454 420 1,304 121 1,054
Amortization of intangible assets 879 815 2,603 117 2,274
------- ------- ------- ------- -------
Operating income 2,869 3,995 6,647 (31) 8,687
Gain on divestiture 1,686 - 1,686 - -
Interest expense 3,952 2,774 10,796 1,116 6,705
------- ------- ------- ------- -------
Income(loss) before income taxes 603 1,221 (2,463) (1,147) 1,982
Provision (benefit) for income taxes 545 862 (220) (452) 1,057
------- ------- ------- ------- -------
Income (loss) before extraordinary item 58 359 (2,243) (695) 925
Extraordinary item, net of tax effect - - (4,015) - -
------- ------- ------- ------- -------
Net income (loss) $ 58 $ 359 $(6,258) $ (695) $ 925
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
-4-
<PAGE>
Iron Age Holdings Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Successor Predecessor Successor
------------------ ------------- -------------
January 26 February 27
Nine months ended 1997 through 1997 through
October 31 February 26 October 25
1998 1997 1997
------------------ ------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C>
Operating activities
Net income (loss) $ (6,258) $ (695) $ 925
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary item, net of tax 4,015 -
Depreciation and amortization 4,251 246 3,505
Amortization of deferred financing fees included in interest 1,998 16 409
Provision for losses on accounts receivable 94 10 152
Deferred income taxes (491) - (10)
Stock-based compensation - 1,054 -
Changes in operating assets and liabilities:
Accounts receivable (779) (954) (1,441)
Inventories 1,944 797 (6,069)
Prepaid expenses 295 65 460
Other assets (537) 20 (119)
Accounts payable (665) (573) (902)
Accrued expenses (1) 1,450 (955)
--------- ------- ---------
Net cash provided by (used in) operating activities 3,866 1,436 (4,045)
Investing activities
Net cash used in business acquisitions (5,240) - (141,717)
Purchases of property and equipment (1,671) (117) (1,197)
--------- ------- ---------
Net cash used in investing activities (6,911) (117) (142,914)
Financing activities
Borrowing under revolving credit agreement 40,150 (1,909) 33,550
Proceeds from senior term notes - - 65,000
Proceeds from senior subordinated notes 100,000 - 14,550
Proceeds from the Discount notes 25,001 - -
Capital contribution - - 40,000
Issuance of Preferred Stock - - 14,900
Issuance of stock purchase warrants - - 100
Principal payment on debt (121,323) (357) (13,099)
Payment of financing costs (6,539) - (7,468)
Redemption of Preferred Stock (17,664) - -
Dividend paid (17,745) - -
Principal payments on capital leases (85) (33) (24)
--------- ------- ---------
Net cash provided by (used in) financing activities 1,795 (2,299) 147,509
Effect of exchange rate changes on cash and cash equivalents (212) (37) (31)
--------- ------- ---------
(Decrease) increase in cash and cash equivalents (1,462) (1,017) 519
Cash and cash equivalents at beginning of period 2,069 1,517 500
--------- ------- ---------
Cash and cash equivalents at end of period $ 607 $ 500 $ 1,019
========= ======= =========
</TABLE>
See accompanying notes.
-5-
<PAGE>
Iron Age Holdings Corporation
Notes to Condensed Consolidated
Financial Statements (Unaudited)
October 31, 1998
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 31, 1998 are not
necessarily indicative of the results that may be expected for the year ended
January 30, 1999. For further information, refer to Holdings' consolidated
financial statements and footnotes thereto for the year ended January 31, 1998.
2. Inventory October 31 January 31
Inventories consist of the following: 1998 1998
---- ----
Raw materials $ 2,217 $ 2,788
Work-in-process 678 682
Finished goods 33,729 33,371
------- -------
$36,624 $36,841
======= =======
-6-
<PAGE>
Item 2. Management's 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 31,
1998, and the audited consolidated financial statements for the year ending
January 31, 1998 of Iron Age Holdings Corporation ("Holdings").
Acquisitions
On February 26, 1997, Fenway Partners Capital Fund, L.P., together with certain
other investors, in partnership with certain members of management, acquired all
of the outstanding stock of the predecessor to Holdings for an aggregate
purchase price of approximately $143.6 million (the "Fenway Acquisition").
Concurrently with the Fenway Acquisition, (i) Holdings and its subsidiary, Iron
Age Corporation ("Iron Age"), entered into a syndicated senior bank loan
facility (the "Old Credit Facility"), (ii) Iron Age issued 12.5% Senior
Subordinated Notes due 2006 (the "Old Subordinated Notes"), (iii) Holdings
issued Series A Preferred Stock (the "Holdings Series A Preferred Stock"), (iv)
Holdings issued Common Stock for equity capital of approximately $32.2 million
and (v) management rolled over certain options to acquire shares of the
predecessor company into options to acquire shares of Common Stock of Holdings
and were granted additional options to acquire shares of Holdings. Holdings and
Iron Age used excess cash and net proceeds from the Discount Note Offering (as
defined below), the April 24, 1998 offering of 9 7/8% Senior Subordinated Notes
due 2008 (the "Senior Subordinated Note Offering") and a new credit facility
(the "New Credit Facility") to repay the Old Credit Facility and the Old
Subordinated Notes and to pay a dividend to Holdings to allow Holdings to redeem
the Holdings Series A Preferred Stock and to make a distribution to
shareholders. Concurrently with the Senior Subordinated Note Offering, Holdings
offered 12 1/8% Senior Discount Notes ("Discount Notes") due 2009 (the "Discount
Note Offering" and, together with the Senior Subordinated Note Offering and the
application of proceeds therefrom, the "Transactions").
During the last five weeks of the three months ended May 2, 1998, Holdings
acquired the stock of Safety Supplies and Service Company, Inc. and acquired
certain assets and assumed certain liabilities of Safety Depot Ltd., ACT Safety,
Inc. and J Mars-Knapp Shoes (the "First Quarter Acquisitions"). The combined
purchase price for the First Quarter Acquisitions was approximately $4.64
million, including transaction costs of approximately $150,000. In addition, on
July 7, 1998, Holdings acquired certain assets of Work-Saf, Inc. for
approximately $0.75 million (the "Second Quarter Acquisition"). The First
Quarter Acquisitions and the Second Quarter Acquisition have been accounted for
using the purchase method of accounting for business combinations, and
accordingly, (i) the results of operations for each of the acquired companies
are included in Holdings' financial statements only from the date of the
respective acquisitions and (ii) the purchase price has been allocated to
Holdings' assets and liabilities based upon fair market value. The First
-7-
<PAGE>
Quarter Acquisitions and the Second Quarter Acquisition resulted in goodwill of
approximately $2.50 million, which is being amortized over 40 years.
Divestitures
On September 9, 1998, Holdings announced the sale of the Dunham product line and
related trademarks to New Balance Athletic Shoes, Inc., effective August 31,
1998, for $2.0 million and recorded a gain of $1.7 million. In conjunction with
the sale, Holdings' Falcon manufacturing subsidiary agreed to a minimum two year
supply agreement with New Balance and the sale of on-hand inventory.
Results of Operations
Three Months ended October 31, 1998 compared to
Three Months ended October 25, 1997
Net Sales for the three months ended October 31, 1998 ("third quarter 1998")
were $32.6 million compared to $30.8 million for the comparable three month
period ended October 25, 1997 ("third quarter 1997"), an increase of $1.8
million, or 5.8%. The increase was primarily attributable to growth in both the
core business of 7.9%, including the effect of the First Quarter Acquisitions.
The increase offset a $1.2 million decrease to sales from the divested Dunham
product line.
Gross Profit for the third quarter 1998 was $15.5 million compared to $15.6
million for the third quarter 1997, a decrease of $0.1 million, or 0.6%. As a
percentage of net sales, gross profit decreased 2.9% to 47.6% for the third
quarter 1998. The decrease in gross profit percentage was attributable to
increased expenses relating to the operations of regional distributors acquired
in the First Quarter Acquisitions. Gross profit percentage on existing core and
Knapp business lines was substantially unchanged or has increased from the third
quarter 1997.
Selling, General and Administrative Expenses for the third quarter 1998 were
$11.3 million compared to $10.3 million for the third quarter 1997, an increase
of $1.0 million, or 9.7%. The increase was related to the First Quarter
Acquisitions and infrastructure, including additional employees and related
expenses, added in the Knapp distribution channel since the second quarter 1997.
The increases offset a $0.4 million decrease in expenses in the core business
and Holdings' manufacturing facility.
Operating Income for the third quarter 1998 was $2.9 million, or 8.9% of net
sales compared to $4.0 million, or 13.0% of net sales, for the third quarter
1997. The decrease was primarily attributable to the decrease in gross profit
and increased selling, general and administrative expenses as discussed above.
Gain on Divestiture for the third quarter 1998 was $1.7 million which was
attributable to the gain on the sale of the Dunham product line and related
trademarks as discussed above.
-8-
<PAGE>
Interest Expense for the third quarter 1998 was $4.0 million compared to $2.8
million for the third quarter 1997, an increase of $1.2 million or 42.9%. The
increase in interest expense was attributable to increased indebtedness of
Holdings related to the Transactions and the New Credit Facility.
Income Tax Expense for the third quarter of 1998 was $0.5 million compared to an
expense of $0.9 million in the third quarter of 1997. The decreased expense in
the third quarter 1998 was attributable to the increase in interest expense as
described above.
Nine Months ended October 31, 1998 compared to
Nine Months ended October 25, 1997
Net Sales for the first nine months of 1998 ("first three quarters of 1998")
were $93.9 million compared to $87.2 million for the nine months ended October
25, 1997 ("first three quarters of 1997"), an increase of $6.7 million, or 7.7%.
The increase was attributable to growth in both the core business of 6.6% and
the Knapp distribution channel of 8.7%. Knapp growth offset a $1.7 million
decrease in sales of the Dunham product line, resulting from the Dunham sale.
For comparability with prior periods, net sales for the predecessor and
successor periods in the first three quarters of 1997 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.
Gross Profit for the first three quarters of 1998 was $46.0 million compared to
$43.3 million for the first three quarters of 1997, an increase of $2.7 million,
or 6.2%. As a percentage of net sales, gross profit decreased 0.7% to 49.0% for
the first three quarters of 1998. The core business gross profit percentage
decreased 0.4% from the first three quarters of 1997 due to increased expenses
relating the operations of regional distributors acquired in the First Quarter
Acquisitions. The core business decrease offset a 2.8% increase in gross profit
percentage in the Knapp distribution channel. For comparability with prior
periods, gross profit for the predecessor and successor periods in the first
three quarters of 1997 have been discussed on a combined basis. Management
believes that a combined discussion of predecessor and successor periods is
reasonable and appropriate because there were no adjustments to gross profit for
a change in basis resulting from the Fenway Acquisition.
Selling, General and Administrative Expenses for the first three quarters of
1998 were $35.4 million compared to $31.1 million for the first three quarters
of 1997, an increase of $4.3 million, or 13.8%. The increase was primarily
related to the First Quarter Acquisitions and infrastructure, including
additional employees and related expenses, added in the Knapp distribution
channel since the first half of 1997. For comparability with prior periods,
selling, general and administrative expenses in the first three quarters of 1997
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.
Operating Income for the first three quarters of 1998 was $6.6 million, or 7.0%
of net sales, and was $8.7 million, or 11.4% of net sales, for the period from
February 27, 1997 through October 25, 1997. The decrease was attributable to the
increased selling, general and administrative expenses as discussed above.
-9-
<PAGE>
Operating loss and operating loss as a percentage of 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 periods included selling,
general and administrative expenses, as discussed above, and additional
depreciation and amortization of $0.3 million. The additional depreciation and
amortization is primarily due to the increase in basis of goodwill, customer
lists and other tangible and intangible assets capitalized as a result of the
Fenway Acquisition and the acquisition of the assets of Knapp Shoes, Inc. in
March 1997 (the "Knapp Acquisition").
Gain on Divestiture for the first three quarters of 1998 was $1.7 million which
was related to the gain on the sale of Dunham and related trademarks as
discussed above.
Interest Expense for the first three quarters of 1998 was $10.8 million and was
$6.7 million for the period from February 27, 1997 through October 25, 1997.
Interest expense for the predecessor period January 26, 1997 through February
26, 1997 was $1.1 million. Interest expense for the successor periods prior to
April 25, 1998 reflect the additional indebtedness of Holdings 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 Transactions.
Income Tax Expense was $1.1 million in the period February 27, 1997 through
October 25, 1997. Income tax benefit for the predecessor period January 26, 1997
through February 26, 1997 was $0.5 million. Income tax benefit for the first
three quarters of 1998 was $0.2 million. Income taxes for the successor periods
reflect the effect of additional nondeductible goodwill amortization.
Extraordinary Item for the first three quarters of 1998 was an extraordinary
loss of $4.0 million, net of tax, 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 Transactions.
Liquidity and Capital Resources
Holdings' primary cash needs are working capital, capital expenditures and debt
service. Holdings anticipates that it may use cash in the future to finance
acquisitions. Holdings 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 $3.9 million in the first three
quarters of 1998, an increase of $6.5 million as compared to net cash used in
operating activities of $2.6 million in the first three quarters of 1997. The
increase in cash from operating activities is primarily the result of the
decrease in inventory levels. Inventory decreased by $1.9 million in the first
three quarters of 1998 compared to an increase of $5.3 million in the first
three quarters of 1997, as a result of the Knapp Acquisition. In addition, the
increase in accounts receivable in the first three quarters of 1998 was $0.8
million compared to a $2.4 million increase in the first three quarters of 1997.
-10-
<PAGE>
Excluding cash paid for acquisitions, Holdings used cash for investing
activities of $1.7 million in the first three quarters of 1998 compared to $1.3
million used for investing activities in the first three quarters of 1997.
Holdings' capital expenditures were $1.7 million in the first three quarters of
1998 compared to $1.3 million in the first three quarters of 1997. Capital
expenditures for the first three quarters of 1998 included $0.2 million in
remaining costs related to the addition to Holdings' central distribution center
building. The remaining $1.5 million in capital expenditures related to
improvements in retail stores, shoemobiles and equipment in the core business
and installing POS (Point-of Sale) systems in stores and trucks acquired as a
component of the First Quarter Acquisitions.
Holdings' total working capital as of October 31, 1998 was $46.7 million. At
January 31, 1998, working capital was $42.7 million. The primary reason for the
increase to working capital was the elimination of the current portion of long
term senior debt in connection with the Transactions in April 1998.
Excluding cash paid for regional distributor acquisitions, Holdings used
approximately $3.4 million from financing activities in the first three quarters
of 1998 due primarily to repayments of the New Credit Facility. In the first
three quarters of 1997, Holdings generated cash of $3.5 million due primarily to
borrowings under the Old Credit Facility.
Holdings is a holding company, and its ability to pay interest on the Discount
Notes is dependent upon receipt of dividends from its subsidiaries. Holdings
does not have, and may not in the future have, any assets other than the common
stock of Iron Age (which is pledged to secure the obligations of Iron Age under
the New Credit Facility). Iron Age is party to the New Credit Facility and an
indenture pursuant to which the Senior Subordinated Notes were offered, each of
which imposes substantial restrictions on Iron Age's ability to pay dividends to
Holdings.
Cash flow from operations for the first three quarters of 1998 was sufficient to
cover debt service requirements under the New Credit Facility and the Senior
Subordinated Notes. Holdings' ability to make scheduled payments of principal,
or to pay the interest or premium (if any) on, or to refinance, its indebtedness
(including the Discount Notes of Holdings), 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 by Iron Age under the New Credit
Facility, will be adequate to meet Holdings' 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 Holdings' 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 Holdings to service its
indebtedness, including the Discount Notes and the Senior Subordinated Notes, or
to make capital expenditures.
-11-
<PAGE>
As of October 31, 1998, Holdings' debt consisted of the Discount Notes, the
Senior Subordinated Notes, the New Credit Facility and certain other debt. The
New Credit Facility consists of a $35.0 million multiple draw acquisition term
loan facility (the "New Acquisition Credit Facility") and $30.0 million in
revolving credit loans, letters of credit and swing line loans (the "New
Revolving Credit Facility"). Holdings' other debt of $0.9 million consists of
capital leases and other notes. As of October 31, 1998, approximately $11.7
million of the New Acquisition Credit Facility and approximately $8.4 million of
the New Revolving Credit Facility were outstanding, and Holdings had additional
borrowing availability under the New Acquisition Credit Facility of $23.3
million and under the New Revolving Credit Facility of approximately $21.6
million. The New Acquisition Credit Facility matures in quarterly installments
from July 2001 until final payment in April 2004. The New Revolving Credit
Facility will mature in April 2004 and has no scheduled interim amortization.
Year 2000 Issue
Many existing computer programs use only two digits, rather than four, to
represent a year. The Year 2000 issue arises because date-sensitive software or
hardware written or developed in this manner may recognize a date using "00" as
the year 1900 rather than the year 2000. This could potentially result in
system failures or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in normal business activities.
Holdings classifies its response to the Year 2000 Issue into five phases:
inventory, assessment, renovation, validation and implementation. Inventory is
the process in which all electronic/computer components are defined for all
systems (information technology ("IT") and non-IT). Assessment is the process
in which all components are classified as either compliant or non-compliant.
Renovation is the process in which a system is upgraded, replaced or retired.
Validation is the process in which compliant systems are tested within Holdings'
infrastructure to validate that either the initial compliant assessment is
correct or the upgrade or replacement from the renovation phase is compliant
with Holdings' infrastructure. Implementation is the process in which a
compliant system is installed into Holdings' production environment and is used
to support business operations.
Holdings recently completed an inventory of its IT systems, and is now in the
renovation and validation phases of its IT systems and currently intends to
implement these systems by February 1999. In the ordinary course of business,
Holdings upgraded the applications software covering the main integrated system.
As of October 31, 1998, Holdings has expended $17,000 and has a total expected
cost of $50,000 to renovate, validate and implement software to address the Year
2000 Issue. The cost is being funded out of operating cash flow with the entire
amount being capitalized as new hardware and software.
Holdings' inventory and assessment of its non-IT systems (including phone,
heating/air-conditioning, electricity and security sytems) is expected to be
completed by year end 1998, followed by any required renovation. Holdings is
using internal resources to address the Year 2000 Issue of its non-IT systems
and has not incurred significant separately identifiable costs related to
-12-
<PAGE>
the Year 2000 Issue through October 31, 1998 and does not expect to incur
significant additional costs in order to upgrade its non-IT systems. All
validation and implementation of these non-IT systems is expected to be
completed by mid-1999.
The costs of systems implementation and Year 2000 modifications are based upon
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources, and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties. As of October 31, 1998, the cost of bringing Holdings' IT and
non-IT systems into Year 2000 compliance is not expected to have a material
effect on Holdings' financial condition or results of operations.
In addition to reviewing its internal systems, Holdings has polled or is in the
process of polling its outside software and other vendors, customer and freight
carriers to determine whether they are Year 2000 compliant or attempt to
identify any potential issues. If Holdings' customers and vendors do not
achieve Year 2000 compliance before the end of 1999, Holdings may experience a
variety of problems which may have a material adverse effect on Holdings. To
the extent such vendors are not Year 2000 compliant by the end of 1999, such
vendors may fail to deliver ordered materials and products to Holdings and may
fail to bill Holdings properly and promptly. Consequently, Holdings may
experience delays in sourcing product to send to its customers. Holdings plans
to address potential problems with its vendors by identifying and arranging for
alternate sources of supply. Due to the nature of its product, Holdings does
not believe it has any exposure to contingencies related to the Year 2000 Issue
for the products it has sold.
Inflation and Changing Prices
Holdings' 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 Holdings' results of operations.
Forward Looking Statements
When used in this quarterly report, the words "believes," "anticipates"
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. Holdings wishes to caution
readers that the following important factors and others in some cases have
affected and in the future could affect Holdings' actual results and could cause
Holdings' actual results to differ materially from those expressed in any
forward statements made by Holdings: (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
-13-
<PAGE>
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 Holdings' relationships with its major suppliers, including
Holdings' largest supplier in China, (x) increased costs associated with newly-
acquired businesses and (xi) inability to grow by acquisition of additional
safety shoe distributors or to effectively consolidate operations of businesses
acquired.
-14-
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
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.
10.9* Falcon Trademark License Agreement with W.L. Gore & Associates, Inc.
dated July
-15-
<PAGE>
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 amended
November 23, 1995.
10.27* Jensen Employment Agreement dated February 26, 1997.
10.28* Mills Employment Agreement dated November 20, 1995.
10.29* McDonough Employment Agreement dated November 20, 1995.
10.30* Johanson Employment Agreement date August 1, 1994.
10.31* Johanson Non-Competition Agreement dated August 1, 1994.
27.1 Financial Data Schedules.
______________
* Incorporated by reference to the similarly numbered exhibit in the
Company's Registration Statement on Form S-4, No. 333-57009, filed June 17,
1998.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the third quarter ended October 31,
1998.
-16-
<PAGE>
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 HOLDINGS CORPORATION
By: /s/Keith A. McDonough
---------------------------------------
Name: Keith A. McDonough
Title: Vice President-Finance
Chief Financial Officer
Dated: December 11, 1998
(Duly authorized officer and principal financial officer)
-17-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 607
<SECURITIES> 0
<RECEIVABLES> 17,952
<ALLOWANCES> (334)
<INVENTORY> 36,624
<CURRENT-ASSETS> 60,715
<PP&E> 13,963
<DEPRECIATION> (3,237)
<TOTAL-ASSETS> 181,290
<CURRENT-LIABILITIES> 14,026
<BONDS> 154,264
0
0
<COMMON> 1
<OTHER-SE> 12,999
<TOTAL-LIABILITY-AND-EQUITY> 181,290
<SALES> 93,871
<TOTAL-REVENUES> 93,871
<CGS> 47,918
<TOTAL-COSTS> 47,918
<OTHER-EXPENSES> 37,526
<LOSS-PROVISION> 94
<INTEREST-EXPENSE> 10,796
<INCOME-PRETAX> (2,463)
<INCOME-TAX> (220)
<INCOME-CONTINUING> (2,243)
<DISCONTINUED> 0
<EXTRAORDINARY> (4,015)
<CHANGES> 0
<NET-INCOME> (6,258)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
