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______________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ x ] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended: January 30, 1999 OR
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[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from: __________________
to ______________________
Commission file number: 333-57009
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Iron Age Holdings Corporation
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(Exact name of registrant as specified in its charter)
Delaware 04-3349775
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Robinson Plaza Three, Suite 400, Pittsburgh, Pennsylvania 15205
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Applicable only to registrants involved in bankruptcy proceedings during the
preceding five years: Indicate by check mark whether the registrant has filed
all documents and reports required to be filed by Sections 12, 13 or 15(d) of
the Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. Yes No Not Applicable.
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(Applicable only to corporate registrants:) As of April 26, 1999, Iron Age
Holdings Corporation had 99,624.89 shares of Common Stock issued and
outstanding.
Documents incorporated by reference: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part II of this Form 10-K or
any amendment to this Form 10-K. [ X ]
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FORM 10-K INDEX
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Page
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Part I 3
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
Part II 8
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 8
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 16
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 47
Part III 48
Item 10. Directors and Executive Officers of the Registrant 48
Item 11. Executive Compensation 50
Item 12. Security Ownership of Certain Beneficial Owners and Management 54
Item 13. Certain Relationships and Related Transactions 56
Part IV 57
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 57
</TABLE>
Reference in this Annual Report on Form 10-K is made to the Iron Age(R) and
Knapp(R) trademarks which are owned by Iron Age Holdings Corporation or its
subsidiaries.
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Part I
Item 1. Business.
Iron Age Holdings Corporation (the "Company" or "Holdings"), together with its
wholly-owned subsidiary, Iron Age Corporation ("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 shoes under the Iron
Age(R) and Knapp(R) brand names, which comprised 91.5% of fiscal 1999 sales. The
Company also distributes footwear directly to retail and wholesale customers
through its wholesale division and manufacturing subsidiary Falcon Shoe Mfg. Co.
("Falcon"). In addition, the Company began distribution of prescription safety
eyewear, on a limited basis, in conjunction with the acquisition of a regional
distributor in May 1998. The Company distributes directly to its customers over
400 styles of footwear under the Iron Age and Knapp brand names. The Iron Age
and Knapp products and services are marketed principally to industrial, service
and government employers, many 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
Iron Age was founded in 1817 and has specialized in safety footwear since the
popularization of steel toe shoes during the 1940s. On February 26, 1997,
Fenway Partners Capital Fund, L.P. (the "Fenway Fund"), together with certain
investors, in partnership with certain members of management, formed Holdings in
order to effect the acquisition of all of the outstanding stock of the
predecessor to Holdings for an aggregate purchase price of $143.6 million (the
"Fenway Acquisition").
Concurrent with the Fenway Acquisition, (i) Holdings and Iron Age entered
into a syndicated senior bank loan facility (the "Old Credit Facility"), (ii)
Iron Age 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) Iron Age 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 Iron Age entered into a new credit
facility (the "New Credit Facility") that, as amended, provides for a $52.0
million senior secured credit facility consisting of a $30.0 million revolving
working capital facility and a $22.0 million revolving acquisition facility.
The Company used excess cash and net proceeds from the Discount Notes, the
Senior Subordinated Notes and the New Credit Facility to repay the Old Credit
Facility, repay the Old Subordinated Notes and redeem the Holdings Series A
Preferred Stock. The transactions described in this paragraph are collectively
referred to herein as the "April 1998 Transactions."
Industry Overview
The work shoe market consists of men's and women's work, safety and duty 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
workers' compensation expenses. Beginning in the 1970s, the federal government
adopted Occupational Safety and Health Administration ("OSHA") regulations
establishing heightened workplace safety standards, including regulations
governing footwear. OSHA regulations established standards requiring employers
to provide their
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workers with workplaces free from recognized hazards that could cause serious
injury or death and requiring employees to abide by all safety and health
standards that apply to their jobs. Changes to OSHA regulations in 1994 required
employers to assess footwear related hazards and implement a program designed to
mitigate such hazards.
In order to satisfy the criteria set forth in OSHA regulations, protective
footwear must comply with standards (the "ANSI Standards") established by the
American National Standards Institute ("ANSI"). There are six ANSI categories
for foot protection: impact and compression, metatarsal footwear, conductive
footwear, electrical hazard footwear, sole puncture resistance footwear and
electro-static dissipative footwear. These OSHA regulations, 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.
Mobile and Store Centers. Each "mobile and store center" consists of a
retail store for its products and
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generally one or more affiliated shoemobiles. Each shoemobile acts as a mobile
selling vehicle for the Company's products, operating generally within a 150-
mile radius of its affiliated retail store. This sector of the Company's
business has grown as its customers have become more demanding and have required
a higher level of customer service. Throughout the last seven years, the Company
has identified this shift in the market and has established new locations in
major industrial markets while upgrading the locations of its existing stores.
Through the retail store channel, the Company is able to service corporate and
individual customers generally located within a 40-mile radius of a given store.
The Company operates its fleet of shoemobiles throughout the United States,
Canada and Mexico. Shoemobiles vary in size--transporting from 900 to 1,600 pair
of shoes--and each contains a display area and a fitting room. The shoemobile
driver/salesperson is responsible for the fitting of footwear and processing of
orders.
Catalog Direct. The Company reaches both large and small customers with its
safety shoe catalogs. The mail-order sector of the Company's business provides
direct service to certain customers who are either too small or do not require
direct shoemobile service or who are remotely located. Mail-order sales are
promoted through a combination of the product catalogs, the Company's field
sales force and trade advertising.
In-Plant Stores. To add further flexibility to its distribution
capabilities, the Company offers large-volume customers an in-plant store
program, which provides the customer with a base stock of inventory and a sales
staff to manage the store on-site at the customer's manufacturing facility. The
customer provides the Company with the necessary store space and all utilities.
Wholesale and Consumer Channels. The Company markets branded products to
select third-party retail customers. The Company also markets primarily Knapp
branded products directly to consumers through a Direct Mail and Counselor
(independent sales representatives) division.
Falcon Manufacturing. Through its Falcon subsidiary, the Company manufactures
private label footwear for such well known customers as New Balance Athletic
Shoes, Inc., Browning Arms Company, L.L. Bean, Inc., Cabela's Inc. and H.S.
Trask & Co.
IA Vision. The Company markets safety prescription eyewear to its existing
industrial customer base through distribution methods identical to its safety
footwear distribution. Mobile service is utilized to bring the product on site
for the customer, where the selection, fitting and sale may be consummated
utilizing a mobile point-of-sale ("POS") system designed specifically for
prescription eyewear.
Products
The Company's product line addresses a full range of protective footwear
applications covering all six ANSI categories in styles for both men and women
in both steel and non-metallic toe caps. Product categories include work,
athletic, hikers, metatarsal, dress/casual and rubber footwear and consist of
over 400 individual styles ranging in price from $15.00 for an inexpensive steel
PVC boot to a $185.00 waterproof boot. The Company's safety footwear is
manufactured in more than 300 length and width combinations, ranging in sizes
from 5 to 17. Sales of Iron Age products are concentrated in traditional, well-
established styles, with sales of new styles in each of fiscal 1997, 1998 and
1999 representing less than 16% of net sales in each period. All the Company's
work and safety shoes and boots are designed, manufactured and laboratory tested
to meet or exceed applicable ANSI Standards. Through its long-standing
relationship with users of safety footwear, the Company has assembled a product
line that is widely regarded as the industry's most complete. In addition to the
Iron Age product line, the Company distributes work, service oxfords, non-slip
and high-end work and hunting boots under the Knapp brand name. In 1997, the
Company acquired and successfully integrated Knapp Shoes, Inc. ("Knapp"), an
underperforming competitor with a strong franchise in the uniform and service
sector market (the "Knapp Acquisition"). On August 31, 1998, the Company sold
the Dunham trademark for $2.0 million and on-hand Dunham inventory for
approximately $0.7 million to New Balance Athletic Shoe, Inc. and New Balance
Trading Company, Ltd. (together, "New Balance"). In connection therewith, the
Company agreed to manufacture for New Balance certain products which New Balance
will continue to sell under the Dunham brand name. Net sales of Dunham products
in fiscal 1998, the last full fiscal
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year of ownership, were $4.0 million. This transaction did not have a material
effect on the results of operations.
The Company has successfully expanded its product line to meet new customer
demands and substantially increased the categories and types of footwear
offered. As the safety shoe market has diversified, the Company has expanded its
product line, moving from the basic heavy-duty styles toward casual, lightweight
safety footwear that meet the needs of professional, light industrial and
service sector employees.
Manufacturing
General. As a result of its strategic acquisitions of Falcon and Knapp, during
fiscal 1999 the Company operated two manufacturing facilities in Lewiston,
Maine. Work shoes are manufactured in the Falcon facility in Lewiston primarily
for sale by the Company under the Iron Age brand name. In addition, the Company
sells work shoes manufactured at the Falcon facility directly to third parties,
including New Balance, Browning Arms Company, L.L. Bean, Inc., Cabela's Inc. and
H.S. Trask & Co. The Company manufactured the Knapp product line at its other
Lewiston facility. As of March 1999 the Company has consolidated the Knapp
manufacturing operations into the Falcon facility. As originally intended at
the time of the Knapp Acquisition.
Suppliers. As a result of its market leadership position and long operating
history, the Company has developed key supply arrangements with 22 leading
footwear manufacturers in seven countries: the United States, China, Korea,
Canada, Taiwan, Maylasia and the Netherlands. Although in fiscal 1999 one
supplier in China manufactured approximately 24% of the pairs of shoes sold by
the Company, the Company does not believe that it is dependent upon any specific
supplier for its product manufacturing. In fiscal 1999, 49% of its total pairs
were produced by foreign suppliers and 38% of its total pairs were produced in
China. The Company has not experienced any material adverse effects as a result
of the current economic downturn in Asia. However, the economic climate could
have an adverse effect on the Company's suppliers located in Asia. The Company
believes that it could find alternative manufacturing sources for those products
it currently sources from Asia, including its largest supplier in China, through
its existing relationships with independent third-party manufacturing facilities
located outside of Asia. However, the loss of a substantial portion of this
manufacturing capacity or the inability of Asian suppliers to provide products
on schedule or on terms satisfactory to the Company, could have a material
adverse effect on the Company's business, financial condition or results of
operations during the transition to alternative manufacturing facilities.
Transportation/Freight. The Company utilizes its own trucks as well as common
carriers to deliver product orders from its Falcon manufacturing subsidiary and
to its mobile and store centers.
Competition
The work shoe market is highly competitive. Management believes that
competition in the industry is based on distribution capabilities, retail
presence, brand name recognition, corporate relationships, systems, service,
product characteristics, product quality and price. The Company's major
competitors in the safety shoe sector of the work shoe industry are Lehigh (a
subsidiary of U.S. Industries, Inc.), Hy-Test (a subsidiary of Wolverine World
Wide, Inc.) and Red Wing Shoe Co. Some of the Company's competitors have greater
financial and other resources than the Company. In addition, the work shoe
market is a mature industry that could experience limited growth.
Environmental Matters
The Company's operations, including manufacturing, are subject to extensive
federal, state, local, and foreign laws and regulations relating to the storage,
handling, generation, treatment, emission, release, transportation, discharge
and disposal of certain substance and waste materials. Permits are required for
certain of the Company's operations, and these permits are subject to
revocation, modification and renewal by issuing authorities. Governmental
authorities have the power to enforce compliance with their regulations, and
violations may result in the payment of fines or the entry of injunctions, or
both. The Company does not believe it will be required under existing
environmental laws and enforcement policies to expend amounts that will have a
material adverse effect on its results of operations or financial condition. The
requirements of such laws and enforcement policies, however, have generally
become more strict in recent years. Accordingly, the Company is unable to
predict the ultimate cost of compliance with environmental laws and enforcement
policies.
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Employees
As of January 30, 1999, the Company employed approximately 1,000 people in
sales and distribution, manufacturing and administration. None of the Company's
employees is presently covered by collective bargaining agreements. Management
considers its employee relations to be good.
Item 2. Properties.
The Company's executive offices are located in Pittsburgh, Pennsylvania. All
of the Company's properties are maintained on a regular basis and are adequate
for the Company's present requirements.
The following table identifies, as of January 30, 1999, the principal
properties utilized by the Company.
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Square
Facility Own/Lease Location Footage(1)
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Corporate Headquarters ................ Lease Pittsburgh, Pennsylvania 20,500
Distribution Facility ................. Own Penn Yan, New York 175,000
Knapp Direct Mail Facility ............. Lease Penn Yan, New York 5,500
Falcon Manufacturing Facility(2) ....... Lease Lewiston, Maine 112,000
Knapp Manufacturing Facility(2) ....... Lease Lewiston, Maine 122,000
</TABLE>
(1) Square footage has been rounded up to the nearest 500 square feet.
(2) The Company consolidated the Knapp manufacturing facility into the Falcon
manufacturing facility in March 1999. The Knapp manufacturing facility is vacant
as of March 15, 1999. The lease for the Knapp facility expires in December,
1999.
Item 3. Legal Proceedings.
The Company is a party to various legal actions arising in the ordinary course
of its business. The Company believes that the resolution of these legal actions
will not have a material adverse effect on the Company's business, results of
operations and financial condition.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company did not submit any matters during the fourth quarter of the
fiscal year covered by this report to a vote of security holders through the
solicitation of proxies or otherwise.
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Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
As of April 26, 1999, Holdings had 200,000 authorized shares of common
stock, par value $.01, of which 99,624.89 were issued and outstanding. There is
no established public trading market for Holdings' common stock. As of April
26, 1999, there were seven holders of Holdings' common stock. Holdings' ability
to pay dividends is limited under an indenture dated as of April 24, 1998
between Holdings 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 Holdings and its predecessor for the five-year period ended January 30, 1999
which were derived from audited consolidated financial statements of Holdings
and its predecessor. The following table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and accompanying notes
thereto included elsewhere in this Annual Report on Form 10-K.
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Successor Predecessor
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Fiscal Years Ending(1)
Fiscal Year February 27, January 26, ----------------------------------------
Ending (1) 1997 through 1997 through
January 30, January 31, February 26, January 25, January 27, January 28,
1999 1998(2) 1997 1997 1996 1995
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(Thousands of Dollars)
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Summary of Operations:
Net sales .......................... $124,294 $107,769 $10,937 $99,360 $95,263 $85,543
Net income (loss)................... $ (7,288)(4) $ 1,957 $ (695) (3) $ 3,590 $ 3,836 $ 2,748
Financial Position at Year End:
Total assets........................ $180,032 $174,801 $ -- $90,043 $91,151 $86,173
Total debt.......................... $151,058 $101,675 $ -- $19,212 $38,295 $35,294
Holdings Series A Preferred Stock... $ -- $ 17,031 $ -- $ -- $ -- $ --
</TABLE>
(1) Holdings utilizes a fiscal year of 52 or 53 weeks, ending on the last
Saturday in January. Each of Holdings' fiscal years set forth herein
contained 52 weeks except for its fiscal year ended January 31, 1998 which
contained 53 weeks.
(2) The statement of income data and other financial data for the period
February 27, 1997 through January 31, 1998 include the results of Knapp
since it was acquired by Holdings on March 14, 1997.
(3) Includes $1,054 of non-cash stock-based compensation and $1,000 of non-
recurring management bonuses paid in connection with the Fenway Acquisition.
(4) Includes an extraordinary loss on early extinguishment of debt, net of tax
effect, of $4,015 and compensation payments to certain members of management
of Iron Age, net of tax effect, of $1,285 incurred in connection with the
April 1998 Transactions.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following is management's discussion and analysis of the financial
condition and results of operations of Holdings for the fiscal years ended
January 30, 1999("fiscal 1999"), January 31, 1998("fiscal 1998") and January 25,
1997 ("fiscal 1997"). For purposes of this discussion and analysis, the
financial condition and results of operations of Holdings for fiscal 1998
represent the combined results of Holdings 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 elsewhere in this
Annual Report on Form 10-K.
Overview
Holdings' primary business is the specialty distribution of safety, work and
uniform related shoes directly to end users under the Iron Age and Knapp brand
names, which comprised 91.5% of fiscal 1999 sales. The Company also distributes
footwear directly to retail and wholesale customers through its wholesale
division and its manufacturing subsidiary Falcon. Holdings manufactures
approximately 20% of total pairs of shoes sold through Falcon. In addition, the
Company began distributing prescription safety eyewear, on a limited basis,
through its subsidiary IA Vision, in conjunction with the acquisition of a
regional distributor in May 1998. Holdings' net sales growth was 4.7% in fiscal
1999, or 6.7% excluding the impact of the additional week in fiscal 1998.
Holdings' net sales growth has averaged 9.4% over the last three fiscal years,
excluding the impact of the additional week in fiscal 1998.
Holdings has an extended history of sales and income growth. Historically,
Holdings' growth has been generated both internally and through the acquisition
of regional independent distributors. From fiscal 1987 to fiscal 1999, Holdings'
net sales and EBITDA have increased at a compound annual growth rate ("CAGR") of
14.2% and 20.1%, respectively.
Acquisitions and Capital Restructuring
The Fenway Acquisition occurred on February 26, 1997. Concurrent with the
Fenway Acquisition, (i) Holdings and Iron Age entered into the Old Credit
Facility, (ii) Iron Age issued the Old Subordinated Notes, (iii) Holdings issued
the Holdings Series A Preferred Stock, (iv) Holdings issued Common Stock for
equity capital of approximately $32.2 million and (v) management rolled over
certain options to acquire shares of the predecessor company into options to
acquire shares of Common Stock of Holdings and were granted additional options
to acquire Common Stock of Holdings. In the April 1998 Transactions, Holdings
and Iron Age used excess cash and net proceeds from the Discount Notes, the
Senior Subordinated Notes and the New Credit Facility to repay the Old Credit
Facility and the Old Subordinated Notes, to redeem the Holdings Series A
Preferred Stock, to make compensation payments to certain members of management
and to make a distribution to Holdings' stockholders.
On October 21, 1998, Holdings consummated an exchange offer of Discount Notes
registered under the Securities Act of 1933, as amended. The Discount Notes and
the notes exchanged therefor are referred to as the "Discount Notes."
In April 1998, Holdings, through IA Vision, acquired the stock of Safety
Supplies & Service Co., Inc. and acquired certain assets and assumed certain
liabilities of Safety Depot Ltd., ACT Safety, Inc. and J. Mars Knapp Shoes (the
"First Quarter Acquisitions"). The combined purchase price for the First Quarter
Acquisitions was approximately $4.64 million, including transactions costs of
approximately $0.15 million. In addition, on July 7, 1998, the Company acquired
certain assets of Work-Saf, Inc. for approximately $0.75 million (the "Second
Quarter Acquisition"). The First Quarter Acquisitions and the Second Quarter
Acquisition have been accounted for using the purchase method of accounting for
business combinations, and accordingly, (i) the results of operations for each
of the acquired companies are included in Holdings' financial statements from
the date of the respective acquisitions and (ii) the purchase price has been
allocated to Holdings' net assets based upon their fair market values. The First
Quarter Acquisitions and the Second Quarter Acquisition resulted in goodwill of
approximately $2.8 million, which is being amortized over 40 years.
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Divestitures
Effective August 31, 1998, Holdings sold the Dunham product line and related
trademarks to New Balance for $2.0 million and recorded a gain of $1.7 million
(the "Dunham Sale"). In conjunction with the Dunham Sale, Falcon agreed to a
minimum two year supply agreement with New Balance and the sale of on-hand
inventory.
Results of Operations
The following table sets forth for the period indicated certain historical
income statement data derived from the consolidated statement of income of
Holdings and its predecessor. The application of the purchase method of business
combinations resulted in a presentation of the results of operations for fiscal
1998 in two periods: a one-month period prior to the Fenway Acquisition and an
11-month period following the date of the Fenway Acquisition.
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Successor Predecessor
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Feb. 27, 1997 Jan. 26, 1997
through through
Fiscal 1999 January 31, 1998 Feb. 26, 1997 Fiscal 1999
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(Thousands of Dollars)
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Income Statement Data:
Net sales..................................... $124,294 $107,769 $10,937 $99,360
Gross profit.................................. 61,066 54,465 5,327 46,923
Selling, general and administrative........... 46,854 36,541 5,120 31,267
Depreciation and amortization................. 5,193 4,426 238 2,751
Operating income (loss)....................... 9,019 13,498 (31) 12,905
Gain on divestiture........................... 1,678 -- -- --
Interest expense.............................. 14,844 9,855 1,116 6,515
Provision (benefit) for income taxes.......... (874) 1,686 (452) 2,800
Extraordinary item, net of tax effect......... (4,015) -- -- --
Other Data:
Gross profit margin........................... 49.1% 50.5% 48.7 % 47.2%
Operating income margin....................... 7.2% 12.5% (0.3)% 13.0%
</TABLE>
Fiscal 1999 Compared to Fiscal 1998
Net Sales. For comparability with fiscal 1999, net sales for the predecessor
and successor periods in fiscal 1998 have been discussed on a combined basis.
Management believes that a combined discussion of predecessor and successor
periods is reasonable and appropriate because there were no adjustments to net
sales for a change in basis resulting from the Fenway Acquisition. Holdings' net
sales for fiscal 1999 were $124.3 million compared to $118.7 million for fiscal
1998, an increase of $5.6 million, or 4.7%. Excluding the impact of the
additional week in fiscal 1998, sales increased $7.8 million, or 6.7%. The
increase in fiscal 1999 was primarily attributable to growth in the Company's
primary business of $6.0 million, or 5.6%. Sales of prescription safety eyewear
and safety and medical products were $2.1 million in fiscal 1999. Growth in net
sales was partially offset by a $2.5 million decrease in sales through Iron
Age's wholesale division and Dunham wholesale sales due to the Dunham Sale.
Gross Profit. For comparability with fiscal 1999, gross profit for the
predecessor and successor periods in fiscal 1998 has been discussed on a
combined basis. Management believes that a combined discussion of predecessor
and successor periods is reasonable and appropriate because there were no
adjustments to gross profit for a change in basis resulting from the Fenway
Acquisition. Holdings' 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.
Selling, General and Administrative Expenses. For comparability with fiscal
1999, selling, general and
-10-
<PAGE>
administrative expenses for the predecessor and successor periods in fiscal 1998
have been discussed on a combined basis. Management believes that a combined
discussion of predecessor and successor periods is reasonable and appropriate
because there were no adjustments to selling, general and administrative
expenses for a change in basis resulting from the Fenway Acquisition. Selling,
general and administrative expenses for fiscal 1999 were $46.9 million compared
to $41.7 million for fiscal 1998, an increase of $5.2 million, or 12.5%.
Selling, general and administrative expenses for fiscal 1999 include non-
recurring charges of $2.2 million of compensation payments to certain members of
management in connection with the April 1998 Transactions, a $0.2 million charge
related to store closings scheduled for the first and second quarter of fiscal
2000 and $0.2 million of recruitment fees. Selling, general and administrative
expenses for fiscal 1998 include a non-recurring charge of $2.1 million of stock
compensation expense and compensation payments to certain members of management
in connection with the Fenway Acquisition. Selling, general and administrative
expenses increased $4.6 million, or 11.6%, from fiscal 1998 to fiscal 1999,
excluding non-recurring charges in both fiscal 1999 and fiscal 1998. The
increase in fiscal 1999 was primarily related to the First Quarter Acquisitions
and infrastructure added in the Knapp distribution channel since the first half
of fiscal 1998. Growth in selling, general and administrative expenses in the
primary business was $1.8 million, or 6.1% in fiscal 1999, excluding the non-
recurring charges discussed above.
Operating Income. Operating income for fiscal 1999 was $9.0 million, or 7.2%
of net sales, compared to $13.5 million, or 12.5% of net sales, for the period
from February 27, 1997 through January 31, 1998. The decrease was attributable
to the increased selling, general and administrative expenses as discussed
above. Operating loss and operating loss as a percentage of net sales for the
predecessor period January 26, 1997 through February 26, 1997 were $0.03 million
and 0.3%, respectively. Operating income for the successor period included
increased selling, general and administrative expenses, as discussed above, and
additional depreciation and amortization of $0.8 million. The additional
depreciation and amortization is primarily due to the increase in basis of
goodwill, customer lists and other intangible and tangible assets capitalized as
a result of the Fenway Acquisition, the Knapp Acquisition, the First Quarter
Acquisitions and the Second Quarter Acquisition.
Gain on Divestiture. Gain on divestiture for fiscal 1999 was $1.7 million
which was related to the gain on the Dunham Sale discussed above.
Interest Expense. Interest expense for fiscal 1999 was $14.9 million
compared to $9.9 million for the period from February 27, 1997 through January
31, 1998, an increase of $5.0 million, or 50.5%. 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 April 1998
Transactions.
Income Tax Expense. Income tax benefit for fiscal 1999 was $0.9 million
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 $0.5 million. Income tax benefit
for fiscal 1999 differs from that of the statutory income tax rate due primarily
to nondeductible goodwill amortization. Holdings recognized a state income tax
benefit of $1.1 million from net operating loss carryforwards for fiscal 1999.
Holdings needs to generate $10.0 million of state taxable income to realize
this benefit before expiration of the net operating loss carryforward periods,
which begin in fiscal 2002 through fiscal 2019. Holdings 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 Holdings to realize this benefit.
Extraordinary Item. For fiscal 1999, Holdings recorded an extraordinary loss
of $4.0 million, net of a $2.9 million tax benefit, due to the early
extinguishment of indebtedness resulting from the repayment of the Old
Subordinated Notes and the Old Credit Facility in April 1998 in connection with
the April 1998 Transactions.
Fiscal 1998 Compared to Fiscal 1997
-11-
<PAGE>
Net Sales. For comparability with prior periods, net sales for the
predecessor and successor periods in fiscal 1998 have been discussed on a
combined basis. Management believes that a combined discussion of predecessor
and successor periods is reasonable and appropriate because there were no
adjustments to net sales for a change in basis resulting from the Fenway
Acquisition. Holdings' net sales for fiscal 1998 increased to $118.7 million, an
increase of $19.3 million, or 19.4%, compared to fiscal 1997. The increase was
attributable to increased sales in the primary business of $6.2 million, or
7.1%, sales of $12.8 million from the operations of the Knapp brand sales
channel and $2.0 million for the additional week in fiscal 1998. The increase
was partially offset by a $1.7 million decrease in sales of Dunham brand
products, Iron Age's wholesale division and private label.
Gross Profit. For comparability with prior periods, gross profit for the
predecessor and successor periods in fiscal 1998 have been discussed on a
combined basis. Management believes that a combined discussion of predecessor
and successor periods is reasonable and appropriate because there were no
adjustments to gross profit for a change in basis resulting from the Fenway
Acquisition. Holdings' gross profit increased to $59.8 million in fiscal 1998,
an increase of $12.9 million, or 27.5%, compared to fiscal 1997. The increase in
gross profit was primarily attributable to the increase in net sales. In
addition, gross profit percentage increased 3.2% in fiscal 1998 compared to
fiscal 1997. The increase in gross profit percentage was attributable to higher
margin product sales of both Iron Age and Knapp branded products, through the
higher margin shoemobile and retail store channels, and stable product costs.
Selling, General and Administrative Expenses. For comparability with prior
periods, selling, general and administrative expenses for the predecessor and
successor periods in fiscal 1998 have been discussed on a combined basis.
Management believes that a combined discussion of predecessor and successor
periods is reasonable and appropriate because there were no adjustments to
selling, general and administrative expenses for a change in basis resulting
from the Fenway Acquisition. Selling, general and administrative expenses were
$41.7 million in fiscal 1998, an increase of $10.4 million, or 33.2%, compared
to fiscal 1997. The acquired Knapp sales channels contributed $5.8 million of
this increase and the primary business contributed $2.5 million of this
increase, which represented a percentage increase of 8.8% over fiscal 1997.
Approximately $0.5 million of the increase was attributable to the Knapp
manufacturing operation within Falcon and $1.0 million related to compensation
payments to management in connection with the Fenway Acquisition. The additional
week in fiscal 1998 contributed $0.6 million of the increase.
Operating Income. Operating income was $13.5 million and $12.9 million in
the period February 27, 1997 through January 31, 1998 and fiscal 1997,
respectively. Operating income in the period February 27, 1997 through January
31, 1998 reflects the direct result of Holdings' gains on both sales and
margins. Operating income as a percentage of net sales was 12.5% in the period
February 27, 1997 through January 31, 1998 and 13.0% in fiscal 1997. Operating
loss and operating loss as a percentage of net sales for the predecessor period
January 26, 1997 through February 26, 1997 were $0.03 million and 0.3%,
respectively. Operating income as a percentage of net sales in the period
February 27, 1997 through January 31, 1998 included additional amortization due
to the increase in the basis of goodwill, customer lists and other intangible
assets capitalized as a component of the purchase accounting related to the
Fenway Acquisition and the Knapp Aquisition.
Interest Expense. Interest expense was $9.9 million in the period February
27, 1997 through January 31, 1998 and $6.5 million in fiscal 1997. Interest
expense for the predecessor period January 26, 1997 through February 26, 1997
was $1.1 million. Interest expense for the period February 27, 1997 through
January 31, 1998 reflects the increase in indebtedness of Holdings incurred in
connection with the Fenway Acquisition and the Knapp Acquisition.
Income Tax Expense. Income tax expense was $1.7 million in the period
February 27, 1997 through January 31, 1998 and $2.8 million in fiscal 1997.
Income tax benefit for the predecessor period January 26, 1997 through February
26, 1997 was $0.5 million. Income taxes for the successor period reflect the
effect of additional non-deductible goodwill amortization.
Liquidity and Capital Resources
Holdings' primary cash needs are working capital, capital expenditures and
debt service. Holdings anticipates
-12-
<PAGE>
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 Iron Age's credit facilities.
Net cash provided by operating activities was $1.4 million in fiscal 1999, as
compared to net cash used by operating activities of $0.5 million in fiscal 1998
and net cash provided by operating activities of $8.8 million in fiscal 1997.
The increase in cash from operating activities in fiscal 1999 is primarily the
result of the decrease in inventory levels of $0.5 million, compared to an
increase of $6.2 million in fiscal 1998, due to the Knapp Acquisition. The
reduction in cash provided by operating activities in fiscal 1998 was the result
of a one-time increase in inventory of $7.0 million related to the Knapp
Acquisition. The major component of the increase in net cash provided by
operating activities in fiscal 1997 was income before non-cash charges of $5.6
million, primarily due to increased income from operations.
Excluding cash paid for acquisitions and proceeds from the divestiture,
Holdings' investing activities consisted of capital expenditures of $2.3 million
in fiscal 1999 compared to $2.5 million in fiscal 1998 and $2.2 million in
fiscal 1997. Holdings' capital expenditures for fiscal 1999 included $0.2
million in remaining costs related to an addition to Holdings' central
distribution center building. The remaining $2.1 million in capital expenditures
was related to improvements in retail stores, shoemobiles and equipment in the
core business and installing the POS systems in stores and trucks acquired in
connection with the First Quarter Acquisitions and the Second Quarter
Acquisition.
Holdings' total working capital as of January 30, 1999 was $47.5 million. At
January 31, 1998, working capital was $42.7 million. The primary reason for the
increase to working capital was the elimination of the current portion of long
term senior debt in connection with the April 1998 Transactions.
Excluding cash paid for regional distributor acquisitions, Holdings used
approximately $3.0 million from financing activities in fiscal 1999, due
primarily to the April 1998 Transactions. of the New Credit Facility. In fiscal
1998, Holdings generated cash of $3.7 million due primarily to borrowings under
the Old Credit Facility. In fiscal 1997, Holdings used $7.0 million for
financing activities due primarily to principal payments on debt and the payment
of a dividend.
Holdings is a holding company, and its ability to pay interest on the Discount
Notes in the future is dependent upon the 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 a party to
the New Credit Facility and the indenture for the Senior Subordinated Notes,
each of which imposes substantial restrictions on Iron Age's ability to pay
dividends to Holdings.
Cash flow from operations for fiscal 1999 was sufficient to cover debt service
requirements under the New Credit Facility. Cash flow from operations for fiscal
1998 was sufficient to cover debt service requirements under the Old Credit
Facility. 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), 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
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, or to make capital expenditures.
As of January 30, 1999 Holdings' debt consisted of the Discount Notes, the
Senior Subordinated Notes, the New Credit Facility and certain other debt. As of
January 30, 1999, the New Credit Facility consisted of a $35.0 million multiple
draw acquisition term loan facility (the "New Acquisition Credit Facility") and
approximately $30.0 million in revolving credit loans, letters of credit and
swing line loans (the "New Revolving Credit Facility"). Holdings' other debt of
$1.0 million consisted of capital leases and other notes. As of January 30,
1999, approximately $11.7 million of the New Acquisition Credit Facility and
approximately $11.0 million of the New
-13-
<PAGE>
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 $19.0
million. The New Credit Facility was amended, effective March 5, 1999, to reduce
the New Acquisition Credit Facility to $22.0 million. The New Acquisition Credit
Facility matures in quarterly installments from July 2001 until final payment in
April 2004. The New Revolving Credit Facility will mature in April 2004 and has
no scheduled interim principal payments.
Year 2000 Issue
Many existing computer 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-information technology ("non-
IT")). Assessment is the process in which all components are classified as
either compliant or non-compliant. Renovation is the process in which a system
is upgraded, replaced or retired. Validation is the process in which compliant
systems are tested within 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 has completed the inventory, renovation and validation of its IT
systems, and implemented these systems in March 1999. In the ordinary course of
business, Holdings upgraded applications software covering the main integrated
system. As of January 30, 1999, Holdings had expended $26,000 and has a total
expected cost of $50,000 to renovate, validate and implement software to address
the Year 2000 Issue. The cost is being funded out of operating cash flow with
the entire amount being capitalized as new hardware and software.
Holdings' inventory and assessment of its non-IT systems (including telephone,
heating/air conditioning, electricity and security systems) was completed by
year end 1998. This is being followed by any required renovation in calendar
1999. Holdings is using internal resources to address the Year 2000 Issue of
its non-IT systems and has not incurred significant costs through January 30,
1999 and does not expect to incur significant costs in order to upgrade its non-
IT systems. All validation and implementation of these non-IT systems is
expected to be completed by mid-1999.
The cost of systems implementation and Year 2000 modifications are based upon
management's best estimates, which are derived utilizing numerous assumptions
and future events, including continued availability of certain resources, and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties. As of January 30, 1999, the cost of 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 its major
footwear and other vendors, to determine whether they are Year 2000 compliant or
to identify any potential issues. As a result of this correspondence,
management has no reason to believe that the Company's major footwear and other
vendors will not be Year 2000 compliant. If 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,
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<PAGE>
Holdings may experience delays in sourcing product to sell 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.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. The Statement
permits early adoption as of the beginning of any fiscal quarter after its
issuance. Holdings expects to adopt the new Statement effective January 30,
2000. The Statement will require Holdings 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
derivative's change in fair value will be immediately recognized in earnings.
Holdings does not anticipate that the adoption of this Statement will have a
significant effect on its results of operations or financial position.
Inflation and Changing Prices
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 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. Holdings
wishes to caution readers that the following important factors 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 looking 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 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 and (x)
inability to grow by acquisition of additional safety shoe distributors or to
effectively consolidate operations of businesses acquired.
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<PAGE>
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Holdings is exposed to market risk primarily from changes in interest rates
and foreign exchange rates.
The following discussion of Holdings' exposure to various market risks
contains "forward looking statements" that are subject to risks and
uncertainties. These projected results have been prepared utilizing certain
assumptions considered reasonable in the circumstances and in light of
information currently available to us. Nevertheless, because of the inherent
unpredictability of interest rates and foreign currency translation rates,
actual results could differ materially from those projected in such forward
looking statements.
Interest Rates
At January 30, 1999, Holdings had fixed-rate debt totaling $146.1 million
in principal amount and having a fair value of $91.8 million. These instruments
are entered into for purposes other than trading. These instruments bear
interest at a fixed rate and, therefore, do not expose Holdings to the risk of
earnings loss due to changes in market interest rates. However, the fair value
of these instruments would decrease by approximately $7.8 million if interest
rates were to increase by 10% from their levels at January 30, 1999 (i.e., an
increase from the weighted average interest rate of 10.6% to a weighted average
interest rate of 11.7%).
At January 30, 1999, Holdings had floating-rate long-term debt totaling
$22.7 million in principal amount and having a fair value of $22.7 million.
These instruments are entered into for purposes other than trading. These
borrowings are under the New Credit Facility (see "Notes to Consolidated
Financial Statements-Note 7, Long-term debt"). If floating rates were to
increase by 10% from their levels at January 30, 1999, Holdings would incur
additional annual interest expense of approximately $0.2 million.
Holdings 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. Holdings has not entered into any derivative financial instruments
for trading purposes. If floating rates were to increase by 10% from their
levels at January 30, 1999, Holdings would incur additional annual 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 Holdings' sales, expenses and cash flows are
transacted in U.S. dollars. For the fiscal year ended January 30, 1999, sales
denominated in currencies other than U.S. dollars (primarily Mexican peso and
the Canadian dollar) totaled $6.6 million, or approximately 5.3% of total sales.
Net income denominated in currencies other than U.S. dollars totaled $0.03
million, or approximately 1% 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 fiscal year
ended January 30, 1999. Holdings' subsidiaries that operate in Mexico and
Canada have certain accounts receivable and payable accounts in their home
currencies which can act to further mitigate the impact of foreign exchange rate
changes. Holdings has no foreign currency exchange contracts.
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<PAGE>
Item 8. Financial Statements and Supplementary Data.
Iron Age Holdings Corporation
Consolidated Financial Statements
Years ended January 30, 1999 and January 31, 1998
Contents
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors................... 18
Audited Consolidated Financial Statements
Consolidated Balance Sheets...................... 19
Consolidated Statements of Income................ 20
Consolidated Statements of Stockholders' Equity.. 21
Consolidated Statements of Cash Flows............ 22
Notes to Consolidated Financial Statements....... 24
Schedule II-Valuation and Qualifying Accounts.... 47
</TABLE>
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<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Iron Age Holdings Corporation
We have audited the accompanying consolidated balance sheets of Iron Age
Holdings Corporation and subsidiaries ("Holdings") as of January 30, 1999 and
January 31, 1998, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended January 30, 1999. Our audits also included the financial statement
schedule listed in the index at Item 8. These financial statements and schedule
are the responsibility of Holdings' management. Our responsibility is to
express an opinion on these financial statements and schedule based upon our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Iron Age Holdings
Corporation and subsidiaries at January 30, 1999 and January 31, 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 30, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
Ernst & Young LLP
Pittsburgh, Pennsylvania
March 15, 1999
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<PAGE>
Iron Age Holdings Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Successor
----------------------------------
January 31 January 30
1999 1998
------------------------------------
(In Thousands)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 517 $ 2,069
Accounts receivable, net 16,965 15,996
Inventories 36,681 36,841
Prepaid expenses 4,469 1,640
Deferred income taxes 861 640
------------------------------------
Total current assets 59,493 57,186
Other noncurrent assets 431 290
Property and equipment, net 11,008 10,479
Intangible assets, net 109,100 106,846
------------------------------------
Total assets $180,032 $174,801
====================================
Liabilities and stockholders' equity
Current liabilities:
Current maturities of long-term debt $ 544 $ 3,699
Accounts payable 3,307 3,510
Accrued expenses 8,134 7,272
------------------------------------
Total current liabilities 11,985 14,481
Long-term debt, less current maturities 150,514 97,976
Other noncurrent liabilities 516 516
Deferred income taxes 4,956 6,949
------------------------------------
Total liabilities 167,971 119,922
Commitments and contingencies -- --
Redeemable preferred stock -- 17,031
Stockholders' 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
Accumulated deficit (25,840) (174)
Other comprehensive income (186) (65)
------------------------------------
Total stockholders' equity 12,061 37,848
------------------------------------
Total liabilities and stockholders' equity $180,032 $174,801
====================================
</TABLE>
See accompanying notes.
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<PAGE>
Iron Age Holdings Corporation
Consolidated Statements of Income
<TABLE>
<CAPTION>
Successor Predecessor
---------------------------------------------------------------------------
February 27 1997 January 26 1997
Year ended through January through February Year ended
January 30 1999 31 1998 26 1997 January 25 1997
---------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Net sales $124,294 $107,769 $10,937 $99,360
Cost of sales 63,228 53,304 5,610 52,437
-------------------------------------------------------------------------
Gross profit 61,066 54,465 5,327 46,923
Selling, general and administrative 46,854 36,541 5,120 31,267
Depreciation 1,670 1,443 121 1,322
Amortization of intangible assets 3,523 2,983 117 1,429
-------------------------------------------------------------------------
Operating income (loss) 9,019 13,498 (31) 12,905
Gain on divestiture 1,678 -- -- --
Interest expense 14,844 9,855 1,116 6,515
-------------------------------------------------------------------------
(Loss)income before income taxes (4,147) 3,643 (1,147) 6,390
(Benefit) provision for income taxes (874) 1,686 (452) 2,800
-------------------------------------------------------------------------
(Loss) income before extraordinary
item (3,273) 1,957 (695) 3,590
Extraordinary item, net of tax (4,015)
-------------------------------------------------------------------------
Net (loss) income $(7,288) $1,957 $(695) $3,590
=========================================================================
</TABLE>
See accompanying notes.
-20-
<PAGE>
Iron Age Holdings Corporation
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Retained
Common Stock Earnings Other
--------------------- Paid-In (Accumulated Comprehensive
Shares Amounts Capital Deficit) Income Total
-------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Predecessor
Balance at January 27, 1996 101,020 $ 1 $ 6,263 $ 5,720 $(244) $ 11,740
Net income -- -- -- 3,590 -- 3,590
Stock-based compensation -- -- 1,065 -- --
Foreign currency translation
adjustment, net of tax -- -- -- -- 21 21
-------------------------------------------------------------------------------------
Balance at January 25, 1997 101,020 1 7,328 9,310 (223) 16,416
Net loss -- -- -- (695) -- (695)
Stock-based compensation -- -- 1,054 -- -- 1,054
Foreign currency translation
adjustment, net of tax -- -- -- -- (22) (22)
-------------------------------------------------------------------------------------
Balance at February 26, 1997 101,020 $ 1 $ 8,382 $ 8,615 $(245) $ 16,753
=====================================================================================
Successor
Balance at February 27, 1997 -- $-- $ -- $ -- $ -- $ --
Net income -- -- -- 1,957 -- 1,957
Capital contribution 99,625 1 38,086 -- -- 38,087
Dividend accrued on
preferred stock -- -- -- (2,131) -- (2,131)
Foreign currency translation
adjustment, net of tax -- -- -- -- (65) (65)
-------------------------------------------------------------------------------------
Balance at January 31, 1998 99,625 1 38,086 (174) (65) 37,848
Net loss -- -- -- (7,288) -- (7,288)
Dividends paid on preferred
stock -- -- -- (633) -- (633)
Dividends paid on common stock -- -- -- (17,745) -- (17,745)
Foreign currency translation
adjustment, net of tax -- -- -- -- (121) (121)
-------------------------------------------------------------------------------------
Balance at January 30, 1999 99,625 $ 1 $38,086 $(25,840) $(186) $ 12,061
=====================================================================================
</TABLE>
See accompanying notes.
-21-
<PAGE>
Iron Age Holdings Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Successor Predecessor
-------------------------------------------------------------------
February 27 January 26
Year ended 1997 through 1997 through Year ended
January 30 1999 January 31 1998 February 26 1997 January 25 1997
-------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Operating activities
Net (loss) income $ (7,288) $ 1,957 $ (695) $ 3,590
Adjustments to reconcile net (loss) income to net cash provided
by (used in) operating activities:
Extraordinary item, net of tax 4,015 -- -- --
Gain on divestiture (1,678) -- -- --
Depreciation and amortization 5,592 4,727 246 3,109
Amortization of deferred financing fees included in interest 606 613 16 384
Accretion of original issue discount 2,400 -- -- --
Provision for losses on accounts receivable (107) 30 10 45
Deferred income taxes (2,383) (596) -- 369
Stock-based compensation -- -- 1,054 1,065
Changes in operating assets and liabilities:
Accounts receivable 85 372 (954) (690)
Inventories 502 (6,976) 797 1,554
Prepaid expenses 99 232 65 (143)
Other noncurrent assets (15) (14) 20 (182)
Accounts payable (981) (1,375) (573) (35)
Accrued expenses 593 (882) 1,450 (249)
-------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,440 (1,912) 1,436 8,817
Investing activities
Net cash used in business acquisitions (5,241) (141,717) -- --
Proceeds from divestiture 2,544 -- -- --
Purchases of property and equipment (2,338) (2,365) (117) (2,222)
-------------------------------------------------------------------
Net cash used in investing activities (5,035) (144,082) (117) (2,222)
Financing activities
Borrowing under revolving credit agreement 49,150 44,450 (1,909) 93,617
Proceeds from senior term notes -- 65,000 -- --
Proceeds from senior subordinated notes 100,000 14,550 -- --
Proceeds from senior discount notes 25,001 -- -- --
Capital contribution -- 40,000 -- --
Issuance of Preferred Stock -- 14,900 -- --
Issuance of stock purchase warrants -- 100 -- --
Principal payments on debt (127,683) (23,531) (357) (100,352)
Payment of financing costs (6,897) (7,468) -- --
Call premium on early extinguishment of old subordinated notes (1,562) -- -- --
Redemption of Holdings Series A Preferred Stock, including
cumulative unpaid dividends (17,664) -- -- --
Dividends paid on common stock (17,745) -- -- --
Principal payments on capital leases (333) (328) (33) (305)
-------------------------------------------------------------------
Net cash provided by (used in) financing activities 2,267 147,673 (2,299) (7,040)
Effect of exchange rate changes on cash and cash equivalents (224) (110) (37) 40
-------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (1,552) 1,569 (1,017) (405)
Cash and cash equivalents at beginning of year 2,069 500 1,517 1,922
-------------------------------------------------------------------
Cash and cash equivalents at end of year $ 517 $ 2,069 $ 500 $ 1,517
===================================================================
</TABLE>
-22-
<PAGE>
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Successor Predecessor
-------------------------------------------------------------------
February 27 January 26
Year ended 1997 through 1997 through Year ended
January 30 1999 January 31 1998 February 26 1997 January 25 1997
-------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 10,377 $ 7,837 $ 552 $ 5,385
Income taxes $ 1,254 $ 1,138 $ 7 $ 2,568
Supplemental schedule of noncash investing and financing
activities
Capital lease agreements for equipment $ 373 $ 206 $ -- $ 340
===================================================================
Assets acquired and liabilities assumed in connection with
acquisitions:
Fair value of assets acquired $ 6,626 $ 171,328 $ -- $ --
Liabilities assumed (1,236) (21,946) -- --
-------------------------------------------------------------------
Cash paid 5,390 149,382 -- --
Less fees and expenses (149) (7,468) -- --
Less cash acquired -- (197) -- --
-------------------------------------------------------------------
Net cash used in business acquisitions $ 5,241 $ 141,717 $ -- $ --
===================================================================
</TABLE>
See accompanying notes.
-23-
<PAGE>
Iron Age Holdings Corporation
Notes to Consolidated Financial Statements
January 30, 1999 and January 31, 1998
1. Organization and Significant Accounting Policies
Organization and Activities
The accompanying consolidated financial statements include the accounts of Iron
Age Holdings Corporation and its wholly owned subsidiaries, Iron Age Corporation
("Iron Age"), 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, "Holdings"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Holdings is majority-owned by Fenway Partners Capital Fund, L.P. (the "Fenway
Fund"). Holdings was acquired by the Fenway Fund and certain other investors, in
partnership with certain members of management, effective February 26, 1997 (the
"Fenway Acquisition") (see Note 2).
The 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 Holdings
Corporation prior to the Fenway Acquisition and the period after February 26,
1997 includes the results of Iron Age Holdings Corporation after the Fenway
Acquisition. In these financial statements, Iron Age Holdings Corporation is
referred to as the "Predecessor" prior to February 26, 1997 and as the
"Successor" or "Holdings" after such date.
Effective April 24, 1998, Holdings refinanced its old credit facility (the "Old
Credit Facility") and its 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 "Discount Notes) (collectively, the "Transactions")
(see Note 7).
Holdings distributes and manufactures work footwear with operations concentrated
in North America. As a percentage of sales, 97% and 3% of Holdings' operations
are related to distributing and manufacturing, respectively. Holdings has one
reportable segment, distribution of work footwear in the United States.
-24-
<PAGE>
1. Organization and Significant Accounting Policies (continued)
Fiscal Year
Holdings' fiscal year ends on the last Saturday in January. The 1997 and 1999
fiscal years include 52 weeks. The combined periods of January 26, 1997 through
February 26, 1997 and February 27, 1997 through January 31, 1998 include 53
weeks.
Cash and Cash Equivalents
Holdings considers all highly liquid investments with a maturity of 90 days or
less at the time of original purchase to be cash equivalents.
Inventories
Approximately 93% and 96% of inventories at January 30, 1999 and January 31,
1998, respectively, are stated at the lower of last-in, first-out (LIFO) cost or
market. The remaining inventories are stated at the lower of first-in, first-out
(FIFO) cost or market.
Catalog Costs
Holdings produces periodic catalogs and amortizes the mailing and production
costs over the related revenue stream, generally four to twelve months. Holdings
has $766,000 and $749,000 of unamortized catalog costs at January 30, 1999 and
January 31, 1998, respectively. For the year ended January 30, 1999, the periods
February 27, 1997 through January 31, 1998 and January 26, 1997 through February
26, 1997, and the year ended January 25, 1997, advertising expense recorded by
Holdings was $2,455,000, $1,801,000, $110,000, and $1,134,000, respectively.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided on the straight-line method based on estimated useful
lives, as follows:
<TABLE>
<S> <C>
Building and improvements 40 years
Machinery and equipment 3-10 years
</TABLE>
-25-
<PAGE>
1. Organization and Significant Accounting Policies (continued)
Property and Equipment (continued)
Leasehold improvements are amortized over the shorter of the useful life of the
asset or the term of the lease. Expenses for repairs, maintenance and renewals
are charged to operations as incurred. Expenditures which improve an asset or
extend its useful life are capitalized.
Intangible Assets
Goodwill--Goodwill represents the excess of amounts paid and liabilities assumed
over the fair value of identifiable tangible and intangible assets acquired.
This amount is amortized using the straight-line method over a period of 40
years. Holdings 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, Holdings 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, Holdings would adjust the book value of the
goodwill to fair value.
Customer Lists--Customer lists represent the estimated cost of replacing
Holdings' customer base and are being amortized by the straight-line method over
15 years. The amortization period of 15 years approximates Holdings' historical
customer loss experience.
Deferred Financing Cost--Deferred financing costs relate to the costs of
obtaining financing. These costs are being amortized over the period the related
loans are outstanding.
Foreign Currency Translation
The assets and liabilities of Holdings' foreign subsidiaries are measured using
the local currency as the functional currency and are translated into U.S.
dollars at exchange rates as of the balance sheet date. Income statement amounts
are translated at the weighted average rates of exchange during the year. The
translation adjustment is accumulated in "other comprehensive income." Foreign
currency transaction gains and losses are included in determining net income.
Such amounts are not material.
Revenue Recognition
Revenue from product sales is recognized at the time products are shipped.
-26-
<PAGE>
1. Organization and Significant Accounting Policies (continued)
Financial Instruments
Holdings periodically enters into interest rate swap agreements to moderate its
exposure to interest rate changes. Holdings has effectively converted $25
million of its floating rate debt to a fixed rate basis and $25 million of its
fixed rate debt to a floating rate basis. These agreements involve the receipt
of fixed rate amounts in exchange for floating rate interest payments and
floating rate amounts in exchange for fixed rate interest payments over the life
of the agreements without an exchange of the underlying principal amounts. The
differential to be paid or received is accrued as interest rates change and
recognized as an adjustment to interest expense related to the debt. The related
amount payable to or receivable from counterparties is included in accrued
interest. Based upon the terms of the agreements, the fair values of the swap
agreements are not recognized in the financial statements. The fair value of the
swap agreements are $225,000 and $(702,000) at January 30, 1999 and January 31,
1998, respectively. Approximately 33%, or $50 million, of Holdings' outstanding
long-term debt was subject to interest-rate swap agreements at January 30, 1999.
Stock-Based Compensation
Certain members of Holdings' 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
Holdings' 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, Holdings adopted Financial Accounting Standards Board
Statement No. 130, Reporting Comprehensive Income. Statement No. 130 establishes
new rules for the reporting and display of comprehensive income and its
components. Statement No. 130 requires foreign currency translation gains and
losses, which are reported separately in stockholders' equity, to be included in
other comprehensive income. The adoption of this statement had no impact on
Holdings' net income or stockholders' equity.
-27-
<PAGE>
1. Organization and Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Reclassification
Certain reclassifications have been made to the January 25, 1997 consolidated
financial statements to conform to the January 31, 1998 and January 30, 1999
presentations.
2. Acquisitions and Divestiture
Iron Age Holdings Corporation (Predecessor)
On February 26, 1997, the Predecessor was acquired in a leveraged buyout
transaction by Holdings through an acquisition corporation for approximately
$143,550,000, including transaction costs of $6,962,000. Holdings was formed by
Fenway Partners, Inc. ("Fenway") and other investors, including certain
members of management, to effect the acquisition. The acquisition was financed
by capital contributions of approximately $34,037,000 (net of carryover basis
adjustment of $1,963,000), manditorily redeemable preferred stock issued for
$14,900,000 (the "Holdings Series A Preferred Stock"), common stock purchase
warrants issued for $100,000, borrowings under the Old Credit Facility of
$79,000,000, and the Old Subordinated Notes issued to certain Outside Investors
(see Note 12) in the amount of $14,550,000 (net of a $450,000 discount).
The Fenway Acquisition of the Predecessor was accounted for under the purchase
method of accounting because on a fully diluted basis, 90% of the existing
voting interest of Holdings common stock was acquired through a new holding
company which was capitalized by a group of new shareholders, constituting a
change in control of voting interest. The new holding company was capitalized
through the issuance of 88,625 shares of common stock and was owned 100% by the
Fenway Fund prior to the acquisition of Holdings. The new holding company was
subsequently renamed Iron Age Holdings Corporation. Accordingly, the purchase
price was allocated to the assets and liabilities assumed based on their
relative fair values. However, since certain members of management had ownership
in the Predecessor, the net assets acquired were recorded at the reinvesting
stockholders' carryover basis. Therefore, in allocating the purchase price of
Holdings among its net assets, the difference between the fair values of the net
-28-
<PAGE>
2. Acquisitions and Divestiture (continued)
Iron Age Holdings Corporation (Predecessor) (continued)
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 stockholder's equity represents the difference
between the fair value of management's 10% ownership and the carryover basis.
Holdings 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 Holdings, its distribution system and its products. Because of this purchase
price allocation, the accompanying consolidated financial statements of Holdings
are not directly comparable to those of the Predecessor.
Holdings' 1998 financial statements only include the Predecessor's operations
from the date of acquisition.
Knapp Shoes, Inc.
On March 14, 1997, Holdings 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 Fenway, New
York Life Insurance Company, American Home Assurance Company, and Banque
Nationale de Paris of $4,000,000 and additional borrowings under the Old Credit
Facility of $1,326,000. The results of operations for Knapp are included in the
consolidated statement of income from the date of acquisition. Knapp was a
distributor and manufacturer of safety footwear. The Knapp Acquisition has been
accounted for using the purchase method of accounting and, accordingly, the
purchase price and transaction costs have been allocated to assets acquired and
liabilities assumed based on their estimated fair values. The excess of
consideration paid over the estimated fair value of assets acquired and
liabilities assumed of approximately $4,885,000 is being amortized on the
straight-line basis over 40 years. Holdings has not provided selected unaudited
pro forma information as if the Knapp Acquisition had occurred as of January 26,
1997 because the Knapp Acquisition was not a significant business combination.
Other Acquisitions
During the year ended January 30, 1999, Holdings acquired the stock of Safety
Supplies & Service Co., Inc., and acquired certain assets and assumed certain
liabilities of Safety Depot Ltd., ACT Safety, Inc., J. Mars Knapp Shoes and
Work-Saf, Inc. for approximately $5,390,000, including transaction costs of
approximately $150,000. The results of operations are included from the date of
the acquisitions. The acquisitions have been accounted for using the purchase
method of accounting and, accordingly, the purchase price and transaction costs
have been allocated to assets acquired and liabilities assumed based upon their
estimated fair values. The excess of consideration paid over the estimated fair
value of assets acquired and liabilities assumed of approximately $2,849,000 is
being amortized on the straight-line basis, over 40 years. Holdings has not
provided selected unaudited pro forma information as if these acquisitions had
occurred as of January 26, 1997 because these acquisitions, individually and
collectively, were not significant business combinations.
-29-
<PAGE>
Divestiture
On September 9, 1998, Holdings announced the sale of the Dunham product line and
related trademarks to New Balance Athletic Shoes, Inc. and New Balance Trading
Company, Ltd. ("New Balance"), effective August 31, 1998, for $2,000,000 and
recorded a gain of $1,678,000. In conjunction with the sale, Holdings' Falcon
manufacturing subsidiary entered into a separate agreement whereby it agreed to
a minimum two-year supply arrangement with New Balance and the sale of on-hand
inventory.
3. Accounts Receivable
Accounts receivable are presented net of allowance for doubtful accounts of
approximately $275,000 and $382,000 as of January 30, 1999 and January 31, 1998,
respectively. Holdings does not require collateral for its trade accounts
receivable. Management continually evaluates its accounts receivable and adjusts
its allowance for doubtful accounts for changes in potential credit risk.
Holdings serves a diverse customer base and believes there is minimal
concentration of credit risk.
4. Inventories
The major components of inventories are as follows:
<TABLE>
<CAPTION>
Successor
------------------------------------
January 30 January 31
1999 1998
------------------------------------
(In Thousands)
<S> <C> <C>
Finished products $33,814 $33,527
Raw materials 3,143 3,470
------------------------------------
36,957 36,997
Less excess of current cost over LIFO inventory value 276 156
------------------------------------
$36,681 $36,841
====================================
</TABLE>
5. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Successor
------------------------------------
January 30 January 31
1999 1998
------------------------------------
(In Thousands)
<S> <C> <C>
Land and buildings $ 3,217 $ 3,158
Vehicles 3,727 3,047
Furniture and fixtures 1,234 917
Machinery and equipment 5,471 4,133
Leasehold improvements 1,060 857
------------------------------------
14,709 12,112
Less accumulated depreciation and amortization 3,701 1,633
</TABLE>
-30-
<PAGE>
<TABLE>
<S> <C> <C>
------------------------------------
Net property and equipment $11,008 $10,479
====================================
</TABLE>
6. Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
Successor
------------------------------------
January 30 January 31
1999 1998
------------------------------------
(In Thousands)
<S> <C> <C>
Goodwill $ 91,823 $ 88,592
Customer lists 17,188 16,150
Deferred financing costs 6,897 5,518
Other 236 262
------------------------------------
116,144 110,522
Less accumulated amortization 7,044 3,676
$109,100 $106,846
====================================
</TABLE>
In connection with the Transactions, Holdings expensed approximately $4,927,000
of unamortized deferred financing costs related to the Old Credit Facility and
the Old Subordinated Notes. Such costs are included in Holdings' extraordinary
loss, net of tax, for the year ended January 30, 1999. Financing costs incurred
in connection with obtaining the Senior Subordinated Notes, the Discount Notes
and the New Credit Facility of approximately $6,897,000 have been deferred by
Holdings as of January 30, 1999 and will be amortized over the period the Senior
Subordinated Notes, the Discount Notes and the New Credit Facility are
outstanding (see Note 7).
-31-
<PAGE>
7. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
Successor
------------------------------------
January 30 January 31
1999 1998
------------------------------------
(In Thousands)
<S> <C> <C>
9-7/8% Senior Subordinated Notes due 2008 $100,000 $ --
12-1/8% Senior Discount Notes due 2009 45,140 --
New Credit Facility 22,700 --
Old Credit Facility (retired):
Working capital advance -- 23,000
Term A Note -- 18,500
Term B Note -- 19,850
Term C Note -- 24,813
Old Subordinated Notes (retired) -- 15,000
Other Notes 178 208
Capitalized lease obligations 796 754
------------------------------------
168,814 102,125
Less:
Current maturities 544 3,699
Unamortized discount 17,756 450
------------------------------------
$150,514 $97,976
====================================
</TABLE>
9-7/8% Senior Subordinated Notes Due 2008
On April 24, 1998, Iron Age issued $100,000,000 of Senior Subordinated Notes.
Iron Age used the net proceeds from the issuance of the Senior Subordinated
Notes, approximately $21,600,000 of borrowings under its New Credit Facility and
approximately $1,200,000 of cash to (i) extinguish certain existing
indebtedness, (ii) redeem a portion of the Holdings Series A Preferred Stock,
and (iii) pay fees and expenses related to these transactions. These
transactions resulted in the recording of an extraordinary loss during April
1998 of approximately $6,923,000, excluding related tax effect of $2,908,000.
The extraordinary loss on the extinguishment of debt is comprised of prepayment
penalties on the Old Credit Facility of $1,562,000; unamortized deferred
financing fees of $4,927,000; and unamortized discount on the Old Subordinated
Notes of $434,000.
-32-
<PAGE>
7. Long-Term Debt (continued)
9-7/8% Senior Subordinated Notes Due 2008 (continued)
The Senior Subordinated Notes accrue interest at the rate of 9-7/8% per annum
and are payable semiannually in arrears on May 1 and November 1, commencing on
November 1, 1998.
The Senior Subordinated Notes are subordinated in right of payment to all
existing and future senior indebtedness of Iron Age.
The Senior Subordinated Notes are redeemable at the option of Iron Age on and
after May 1, 2003 at prices decreasing from 104.938% of the principal amount
thereof to par on May 1, 2006 and thereafter. Iron Age is required to redeem the
outstanding Senior Subordinated Notes based upon certain events as described in
the indenture for the Senior Subordinated Notes.
The indenture for the Senior Subordinated Notes requires Iron Age and its
subsidiaries to comply with certain restrictive covenants, including a
restriction on dividends and limitations on incurrence of indebtedness, certain
payments and distributions and sales of Iron Age's assets and stock.
Effective September 15, 1998, Iron Age filed a registration statement on Form S-
4 under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to its offer to exchange an aggregate principal amount of up to
$100,000,000 of its 9-7/8% Senior Subordinated Notes due 2008 (the "Exchange
Notes"), which have been registered under the Securities Act, for a like
principal amount of its Senior Subordinated Notes, which have not been so
registered. The terms of the Exchange Notes are identical in all material
respects to the Senior Subordinated Notes, except for certain transfer
restrictions and registration rights relating to the Senior Subordinated Notes.
12-1/8% Senior Discount Notes Due 2009
On April 24, 1998, Holdings issued $45,140,000 principal amount at maturity of
Discount Notes, the proceeds of which were used (i) to pay a dividend to
Holdings' stockholders of $17,745,000, (ii) to redeem a portion of the Holdings
Series A Preferred Stock, (iii) to make a capital contribution to Iron Age of
approximately $2,245,000 for compensation payments to certain members of
management and (iv) to pay fees and expenses related to these transactions. The
Discount Notes accrete at a rate of 12-1/8% per annum compounded semiannually
until May 1, 2003. No interest will accrue prior to May 1, 2003. Interest will
accrue thereafter at a rate of 12-1/8% per annum and is payable semiannually in
arrears on May 1 and November 1, commencing on November 1, 2003. The Discount
Notes mature on May 1, 2009.
-33-
<PAGE>
7. Long-Term Debt (continued)
12-1/8% Senior Discount Notes Due 2009 (continued)
The Discount Notes are subordinated in right of payment to all existing and
future senior indebtedness of Holdings.
The Discount Notes are redeemable at the option of Holdings on and after May 1,
2003 at prices decreasing from 106.063% of the principal amount thereof to par
on May 1, 2006 and thereafter. Holdings is required to redeem the outstanding
Discount Notes based upon certain events as described in the indenture for the
Discount Notes.
The indenture for the Discount Notes requires Holdings and its subsidiaries to
comply with certain restrictive covenants, including a restriction on dividends
and limitations on the incurrence of indebtedness, certain payments and
distributions and sales of Holding's assets and stock.
The ability of Holdings to pay principal and interest on the Discount Notes and
to satisfy other existing and future debt obligations will depend on Iron Age's
ability to distribute dividends to Holdings. Iron Age is party to the New Credit
Facility and the indenture for the Senior Subordinated Notes, each of which
imposes substantial restrictions (including the satisfaction of certain
financial conditions) on Iron Age's ability to pay dividends or make other
payments to Holdings. The ability of Iron Age to comply with such conditions
under the New Credit Facility and the indenture for the Senior Subordinated
Notes may be affected by events that are beyond the control of Holdings. Future
borrowings by Iron Age can be expected to contain restrictions or prohibitions
on the payment of dividends by Iron Age to Holdings. Applicable state laws may
also, under certain circumstances, impose significant restrictions on the
payment of dividends by Iron Age or Holdings' other subsidiaries.
Effective September 15, 1998, Holdings filed a registration statement on Form S-
4 under the Securities Act with respect to its offer to exchange an aggregate
principal amount of up to $45,140,000 at maturity of its 12-1/8% Senior Discount
Notes due 2009 (the "Exchange Discount Notes"), which have been registered
under the Securities Act, for a like principal amount at maturity of its
Discount Notes, which have not been so registered. The terms of the Exchange
Discount Notes are identical in all material respects to the Discount Notes,
except for certain transfer restrictions and registration rights relating to the
Discount Notes.
-34-
<PAGE>
7. Long-Term Debt (continued)
New Credit Facility
On April 24, 1998, Iron Age and Holdings entered into a $65,000,000 New Credit
Facility with a syndicate of lenders and a financial institution, as agent for
itself and the other lenders that is comprised of a $30,000,000 revolving
working capital facility and a $35,000,000 revolving acquisition facility. The
revolving acquisition facility was amended on March 5, 1999 to reduce the
borrowing commitment to $22,000,000. The working capital facility matures on
April 24, 2004. The balance of the revolving acquisition facility converts into
a term loan on April 30, 2001 and matures in quarterly installments from July
31, 2001 to April 30, 2004. Under the working capital facility, Iron Age has a
$2,000,000 letter of credit and a $3,000,000 swing line facility which will
expire April 24, 2004. Outstanding obligations under the letter of credit and
the swing line facility were $294,000 and $0, respectively, at January 30, 1999.
Borrowings under the New Credit Facility may be used to fund Iron Age's working
capital requirements, finance certain permitted acquisitions and general
corporate requirements of Holdings and pay fees and expenses related to the
foregoing. Iron Age is required to pay a 0.4375% fee on the average daily unused
portion of the New Credit Facility. Iron Age is also subject to mandatory
prepayment terms as described in the New Credit Facility.
Borrowings under the New Credit Facility accrue interest, at the option of Iron
Age, at either LIBOR plus 2.25% or the greater of the financial institution's
prime rate and the federal funds rate plus 0.5%. Borrowings on the New Credit
Facility accrue interest at 8.50% and 7.50% for prime rate borrowings and LIBOR
borrowings, respectively, at January 30, 1999.
Iron Age has classified its borrowings under the New Credit Facility as long-
term as of January 30, 1999 due to its ability and intent to maintain such
borrowings on a long-term basis.
The New Credit Facility is guaranteed on a senior basis by Holdings and is
collateralized by substantially all of Iron Age's and its subsidiaries' assets.
The New Credit Facility contains certain covenants which require Iron Age to
maintain leverage ratios, fixed charge coverage ratios and interest coverage
ratios. The New Credit Facility further limits capital expenditures and sales of
assets, declaration of dividends and other restricted payments, and additional
indebtedness. The New Credit Facility also restricts the sale or transferring of
Iron Age's assets or capital stock.
-35-
<PAGE>
7. Long-Term Debt (continued)
Old Credit Facility (Retired)
On February 26, 1997, Holdings and Iron Age entered into a $100,000,000 Old
Credit Facility with a financial syndicate of lenders and a financial
institution, as agent for itself and the other lenders, that was comprised of a
$23,000,000 working capital advance and three term notes (A, B and C) of
$18,500,000, $19,850,000 and $24,813,000, respectively.
The Old Credit Facility obligations of $86,820,000, including accrued interest
of $253,000, were extinguished with the proceeds of the Senior Subordinated
Notes and the New Credit Facility on April 24, 1998.
Old Subordinated Notes (Retired)
On February 26, 1997, Iron Age issued the Old Subordinated Notes in the
principal amounts of $10,000,000 and $5,000,000 at a discount. The Old
Subordinated Notes of $15,000,000 were extinguished with the proceeds of the
Senior Subordinated Notes and the New Credit Facility on April 24, 1998. The
extinguishment required prepayment premiums of $1,562,000 which are included in
extraordinary loss, net of tax, for the year ended January 30, 1999. The
unamortized debt discount of approximately $434,000 was also expensed in
connection with the extinguishment of the Old Subordinated Notes and is included
in Iron Age's extraordinary loss, net of tax, for the fiscal year ended January
30, 1999.
Other Notes
Holdings has other notes of approximately $178,000 and $208,000 at January 30,
1999 and January 31, 1998, respectively. The notes will be paid during 1999. The
notes accrue interest at 9.5%.
Future Maturities of Long-Term Debt
Five-year maturities of long-term debt are as follows (in thousands):
<TABLE>
<S> <C>
2000 $544
2001 226
2002 2,760
2003 3,574
2004 4,400
Thereafter 157,310
------------------
$168,814
==================
</TABLE>
-36-
<PAGE>
8. Fair Values of Financial Instruments
The following methods and assumptions were used by Holdings in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents--The carrying amount reported in the balance sheet for
cash and cash equivalents approximates its fair value.
Long-term debt and interest rate swaps--The carrying amounts of Holdings'
borrowings under its new credit facility, old credit facilities, and old
subordinated notes approximate their fair value. The fair values of Holdings'
Senior Subordinated Notes and Senior Discount Notes are estimated based upon
quoted market prices. The fair values of Holdings' other long-term debt and
interest rate swaps are estimated using discounted cash flow analysis, based on
Holdings' current incremental borrowing rates for similar types of borrowing
arrangements.
The carrying amounts and fair values of Holdings' financial instruments at
January 30, 1999 and January 31, 1998 are as follows:
<TABLE>
<CAPTION>
Successor
---------------------------------------------------------------
January 30, 1999 January 31, 1998
---------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 517 $ 517 $ 2,069 $ 2,069
9-78% Senior Subordinated Notes due 2008 100,000 75,000 -- --
New Credit Facility 22,700 22,700 -- --
12-1/8% Senior Discount Notes due 2009 27,384 15,799 -- --
Working capital advance (retired) -- -- 23,000 23,000
Term notes (retired) -- -- 63,163 63,163
Old Subordinated Notes (retired) -- -- 15,000 15,000
Other notes 178 178 208 208
Interest rate swap agreements -- 225 -- (702)
</TABLE>
9. Employee Benefit Plans
Holdings and its subsidiary Falcon sponsor 401(k) profit sharing defined
contribution pension plans. In connection with the Knapp Acquisition, Holdings
assumed a third 401(k) defined contribution plan which was merged into Holdings'
plan on December 31, 1998. Contributions to the plans are based on a percentage
of profits, but may be increased or decreased at the discretion of the Board of
Directors. The plans cover substantially all of its salaried employees. For the
fiscal year ended January 30, 1999, and the periods February 27, 1997 through
January 31, 1998 and January 26, 1997 through February 26, 1997, and for the
year ended January 25, 1997, pension and profit sharing expenses were
approximately $520,000, $820,000, $156,000, and $744,000, respectively.
-37-
<PAGE>
10. Income Taxes
Income tax expense consisted of the following:
<TABLE>
<CAPTION>
Successor Predecessor
February 27 1997 January 26 1997
Year ended through through Year ended
January 30 1999 January 31 1998 February 26 1997 January 25 1997
------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Income taxes:
Current:
Federal $ 533 $2,306 $(450) $1,782
State 145 (24) (2) 649
------------------------------------------------------------------------------
678 2,282 (452) 2,431
Deferred:
Federal (1,098) (458) -- 321
State (454) (138) -- 48
------------------------------------------------------------------------------
(1,552) (596) -- 369
------------------------------------------------------------------------------
$ (874) $1,686 $(452) $2,800
==============================================================================
</TABLE>
A reconciliation of U.S. income tax computed at the statutory rate and actual
expense is as follows:
<TABLE>
<CAPTION>
Successor Predecessor
February 27 1997 January 26 1997
Year ended through through Year ended
January 30 1999 January 31 1998 February 26 1997 January 25 1997
------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Amount computed at statutory rate $(1,410) $1,239 $(390) $2,173
State and local taxes less
applicable federal income tax (203) (107) (1) 460
Goodwill and other amortization 682 657 26 232
Other 57 (103) (87) (65)
$ (874) $1,686 $(452) $2,800
==============================================================================
</TABLE>
-38-
<PAGE>
10. Income Taxes (continued)
The components of the net deferred tax asset and liability are as follows:
<TABLE>
<CAPTION>
Successor
-----------------------------------
January 30 January 31
1999 1998
-----------------------------------
(In Thousands)
<S> <C> <C>
Deferred tax liabilities:
Inventory $2,244 $2,244
Property and equipment 1,147 1,088
Customer lists 5,584 5,783
Other 257 349
-----------------------------------
Total deferred tax liabilities 9,232 9,464
Deferred tax assets:
Interest expense 2,788 2,016
State net operating loss carryforwards 1,100 --
Inventory 556 568
Accrued expenses 553 526
Other 140 45
-----------------------------------
Total deferred tax assets 5,137 3,155
-----------------------------------
Net deferred tax liabilities $4,095 $6,309
===================================
</TABLE>
State net operating loss carryforwards ("NOLs") were generated during the 1999
fiscal year. Approximately $831,000 relates to the state income tax benefit
from extraordinary losses incurred in connection with the early debt
extinguishment (see Note 7). The NOLs expire at various times beginning in
fiscal year 2002 through 2019.
11. Commitments and Contingencies
Purchase Commitments
Holdings purchases the majority of its inventory through purchase order
commitments which are denominated in U.S. dollars. Holdings purchased
approximately 24%, 20%, 17%, and 17% of its inventory from one vendor for the
fiscal year ended January 30, 1999, and the periods February 27, 1997 through
January 31, 1998 and January 26, 1997 through February 26, 1997, and the fiscal
year ended January 25, 1997, respectively. At January 30, 1999 and January 31,
1998, Holdings had outstanding inventory purchase commitments of approximately
$16,189,000 and $15,275,000, respectively.
A significant amount of Holdings' products are produced in the Far East. As a
result, Holdings' operations could be adversely affected by political
instability resulting in the disruption of trade from the countries in which
these suppliers are located or by the imposition of additional duties or
regulations relating to imports or by the supplier's inability to meet Holdings'
production requirements.
-39-
<PAGE>
11. Commitments and Contingencies (continued)
Lease Commitments
Holdings leases substantially all of its vehicles and certain other equipment
and facilities. These leases are subject to renewal options for varying periods.
Future minimum payments, by year and in the aggregate, under capital leases and
noncancelable operating leases with initial or remaining terms of one year or
more consisted of the following:
<TABLE>
<CAPTION>
Capital Operating Leases
Leases
------------------------------------
<S> <C> <C>
2000 $ 451 $ 3,427
2001 291 2,663
2002 226 1,784
2003 92 1,062
2004 34 707
Thereafter -- 811
------------------------------------
Total minimum lease payments 1,094 $10,454
=================
Less amounts representing interest 298
-------------------
Present value of future minimum lease payments 796
Less current maturities of capital lease obligations 366
-------------------
Capital lease obligations $ 430
===================
</TABLE>
Operating lease expense under such arrangements was approximately $3,972,000,
$3,785,000, $203,000, and $2,271,000 for the fiscal years ended January 30,
1999, the periods February 27, 1997 through January 31, 1998 and January 26,
1997 through February 26, 1997, and the year ended January 25, 1997,
respectively.
-40-
<PAGE>
11. Commitments and Contingencies (continued)
Lease Commitments (continued)
At January 30, 1999 and January 31, 1998, property and equipment include
capitalized vehicle leases of approximately $1,627,000 and $1,223,000,
respectively, and accumulated amortization of approximately $592,000 and
$315,000, respectively.
Litigation
Holdings is involved from time to time in lawsuits that arise in the normal
course of business. Holdings actively and vigorously defends all lawsuits.
Management believes that there are no lawsuits that will have a material effect
on Holdings' financial position, results of operations or liquidity.
12. Redeemable Preferred Stock and Stock Purchase Warrants
Effective February 26, 1997, in connection with the Fenway Acquisition described
in Note 2, Holdings authorized 10,000 shares and issued to New York Life
Insurance Company and American Home Assurance Company (the "Outside
Investors") 1,500 shares of Series A nonvoting, cumulative, redeemable
preferred stock with a par value of $.01 per share (the "Holdings Series A
Preferred Stock") for consideration of $14,900,000, with a liquidation
preference of $10,000 per share. Dividends are cumulative at an annual rate of
15.5% and are payable in cash or, at the option of Holdings, in whole or in part
in additional Holdings Series A Preferred Stock. The Holdings Series A Preferred
Stock ranks senior to all classifications of stock. The Holdings Series A
Preferred Stock is optionally redeemable at any time, and mandatorily redeemable
on February 26, 2007, upon not less than ten days notice at a redemption price
equal to the liquidation preference thereof plus accrued and unpaid dividends to
the redemption date. The Holdings Series A Preferred Stock, including accrued
and unpaid dividends of $2,764,000 were redeemed with a portion of the proceeds
of the New Credit Facility and the Senior Subordinated Notes.
In connection with the Fenway Acquisition and the Knapp Acquisition described in
Note 2 and in conjunction with the issuance of preferred stock described above,
Holdings issued to the Outside Investors 9,818 shares of Holdings common stock
for an aggregate consideration of approximately $3,570,000, or $363.64 per
share, and common stock purchase warrants ("Warrants") to acquire 6,962 shares
of Holdings common stock for an aggregate consideration of $100,000. The
Warrants can be exercised at any time through February 26, 2007 for an exercise
price of approximately $186 per share. The value ascribed to the Warrants to
purchase the Holdings common stock in the Securities Purchase Agreement dated
February 26, 1997 among Holdings, Iron Age and the preferred stockholders
resulted in a corresponding discount of $100,000 to the Holdings Series A
Preferred Stock and an addition to paid-in capital of approximately $100,000.
The discount is being amortized over the life of the preferred stock using the
straight-line method. The addition to paid-in capital is net of tax of
approximately $40,000.
-41-
<PAGE>
13. Stock Options
Successor
The 1997 Stock Option Plan (the "Option Plan") provides for the granting of
either incentive stock options or nonqualified stock options to purchase shares
of Holdings common stock and for other stock-based awards to officers,
directors, key employees, consultants and advisors who, in the opinion of
Holdings' Board of Directors are in a position to make a significant
contribution to the success of Holdings and its subsidiaries. The Option Plan
authorized the issuance of options to purchase up to an aggregate of 20,245
shares of Holdings common stock; 11,528 of which shall be for Series A Options
and 8,717 of which shall be for Series B Options.
Nonqualified Series A Options of 11,528 were granted to certain officers of Iron
Age in connection with the Fenway Acquisition effective February 26, 1997 in
exchange for options to acquire shares of the Predecessor to Holdings. The
exercise price of Series A Options is approximately $36 per share and represents
the difference between the fair market value of Holdings' common stock at the
date of grant and the total fair value of the exchanged options which was
recognized as a capital contribution to Holdings of approximately $3,772,700, or
approximately $328 per share. The total fair value of the exchanged options was
recognized as a capital contribution to Holdings because the exchanged options
represented a portion of the purchase price of Holdings. The basis used to
determine the fair market value of Holdings common stock was the purchase price
paid by the Fenway Fund as of the date of the Fenway Acquisition, which was the
date of grant of the Series A Options. The Series A Options are fully vested and
exercisable as of January 30, 1999 and January 31, 1998.
Nonqualified Series B Options of 8,567 were granted in August 1997 in connection
with the Fenway Acquisition to certain officers of Iron Age with an exercise
price of approximately $364 per share. Approximately 65% of the options become
exercisable ("Series B Basic"), subject to the achievement of certain target
earnings and continued employment, at the rate of 20% per year commencing with
Holdings' fiscal year ended January 31, 1998. The remaining 35% of Series B
Options ("Series B Extra") vest upon a change of Iron Age control and the
attainment of certain internal rate of return objectives by Holdings'
stockholders as defined in the Option Plan. The exercise price of Series B
Options granted in August 1997 was approximately $364 per share at the time such
Series B Options were granted. On April 24, 1998, in connection with the
Transactions, the exercise price of Series B Options that were not vested as of
April 24, 1998 was reduced. The exercise price of (i) Series B Options of 7,465
that were not vested (as such term is defined in the Option Plan) as of April
24, 1998 is approximately $186 per share and (ii) Series B Options of 1,102 that
were vested (as such term is defined in the Option Plan) as of April 24, 1998 is
approximately $364 per share. Holdings will recognize compensation expense
related to the Series B Options based upon the difference between the estimated
fair value of Holdings' common stock and the exercise prices of $186 or $364,
respectively, upon the achievement of certain target earnings and continued
employment as defined in the Option Plan. No additional Series B Options vested
during the year ended January 30, 1999.
Holdings applies APB Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for its stock option plan. At January
30, 1999 and January 31, 1998, no compensation cost has been recognized in
Holdings' financial statements.
-42-
<PAGE>
13. Stock Options (continued)
Successor (continued)
Had compensation cost for Holdings' stock option plan been determined based on
the fair value of such awards at the grant date, consistent with the methods of
Financial Accounting Standards Board Statement No. 123, Accounting for Stock-
Based Compensation, Holdings' total net income would have been as follows:
<TABLE>
<CAPTION>
February 27 1997
Year ended through January
January 30 1999 31 1998
------------------------------------
(In Thousands)
<S> <C> <C>
Net (loss) income:
As reported $(7,288) $1,957
Pro forma (7,366) 1,801
</TABLE>
The fair values of options granted in February and August 1997 were estimated
using the minimum value option-pricing model based on the following assumptions:
<TABLE>
<S> <C>
Risk-free interest rate 6.0
Dividend yield 0.0
Expected life 3 years
Volatility Not applicable
</TABLE>
A summary of the status of the shares under Holdings' stock option plan is as
follows:
<TABLE>
<CAPTION>
February 27 1997
Year ended through January
January 30 1999 31 1998
---------------------------------------
<S> <C> <C>
Outstanding, beginning of year 20,245 --
Granted -- 20,245
Expired and forfeited (1,107) (1) --
--------------------------------------
Outstanding, end of year 19,138 20,245
======================================
Options exercisable at end of year 12,560 12,660
======================================
</TABLE>
(1) Subject to re-vesting in fiscal 2000.
-43-
<PAGE>
13. Stock Options (continued)
Successor (continued)
Additional information regarding stock options granted in connection with the
1997 stock option plan is outlined below:
<TABLE>
<CAPTION>
Year ended February 27, 1997 through
January 30, 1999 January 31, 1998
------------------------------------------------------------------
Series B Series B Series B Series B
Series A Basic Extra Series A Basic Extra
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted average fair value of options
at grant date 5 51 26 5 51 26
Weighted average exercise price of all
outstanding options 36 228 186 36 364 364
Weighted average exercise price of
options exercisable 36 364 -- 36 364 --
Weighted average exercise price of
expired and forfeited options -- 186 -- -- -- --
Weighted average remaining contractual
life of options outstanding 8.1 8.1 8.1 9.1 9.1 9.1
Options outstanding at end of year 11,528 4,552 3,058 11,528 5,659 3,058
Options exercisable at end of year 11,528 1,032 -- 11,528 1,132 --
</TABLE>
Predecessor
The Predecessor had an option plan (the "Prior Plan") for eligible officers
and key management personnel. The Prior Plan authorized the issuance of up to
12,212 shares of Predecessor's Class A common stock. A summary of Predecessor's
stock option activity and related information for the period January 26, 1997
through February 26, 1997 and the fiscal year ended January 25, 1997 is as
follows:
<TABLE>
<CAPTION>
January 26, 1997 through Year ended
February 26, 1997 January 25, 1997
-----------------------------------------------------------------
Weighted Average Weighted Average
Option Exercise Price Options Exercise Price
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 12,212 $62 11,595 $62
Granted -- 617 62
Exercised 12,212 62 --
----------- ------------
Outstanding, end of year -- 12,212
=========== ============
Exercisable, end of year -- 9,536
=========== ============
Weighted average fair value of options
granted during the year $611
</TABLE>
-44-
<PAGE>
13. Stock Options (continued)
Predecessor (continued)
For the period January 26, 1997 through February 26, 1997 and the year ended
January 25, 1997, the Predecessor recognized compensation expense of $1,054,000
and $1,065,000, respectively, for vesting of stock options and warrants issued
to employees in accordance with APB Opinion No. 25, based on the intrinsic value
between the exercise prices of performance-based and fixed option grants and the
fair value of the Predecessor's common stock at the measurement dates.
Had compensation expense for the Prior Plan been determined based on the fair
value of stock option awards at the grant date, consistent with the methods of
Financial Accounting Standards Board Statement No. 123, Accounting for Stock-
Based Compensation, Predecessor's net income on a pro forma basis for the period
January 26, 1997 through February 26, 1997 and the year ended January 25, 1997,
would have been as follows:
<TABLE>
<CAPTION>
January 26 1997
through Year ended
February 26 1997 January 25 1997
---------------------------------------
(In Thousands)
<S> <C> <C>
Net (loss) income before stock options and warrants $ (695) $ 3,590
Recorded APB No. 25 compensation expense (1,054) (1,065)
Pro forma compensation expense from stock options and warrants:
Fiscal year ended January 27, 1996 grant 108 108
Fiscal year ended January 25, 1997 grant -- 355
---------------------------------------
Pro forma net income $ 251 $ 4,192
========================================
</TABLE>
The fair values of options granted under the Prior Plan were estimated using the
minimum value option-pricing model based on the following assumptions for all
periods presented:
<TABLE>
<S> <C>
Risk-free interest rate 6.0
Dividend yield 0.0
Expected life 3 years
Volatility Not applicable
</TABLE>
-45-
<PAGE>
14. Related Party Transactions
Fenway provides management services to Holdings and Iron Age pursuant to an
amended and restated management agreement (the "Management Agreement") among
Holdings, Iron Age and Fenway. Fenway is an affiliate of the Fenway Fund, the
principal stockholder of Holdings. Pursuant to the Management Agreement, Fenway
provides Holdings and Iron Age with general management, advisory and consulting
services with respect to Iron Age's business and with respect to such other
matters as Holdings may reasonably request from time to time, including, without
limitation, strategic planning, financial planning, business acquisition and
general business development services. Prior to the Fenway Acquisition, a
similar agreement was in effect with Butler Capital Corporation. Holdings paid
management fees of $250,000, $250,000, $0, and $132,000 in the fiscal year
ended January 30, 1999, and the periods February 27, 1997 through January 31,
1998 and January 26, 1997 through February 26, 1997, and the year ended January
25, 1997, respectively, for management and other advisory services. In addition,
Holdings has reimbursed Fenway for certain related expenses incurred in
connection with rendering such services in an amount equal to $16,000 for the
year ended January 30, 1999 and $80,000 for the 11 months ended January 31,
1998.
In connection with the Fenway Acquisition and the Knapp Acquisition, Holdings
paid $2,070,000 and $200,000, respectively, to Fenway for financial advisory
fees.
Holdings, the Fenway Fund, the Outside Investors, Iron Age management and all of
the other stockholders and optionholders of Holdings are party to a
stockholders' agreement (the "Stockholders' Agreement") that, among other
things, provides for tag-along rights, take-along rights, registration rights,
restrictions on the transfer of shares held by parties to the Stockholders'
Agreement, certain rights of first refusal for Holdings and certain preemptive
rights for certain stockholders. The Stockholders' Agreement also provides that
the parties thereto will vote their shares in the same manner as the Fenway Fund
in connection with certain transactions and that the Fenway Fund will be
entitled to fix the number of directors of Holdings. Pursuant to the
Stockholders' Agreement, the Fenway Fund is entitled to designate a sufficient
number of directors to maintain a majority of the board of directors of Holdings
and Donald R. Jensen is entitled to designate one director.
-46-
<PAGE>
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
IRON AGE HOLDINGS CORPORATION
January 30, 1999
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ------------------------------- ------------ -------------------------- -------------------------------
Additions
--------------------------
Charged to
Balance at Charged to Other
Beginning of Costs and Accounts-- Deductions-- Balance at End
Descriptions Period Expenses Describe Describe Of Period
- ------------------------------- ------------ -------------------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Year ended January 30, 1999:
Deducted from assets accounts:
Allowance for doubtful accounts..... $382,000 $151,000 -- $258,000 (1) $275,000
Year ended January 31, 1998:
Deducted from assets accounts:
Allowance for doubtful accounts..... $352,000 $ 40,000 -- $ 10,000 (2) $382,000
Year ended January 25, 1997:
Deducted from assets accounts:
Allowance for doubtful accounts..... $307,000 $ 45,000 -- -- $352,000
</TABLE>
(1) Uncollectible accounts written off, net of recoveries and adjustments
related to the Dunham Sale.
(2) Uncollectible accounts written off, net of recoveries.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
-47-
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth certain information regarding Holdings'
directors and executive officers, including their respective ages, as of April
26, 1999.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Donald R. Jensen........... 61 Chairman and Director
William J. Mills........... 39 President and Director
Keith A. McDonough......... 40 Vice President-Finance and Chief Financial Officer
Theodore C. Johanson....... 61 President and Chief Executive Officer, Falcon Shoe Mfg. Co.
Peter Lamm................. 47 Director
Andrea Geisser............. 56 Vice President and Director
John B. Ayer............... 37 Director
Reza R. Satchu............. 29 Director
</TABLE>
Donald R. Jensen has been Chairman of Holdings and Iron Age since 1994. Mr.
Jensen became a director of Holdings in 1997 and a director of Iron Age in 1990.
Mr. Jensen retired as President and Chief Executive Officer of Holdings and as
Chief Executive Officer of Iron Age on February 1, 1999. He joined Iron Age as
President and Chief Executive Officer in 1986. Prior to that time, Mr. Jensen
worked in the automotive parts supply business from 1960 to 1970 and held
various positions with Endicott Johnson Corporation from 1970 to 1985, beginning
as a territory salesman. At Endicott Johnson Corporation, he served as Vice
President in charge of the product development, importing, athletic footwear and
rubber footwear divisions and became Executive Vice President in 1985.
William J. Mills became President of Holdings on February 1, 1999.
Immediately prior to this date he was the Executive Vice President of Holdings.
Mr. Mills has also been President and Chief Operating Officer of Iron Age since
May, 1997 and became its Chief Executive Officer on February 1, 1999. Mr.
Mills became a director of Holdings in 1997 and a director of Iron Age in 1995.
Mr. Mills joined Iron Age in 1987 as a District Manager before moving on to
manage all national accounts and assume the position of National Sales Manager.
He was promoted to regional Vice President of Sales in 1991 and to Executive
Vice President in 1994. Prior to 1987, he held various positions at Endicott
Johnson in product development, sales, importing and sales management.
Keith A. McDonough is Vice President-Finance and Chief Financial Officer of
Holdings. Mr. McDonough joined Iron Age in 1981. He was appointed to Executive
Vice President of Iron Age in May 1997 and has been Iron Age's Chief Financial
Officer since 1990. Mr. McDonough is responsible for all corporate financial
matters, including financial reporting, banking and banking relationships,
subsidiary financial oversight and information technology. Mr. McDonough also
manages acquisition forecast development and financial accountability
implementation.
Theodore C. Johanson joined Iron Age as President and Chief Executive Officer
of Falcon in August 1994 when Falcon was acquired by Iron Age. Mr. Johanson, the
founder and President of Falcon since 1963, brings management and manufacturing
expertise to the Iron Age group. He served Eagle Shoe Manufacturing Co. as a
machine operator, Industrial Engineer, Assistant Factory Superintendent and
Salesman from 1954 until founding Falcon. Mr. Johanson currently serves as a
director of KSB Bancorp, Inc.
-48-
<PAGE>
Peter Lamm became a director of Holdings and Iron Age in 1997. Mr. Lamm is
Chairman and Chief Executive Officer of Fenway, a New York-based direct
investment firm for institutional investors with a primary objective of
acquiring leading middle-market companies. From February 1982 to April 1994, Mr.
Lamm was a member of Butler Capital Corporation, a private investment firm, most
recently as Senior Direct Investment Officer and Managing Director. Mr. Lamm
currently serves as a director of Aurora Foods, Inc., Simmons Company, Delimex,
CT Farm & Country and Blue Capital.
Andrea Geisser became a director and Vice President of Holdings and director
of Iron Age in 1997. Mr. Geisser has been a Managing Director of Fenway since
its formation in 1994. From February 1989 to June 1994, Mr. Geisser was a
Managing Director of Butler Capital Corporation. From 1986 to 1989, Mr. Geisser
served as a Managing Director of Onex Investment Corporation, the largest
Canadian leveraged buyout company. Mr. Geisser currently serves as a director of
Aurora Foods, Inc., Simmons Company, Decorative Concepts, New Creative
Enterprises and Valley Recreation Products.
John B. Ayer became a director of Holdings and Iron Age in February 1999. Mr.
Ayer has been a Principal of Fenway since February 1998. Prior to that time,
Mr. Ayer was a partner at the law firm of Ropes & Gray, Boston, Massachusetts
from November 1996 until January 1998, and an associate at that firm from
September 1987 until October 1996.
Reza R. Satchu became a director of Holdings and Iron Age in April 1999. Mr.
Satchu has been a Vice President of Fenway since December 1997 and was an
Associate of Fenway from May 1996 until November 1997. Prior to that time, Mr.
Satchu was a financial analyst in the high yield finance and restructuring group
at Merrill Lynch & Co.
All directors are elected and serve until a successor is duly elected and
qualified or until the earlier of his death, resignation or removal. There are
no family relationships among any of the directors or executive officers of
Holdings or Iron Age. The executive officers of Holdings and Iron Age are
elected by and serve at the discretion of their respective Boards of Directors.
-49-
<PAGE>
Item 11. Executive Compensation.
The following table sets forth information concerning the compensation earned
for the fiscal years ended January 30, 1999 and January 31, 1998 by Mr. Jensen,
Holdings' Chairman, and the four other most highly compensated executive
officers of Holdings (collectively, the "Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term All Other
Annual Compensation Compensation($) Compensation($)
----------------------------------------------------------------
Number of
Securities
Underlying
Name and Position Year (1) Salary ($) Bonus($) Options(2)
- --------------------------------------- ---------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Donald R. Jensen (3)................... 1998 404,740 554,900(5) 9,351.60 9,956(7)
Chairman 1999 397,961 1,488,774(6) -- 23,307(8)
William J. Mills (4)................... 1998 167,857 237,200(9) 3,189.75 9,956(7)
President 1999 172,780 431,394(10) -- 11,085(11)
Keith A. McDonough..................... 1998 118,269 224,760(9) 3,129.75 7,464(13)
Vice President-Finance and 1999 122,777 416,495(12) -- 10,437(14)
Chief Financial Officer
William J. Taaffe (15)................. 1998 99,176 206,100(9) 1,617.89 6,301(17)
Corporate Vice President 1999 101,842 160,116(16) -- 10,609(18)
Theodore C. Johanson................... 1998 193,123 20,000(19) 200.00 5,075(21)
President and Chief Executive Officer, 1999 191,361 39,079(20) -- 4,485(22)
Falcon
</TABLE>
(1) 1999: Fiscal year ended January 30, 1999.
1998: Fiscal year ended January 31, 1998.
(2) Options to acquire common stock of Holdings.
(3) In addition to serving as Chairman of Holdings, Mr. Jensen also served as
Holdings' Chief Executive Officer and President until February 1, 1999.
(4) Prior to February 1, 1999, Mr. Mills served as Executive Vice President of
Holdings.
(5) Includes $275,000 bonus paid by Iron Age in connection with the Fenway
Acquisition.
(6) Includes $1,202,966 bonus paid by Iron Age in connection with the
April 1998 Transactions.
(7) Includes Iron Age allocations of $9,309 under defined contribution plan for
the plan year ended December 31, 1997 and group term life insurance
premiums of $647 paid by Iron Age during the plan year ended December 31,
1997.
(8) Includes Iron Age allocations of $6,020 under defined contribution plan for
the plan year ended December 31, 1998 and group term life insurance
premiums of $3,510 paid by Iron Age during the plan year ended December 31,
1998.
(9) Includes $175,000 bonus paid by Iron Age in connection with the Fenway
Acquisition.
(10) Includes $367,881 bonus paid by Iron Age in connection with the April 1998
Transactions.
(11) Includes Iron Age allocations of $6,020 under defined contribution plan
for the plan year ended December 31, 1998 and group term life insurance
premiums of $330 paid by Iron Age during the plan year ended December 31,
1998.
(12) Includes $365,685 bonus paid by Iron Age in connection with the April 1998
Transactions.
(13) Includes Iron Age allocations of $6,948 under defined contribution plan
for the plan year ended December 31, 1997 and group term life insurance
premiums of $516 paid by Iron Age during the plan year ended December 31,
1997.
-50-
<PAGE>
(14) Includes Iron Age allocations of $6,020 under defined contribution plan
for the plan year ended December 31, 1998 and group term life insurance
premiums of $386 paid by Iron Age during the plan year ended December 31,
1998.
(15) Mr. Taaffe resigned effective January 13, 1999.
(16) Includes $128,360 bonus paid by Iron Age in connection with the April 1998
Transactions.
(17) Includes Iron Age allocations of $5,865 under defined contribution plan
for the plan year ended December 31, 1997 and group term life insurance
premiums of $436 paid by Iron Age during the plan year ended December 31,
1997.
(18) Includes Iron Age allocations of $5,632 under defined contribution plan
for the plan year ended December 31, 1998 and group term life insurance
premiums of $310 paid by Iron Age during the plan year ended December 31,
1998.
(19) Includes $20,000 bonus paid by Iron Age in connection with the Fenway
Acquisition.
(20) Includes $7,321 bonus paid by Iron Age in connection with the April 1998
Transactions.
(21) Represents Falcon allocations under defined contribution plan for the
plan year ended December 31, 1997.
(22) Represents Falcon allocations under defined contribution plan for the
plan year ended December 31, 1998.
-51-
<PAGE>
Aggregated Fiscal Year-End Option Values
The following table sets forth information concerning the value of unexercised
stock options at the end of fiscal 1999 for the Named Executive Officers.
Aggregated Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at at Fiscal Year
Fiscal Year End(#)(1) End($)(2)
---------------------- --------------------
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
- -------------------------- ----------------- ---------------
<S> <C> <C>
Donald R. Jensen
Series A................ 6,404.83/0 1,188,224/0
Series B--Basic B....... 339.60/1,018.40 0/0
Series B--Extra B....... 0/1,248.77 0/0
William J. Mills
Series A................ 1,929.75/0 358,007/0
Series B--Basic B....... 132/396 0/0
Series B--Extra B....... 0/600 0/0
Keith A. McDonough
Series A................ 1,929.75/0 358,007/0
Series B--Basic B....... 120/360 0/0
Series B--Extra B....... 0/600 0/0
William J. Taaffe
Series A................ 617.89/0 114,631/0
Series B--Basic B....... 100/300 0/0
Series B--Extra B....... 0/500 0/0
Theodore C. Johanson
Series B--Basic B....... 40/120 0/0
</TABLE>
(1) Options to acquire common stock of Holdings.
(2) Value based on assumed value at January 30, 1999 of $185.52 per share.
Compensation of Directors
Holdings pays no compensation to its independent directors and pays no
additional remuneration to its employees or to executives of Holdings for
serving as directors.
Employment Agreements
Mr. Jensen is currently employed as Chairman of the Board of Directors of
Holdings and Iron Age pursuant to an agreement dated February 26, 1997. Under
this agreement, Mr. Jensen is entitled to receive an annual salary of $250,000.
In addition, Mr. Jensen is eligible for an annual bonus of up to $100,000
determined by Iron Age's achievement of EBITDA targets. If Mr. Jensen is
terminated other than for cause or resigns voluntarily for good reason, he is
entitled to receive continued salary until December 31, 2001 and continued
coverage under group health plans for himself and his spouse until his 65th
birthday, or until his spouse's 65th birthday if he dies prior to age 65. If
Mr. Jensen's employment is terminated by reason of his death and he is survived
by his spouse, his surviving spouse is entitled to receive a continuation of his
salary until the month of his 62nd birthday and continued coverage under group
health plans until her 65th birthday. If Mr. Jensen's employment is terminated
by reason of his incapacity, Mr. Jensen is entitled to receive continued salary
less amounts received by him under group disability plans and social security
disability benefits until earlier of his death or his 65th birthday and
continued coverage under group health plans for him and his spouse until his
65th birthday if he dies prior to age 65.
-52-
<PAGE>
Mr. Mills is currently employed by Iron Age pursuant to an agreement dated
November 20, 1995. Under this agreement, which is extended from year to year in
the absence of a notice of non-renewal given at least 90 days prior to end of
each fiscal year, Mr. Mills receives an annual salary of $210,000, subject to
annual increases, and is eligible for a bonus of not less than $75,000 based
upon Iron Age's achievement of EBITDA targets. If Mr. Mills is terminated other
than for cause or resigns voluntarily for good reason, he is entitled to receive
continued salary for 18 months and continued coverage under group health plans
for one year following his termination or resignation. If Mr. Mills' employment
is terminated by reason of his death and he is survived by his spouse, his
surviving spouse is entitled to receive continued coverage under group health
plans until the earlier of her 65th birthday or January 31, 2000. If Mr. Mills'
employment is terminated by reason of his incapacity, Mr. Mills is entitled to
receive continued coverage under group health plans until January 31, 2000.
Mr. McDonough is currently employed by Iron Age pursuant to an agreement
dated November 20, 1995. Under this agreement, which is extended from year to
year in the absence of a notice of non-renewal given at least 90 days prior to
end of each fiscal year, Mr. McDonough receives an annual salary of $127,500,
subject to annual increases, and is eligible for a bonus of not less than
$50,000 based upon Iron Age's achievement of EBITDA targets. If Mr. McDonough
is terminated other than for cause or resigns voluntarily for good reason, he is
entitled to receive continued salary for 18 months and continued coverage under
group health plans for one year following his termination or resignation. If Mr.
McDonough's employment is terminated by reason of his death and he is survived
by his spouse, his surviving spouse is entitled to receive continued coverage
under group health plans until the earlier of her 65th birthday or January 31,
2000. If Mr. McDonough's employment is terminated by reason of his incapacity,
Mr. McDonough is entitled to receive continued coverage under group health plans
until January 31, 2000.
Mr. Johanson is currently employed by Falcon pursuant to an agreement dated
August 1, 1994. Under this agreement, Mr. Johanson receives an annual salary or
$190,000 and is eligible for a bonus of 25-35% of base salary determined by
Falcon's achievement of operating income targets. If Mr. Johanson is terminated
other than for cause or resigns voluntarily for good reason, he is entitled to
receive continued salary, reduced by one-half of any compensation received by
Mr. Johanson from other employment, and continued coverage under group health,
disability and life insurance plans, to the extent such benefits are not
provided as a result of other employment, until January 31, 2000. If Mr.
Johanson's employment is terminated by reason of physical or mental disability,
Mr. Johanson is entitled to receive continued coverage under group health and
life insurance plans until January 31, 2000 and payments under Falcon's
disability income plan.
Mr. Taaffe resigned from his executive officer positions with Holdings and
Iron Age effective January 13, 1999 and from his employment with Holdings and
Iron Age effective June 30, 1999. Pursuant to a Severance Agreement dated
January 13, 1999, Mr. Taaffe is on a terminal leave of absence until June 30,
1999 during which time he will continue to receive his current salary, will
remain fully covered by the Company's benefits plans except to the extent he
becomes covered by a medical plan of another employer and will continue to
participate in the Company's profit sharing retirement plan. In addition, Mr.
Taaffe has the right to exercise any of his vested options under the Option Plan
until such options terminate on July 30, 1999. Pursuant to an Agreement and
General Release dated January 13, 1999, and in consideration for the payments
and other benefits set forth in the Severance Agreement, Mr. Taaffe agreed to
release all present and future claims against Iron Age and its affiliates,
including past and present officers, directors and employees of the Company.
Compensation Committee Interlocks and Insider Participation
Messrs. Lamm, Geisser and Jensen were appointed to the Compensation Committee
by Holdings' Board of Directors on September 15, 1998. Mr. Jensen is an
executive officer of Holdings. Mr. Jensen's compensation for fiscal 1999 was
previously established by the terms of his employment agreement.
-53-
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
As of April 26, 1999, the outstanding capital stock of Holdings consisted of
99,624.89 shares of common stock, par value $0.01 per share.
The following table sets forth certain information as of April 26, 1999
regarding the beneficial ownership of (i) each class of voting securities of
Holdings by each person known to Holdings to own more than 5% of any class of
outstanding voting securities of Holdings and (ii) the equity securities of
Holding by each director of Holdings, each Named Executive Officer of Holdings,
and the directors and executive officers of Holdings as a group. To the
knowledge of Holdings, each such stockholder has sole voting and investment
power as to the shares owned unless otherwise noted. Beneficial ownership of
the securities listed in the table has been determined in accordance with the
applicable rules and regulations promulgated under the Securities Exchange Act
of 1934, as amended.
<TABLE>
<CAPTION>
Shares Beneficially Owned(1)
Common Stock
----------------------------
Number of Percentage of
Name and Address Shares Class
- -------------------------------------------------- ----------- -------------
<S> <C> <C>
Principal Stockholders:
Fenway Partners Capital Fund, L.P.(2)............. 88,431.57 88.76%
152 West 57th Street
New York, New York 10019
New York Life Insurance Company(3)................ 11,187.21 10.73
51 Madison Avenue
New York, NY 10010
American Home Assurance Company(4)................ 5,593.61 5.49
c/o AIG Global Investment Co.
200 Liberty Street
New York, NY 10281
Directors and Executive Officers:
Donald R. Jensen(5)............................... 6,744.43 6.34
William J. Mills(6)............................... 2,061.75 2.03
Keith A. McDonough(7)............................. 2,049.75 2.02
William J. Taaffe(8).............................. 717.89 *
Theodore C. Johanson(9)........................... 40.00 *
Peter Lamm(10).................................... -- --
Andrea Geisser(10)................................ -- --
John B. Ayer(10).................................. -- --
Reza R. Satchu(10)................................ -- --
All directors and executive officers as a group,
including the above named persons.............. 11,613.82 10.44
</TABLE>
- ----------------
* Less than one percent.
(1) As used in this table, beneficial ownership means the sole or shared power
to vote, or to direct the voting of a security, or the sole shared power to
dispose, or direct the disposition, of a security and includes options and
warrants exercisable within 60 days.
(2) Includes shares of common stock held by the Fenway Fund and its affiliated
entities FPIP, LLC and FPIP Trust, LLC.
(3) Includes 4,641.66 shares of common stock subject to acquisition from
Holdings at a purchase price of $185.52 per share pursuant to a warrant that
expires on February 26, 2007.
-54-
<PAGE>
(4) Includes 2,320.83 shares of common stock subject to acquisition from
Holdings at a purchase price of $185.52 per share pursuant to a warrant that
expires on February 26, 2007.
(5) Includes 6,404.83 shares of common stock that may be acquired upon the
exercise of outstanding Series A Options at an exercise price of $36.36 per
share and 339.60 shares that may be acquired upon the exercise of
outstanding Series B Options at an exercise price of $363.60 per share
pursuant to the Option Plan (as defined) of Holdings. See "Management
Equity Arrangements."
(6) Includes 1,929.75 shares of common stock that may be acquired upon the
exercise of outstanding Series A Options at an exercise price of $36.36 per
share and 132 shares that may be acquired upon the exercise of outstanding
Series B Options at an exercise price of $363.60 per share pursuant to the
Option Plan of Holdings. See "Management Equity Arrangements."
(7) Includes 1,929.75 shares of common stock that may be acquired upon the
exercise of outstanding Series A Options at an exercise price of $36.36 per
share and 120 shares that may be acquired upon the exercise of outstanding
Series B Options at an exercise price of $363.60 per share pursuant to the
Option Plan of Holdings. See "Management Equity Arrangements."
(8) Includes 617.89 shares of common stock that may be acquired upon the
exercise of outstanding Series A Options at an exercise price of $36.36 per
share and 100 shares that may be acquired upon the exercise of outstanding
Series B Options at an exercise price of $363.60 per share pursuant to the
Option Plan of Holdings. See "Management Equity Arrangements."
(9) Represents 40 shares of common stock that may be acquired upon the exercise
of outstanding Series B Options at an exercise price of $363.60 per share
pursuant to the Option Plan of Holdings. See "Management Equity
Arrangements."
(10) Includes shares of common stock owned by the Fenway Fund and its affiliated
entities, FPIP, LLC and FPIP Trust, LLC. Messrs. Lamm, Geisser, Ayer and
Satchu are limited partners of Fenway Partners, L.P., the general partner of
the Fenway Fund. Accordingly, Messrs, Lamm, Geisser, Ayer and Satchu may be
deemed to beneficially own shares owned by the Fenway Fund. Messrs. Lamm,
Geisser, Ayer and Satchu are members of FPIP, LLC and FPIP Trust, LLC and,
accordingly, may be deemed to beneficially own shares owned by such funds.
Messrs. Lamm, Geisser, Ayer and Satchu disclaim beneficial ownership of any
such shares in which they do not have pecuniary interests. The business
address of each of the foregoing is c/o Fenway Partners, Inc., 152 West
57th Street, New York, New York 10019.
-55-
<PAGE>
Item 13. Certain Relationships and Related Transactions.
Management Equity Arrangements
Holdings adopted a Stock Option Plan (the "Option Plan") for the benefit of
directors, executive officers, other employees, consultants and advisors of
Holdings and its subsidiaries on February 26, 1997. The Plan provides for
issuance of Series A options ("Series A Options") and Series B options ("Series
B Options"). Series B Options are designated as either "Series B--Basic B
Options" or "Series B--Extra B Options." Series A Options vest immediately in
full on the date such options are granted, Series B--Basic B Options are
subject to certain time and performance vesting restrictions and Series
B--Extra B Options vest only in connection with the consummation by the Fenway
Fund of a sale, other than to one of its affiliates, of its entire equity
interest in Holdings and the attainment of certain internal rate of return
objectives. Holdings has reserved 20,244.70 shares of Holdings common stock for
issuance under the Option Plan, 11,527.78 of which shares are reserved for
Series A Options and 8,716.92 of which shares are reserved for Series B
Options.
In February 1997, Holdings granted Series A Options to certain management
employees to purchase an aggregate of 11,527.78 shares of common stock at an
exercise price of $36.36 per share. These Series A Options were issued in
exchange for existing options for shares of the parent of the predecessor in
connection with the Fenway Acquisition. The Series A Options granted expire on
February 28, 2007. In August 1997, Holdings granted to certain management
employees Series B--Basic B Options to purchase an aggregate of 5,508 shares of
common stock and Series B--Extra B Options to purchase an aggregate of 3,058.77
shares of common stock. All of the Series B Options granted expire on February
28, 2007. The exercise price of Series B Options granted in August 1997 (i) that
were not vested (as such term is defined in the Option Plan) as of April 24,
1998 is approximately $186 per share and (ii) that were vested (as such term is
defined in the Option Plan) as of April 24, 1998 is approximately $364 per
share. None of the options granted under the Option Plan has been exercised.
In connection with the April 1998 Transactions, members of management of Iron
Age holding vested options received aggregate payments of $2,245,000 which
reflects the decrease in the equity value of the Company as a result of the cash
distribution to the stockholders of Holdings in the April 1998 Transactions.
Stockholders Agreement
Holdings, the Fenway Fund and all of the other stockholders and optionholders
of Holdings entered into a stockholders agreement (the "Stockholders
Agreement") that, among other things, provides for tag-along rights, take-along
rights, registration rights, restrictions on the transfer of shares held by
parties to the Stockholders Agreement, certain rights of first refusal for
Holdings and certain preemptive rights for certain stockholders. The
Stockholders Agreement also provides that the parties thereto will vote their
shares in the same manner as the Fenway Fund in connection with certain
transactions and that the Fenway Fund will be entitled to fix the number of
directors of Holdings. Pursuant to the Stockholders Agreement, the Fenway Fund
is entitled to designate a sufficient number of directors to maintain a majority
of the board of directors of Holdings and Donald R. Jensen is entitled to
designate one director.
Management Agreement
Holdings and Iron Age are party to the amended and restated management
agreement (the "Management Agreement") with Fenway pursuant to which Fenway
agreed to provide management and advisory services to Holdings and Iron Age. In
exchange for such services, Holdings and Iron Age agreed to pay Fenway (i)
annual management fees equal to $250,000 for fiscal 1999 and fiscal 1998,
$275,000 for fiscal 2000, $300,000 for fiscal 2001 and, for each subsequent
fiscal year, 0.25% of the net sales for the immediately preceding fiscal year
which annual management fees shall be increased by an amount to be negotiated in
good faith in the event of an acquisition of a business with an enterprise value
in excess of $50 million, (ii) fees in connection with the negotiation and
consummation by Fenway of senior financing for any acquisition transactions,
which fees shall not exceed the greater of $1 million or 1.5% of the aggregate
transaction value and (iii) certain fees and expenses, including legal
-56-
<PAGE>
and accounting fees and any out-of-pocket expenses incurred by Fenway in
connection with providing services to Holdings and Iron Age. Holdings and Iron
Age also agreed to indemnify Fenway under certain circumstances. In addition,
pursuant to the Management Agreement, Fenway received $2,070,000 in connection
with the structuring of the Fenway Acquisition and the related senior secured
financing. Holdings believes that the fees payable pursuant to the Management
Agreement are comparable to fees payable to unaffiliated third parties for
similar services.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) Financial Statements
See Index to Financial Statements appearing at page 17.
(a)(2) Financial Statement Schedules
The following Financial Statement Schedule is included at page 47:
Schedule II Valuation and Qualifying Accounts.
Information required by other schedules called for under Regulation S-X
is either not applicable or is included in the consolidated financial
statements or notes thereto.
(a)(3) Exhibit Index
3.1* Holdings Certificate of Incorporation, as amended.
3.2* Holdings By-laws.
4.1* Indenture dated as of April 24, 1998.
10.1* Credit Agreement dated as of April 24, 1998.
10.2* Security Agreement dated April 24, 1998.
10.3* Intellectual Property Security Agreement dated April 24, 1998.
10.4* Canadian Security Agreement dated April 24, 1998.
10.5* Mortgage, Assignment of Leases and Rents, Fixture Filing, Security
Agreement and Financing Statement dated February 26, 1997, as amended
April 24, 1998.
10.6* Intercompany Subordination agreement dated April 24, 1998.
10.7* Subsidiary Guaranty dated April 24, 1998.
10.8* Iron Age Trademark License Agreement with W.L Gore & Associates, Inc.
dated August 15, 1994.
10.9* Falcon Trademark License Agreement with W.L. Gore & Associates, Inc.
dated July 25, 1994.
10.10* Falcon Manufacturing Certification Agreement with W.L Gore &
Associates, Inc. dated July 25, 1994.
10.11* General Services Administration Contract effective July 26, 1994, as
modified May 24, 1995.
10.12* Amended and Restated Management Agreement dated as of February 26,
1997.
10.13* Stockholders Agreement dated as of February 26, 1997.
10.14* Amendment No. 1 to Stockholders Agreement dated as of March 25, 1997.
10.15* American Home Assurance Company Joinder to the Stockholders Agreement
dated as of March 25, 1997.
10.16* Banque Nationale de Paris Joinder to the Stockholders Agreement dated
as of March 25, 1997.
10.17* Stock Option Plan dated February 26, 1997.
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.
-57-
<PAGE>
10.21* Pittsburgh, Pennsylvania Lease Agreement dated March 1, 1993, as
amended June 2, 1994, as amended June 12, 1996, as amended December 10,
1997.
10.22* Jerusalem, New York Lease Agreement dated December 9, 1992, as amended
January 1, 1994, as amended April 1997.
10.23* Jerusalem, New York Lease Agreement dated June 20, 1997, as amended
January 9. 1998.
10.24* Lewiston, Maine Lease Agreement dated January 14, 1994.
10.25* Lewiston, Maine Lease Agreement dated November 30, 1990, as amended
June 8, 1994.
10.26* Ontario, Canada Lease Agreement dated June 11, 1991, as amended
November 23, 1995.
10.27* Jensen Employment Agreement dated February 26, 1997.
10.28* Mills Employment Agreement dated November 20, 1995.
10.29* McDonough Employment Agreement dated November 20, 1995.
10.30* Johanson Employment Agreement date August 1, 1994.
10.31* Johanson Non-Competition Agreement dated August 1, 1994.
10.32 Taaffe Severance Agreement dated January 13, 1999.
10.33 Taaffe Agreement and General Release dated January 13, 1999.
10.34 Letter Waiver to Banque Nationale de Paris Credit Agreement dated
August 28, 1998.
10.35 Amendment No. 2 and Waiver to Banque Nationale de Paris Credit
Agreement dated February 26, 1999.
10.36 Election to reduce Acquisition Commitment of Banque Nationale de Paris
Credit Agreement dated March 5, 1999.
21.1* Subsidiaries of Holdings.
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 fourth quarter of the fiscal
year ended January 30, 1999.
-58-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Iron Age Holdings Corporation
Dated: April 26, 1999 By:/S/KEITH A. MCDONOUGH
Vice President Finance,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/S/DONALD R. JENSEN Chairman and Director April 26, 1999
Donald R. Jensen
/S/WILLIAM J. MILLS President and Director April 26, 1999
William J. Mills (principal executive officer)
/S/KEITH A. MCDONOUGH Vice President Finance, Chief April 26, 1999
Keith A. McDonough Financial Officer (principal
financial and accounting officer)
/S/PETER LAMM Director April 26, 1999
Peter Lamm
/S/ANDREA GEISSER Director April 26, 1999
Andrea Geisser
/S/JOHN B. AYER Director April 26, 1999
John B. Ayer
/S/REZA R. SATCHU Director April 26, 1999
Reza R. Satchu
</TABLE>
-59-
<PAGE>
EXHIBIT A TO AGREEMENT AND GENERAL RELEASE
Exhibit 10.32
SEVERANCE AGREEMENT
-------------------
By and between WILLIAM J. TAAFFE ("Mr. Taaffe"), a resident of New York and
IRON AGE CORPORATION, a Delaware corporation ("Iron Age")
WITNESSETH:
-----------
1. Mr. Taaffe hereby resigns as President and Chief Operating Officer of
Knapp Consumer Brands Division of Iron Age Corporation as of the date hereof.
2. Mr. Taaffe shall begin a terminal leave of absence effective as of the
date hereof, subject to the following terms and conditions:
(i) Mr. Taaffe shall continue to receive his current gross salary of
$4,038.46 payable bi-weekly through July 1, 1999.
(ii) Mr. Taaffe shall be released of all further duties and shall not
report to work on and after the date hereof.
(iii) Mr. Taaffe shall remain fully covered by all Company benefits plans
as in effect from time to time from the date hereof through July 1, 1999;
provided, however, that if Mr. Taaffe becomes covered by a medical plan of
another employer his medical coverage with Iron Age shall cease as of such date.
(iv) Mr. Taaffe shall continue to participate in the Iron Age Corporation
Profit Sharing Retirement Plan through July 1, 1999 and on such date shall be
deemed to have completed 1,000 Hours of Service during the Plan Year ended
December 31, 1999. It is the
<PAGE>
intent of this paragraph that Mr. Taaffe shall be fully vested in his entire
account in the Profit Sharing Retirement Plan on July 1, 1999.
(v) Mr. Taaffe shall have the right to exercise any or all of his vested
options under the Iron Age Holdings Corporation 1997 Stock Option Plan through
and until July 30, 1999 at which time all his nonexercised options shall be
deemed terminated and canceled.
3. Mr. Taaffe shall return to the Company all proprietary information,
including trade secrets, relating to the Company or any of its affiliated
companies currently in his possession, including original agreements and any
copies thereof.
4. Mr. Taaffe shall keep confidential and shall not disclose to any third
party other than his attorneys or other personal advisors any proprietary
information, including trade secrets, relating to the Company or any of its
affiliated companies which he obtained during his employment with the Company.
5. It is understood and agreed that any violation by Mr. Taaffe of this
Severance Agreement shall entitle the Company to terminate and cancel this
Severance Agreement without any further liability to Mr. Taaffe.
IN WITNESS WHEREOF, and intending to be legally bound hereby, each of the
parties hereto has caused this Severance Agreement to be executed as of the
dates indicated.
IRON AGE CORPORATION
Date: _____________________ By:_______________________
Chairman and CEO
/s/
Date: _____________________ __________________________
WILLIAM J. TAAFFE
-2-
<PAGE>
Exhibit 10.33
AGREEMENT and GENERAL RELEASE
-----------------------------
This AGREEMENT and GENERAL RELEASE ("Agreement") is entered into by and
between
Iron Age Corporation and its subsidiaries and affiliates ("Iron Age")
and
William J. Taaffe ("Mr. Taaffe")
WHEREAS, Mr. Taaffe is employed as President and Chief Operating Officer of
Knapp Consumer Brands Division; and
WHEREAS, the parties have agreed that it is in their mutual best interest
that Mr. Taaffe resign his employment; and
WHEREAS, Mr. Taaffe and Iron Age wish to resolve all issues arising from
Mr. Taaffe's employment and termination of employment.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and intending to be legally bound thereby, the parties agree as follows:
1. This Agreement shall constitute Mr. Taaffe's letter of resignation as
President and Chief Operating Officer effective immediately and from his
employment effective June 30, 1999.
2. Until June 30, 1999, Mr. Taaffe will be on paid terminal leave of
absence in accordance with the provisions of Exhibit A to this Agreement.
<PAGE>
3. Mr. Taaffe acknowledges that by signing this Agreement and accepting the
benefits of it, that he is giving up forever the right to seek any relief from
Iron Age or any person associated with Iron Age for any event occurring prior to
the execution of this Agreement by all parties. Pursuant to that understanding
and as consideration for the payments set forth in Paragraph 2, Mr. Taaffe
irrevocably and unconditionally releases, remits, acquits, and discharges Iron
Age, its corporate affiliates, its present and former officers, directors,
agents, employees, contractors, successors and assigns (separately and
collectively "Releasees"), jointly and individually, from any and all claims,
known or unknown, which Mr. Taaffe, his heirs or assigns have or may have
against Releasees, and any and all liability which the Releasees may have to
him, whether called claims, demands, causes of action, obligations, damages or
liabilities arising from any and all basis, however called, including but not
limited to claims of breach of contract or discrimination under any federal,
state or local law, rule, or regulation. This Release relates to claims arising
prior to and during Mr. Taaffe's employment by Iron Age, whether those claims
are past or present, whether they arise from common law, contract or statute,
whether they arise from labor laws, discrimination laws, or any other law, rule
or regulation, provided, however, that this Release does not apply to any
employment rights or claims that may arise after this Agreement is executed by
all of the parties. Mr. Taaffe specifically acknowledges that this Release is
applicable to any claim under the Age Discrimination in Employment Act, the
Civil Rights Act of 1964 and the Americans With Disabilities Act. This Release
is for any relief, no matter how called, including but not limited to
reinstatement, wages, back pay, front pay, severance pay, compensatory damages,
punitive damages, damages for pain and suffering, or attorneys' fees. Mr. Taaffe
agrees he will not be entitled to any benefit from any claim or proceeding filed
by him or on his behalf with any agency or court. Mr. Taaffe further agrees that
-2-
<PAGE>
he is waiving any right to seek future employment with Iron Age, and if he
should do so, Iron Age will deny employment and such denial shall not be the
basis of any claim whatsoever.
Mr. Taaffe further agrees that if he should initiate any court action
against Iron Age which is successfully defended by Iron Age, Mr. Taaffe shall
reimburse Iron Age for all costs and attorney fees incurred in defending such
action.
4. Mr. Taaffe further agrees that he will not seek unemployment
compensation based upon his resignation, and agrees that if Iron Age is required
to submit a separation report, Mr. Taaffe will not contest that his resignation
was without good cause.
5. Mr. Taaffe agrees that he will not divulge to anyone any information
regarding Iron Age's records, ideas, plans or any other aspect of Iron Age's
operations and any information obtained by Mr. Taaffe during his employment
shall be deemed confidential. This obligation of confidentiality shall not
apply to information which prior to any disclosure by Mr. Taaffe has become
publicly available information.
6. The parties agree that the execution of this Agreement is in compromise
and final settlement between the parties of all disputed matters, whether
asserted or not, constitutes full satisfaction of all claims made or which could
be made, and does not in any way admit liability or wrongdoing by any entity or
individual.
7. The parties intend this Agreement to be legally binding upon and inure
to the benefit of each of them and their respective heirs, successors and
assigns.
8. The Parties agree that the terms of this Agreement shall be kept
confidential, except as necessary for the administration or enforcement of this
Agreement.
-3-
<PAGE>
9. This Agreement is the complete agreement between the parties, and there
are no written or oral understandings, promises or agreements directly or
indirectly related to this Agreement that are not incorporated herein in full.
10. Mr. Taaffe states that he has carefully read the within and foregoing
Agreement, that he has been advised prior to execution of this Agreement to seek
the advice of an attorney, that he knows and understands the contents of this
Agreement, that he has been given adequate time to consider whether to execute
the Agreement, that he executes this Agreement knowingly and voluntarily as his
own free act and deed, and that this Agreement was freely entered into without
fraud, duress or coercion.
11. Mr. Taaffe acknowledges that he was given at least twenty-one (21) days
in which to consider whether to execute this Agreement before being required to
make a decision. Mr. Taaffe further acknowledges that he may revoke the
Agreement for a period of seven (7) days from the date that he executed the
Agreement.
12. This Agreement shall be and remain in effect despite any alleged breach
of this Agreement or the discovery or existence of any new or additional fact,
or any fact different from that which Iron Age or Mr. Taaffe now know or believe
to be true. Notwithstanding the foregoing, nothing in this Agreement shall be
construed as or constitute a release of any party's rights to enforce the terms
of this Agreement.
IN WITNESS WHEREOF, and intending to be legally bound, each of the parties
hereto has caused this Agreement to be executed as of the dates indicated.
-4-
<PAGE>
IRON AGE CORPORATION
Date: By:
-------------------- ----------------------------------
Chairman and CEO
/s/ William J. Taaffe
Date: -------------------------------------
-------------------- WILLIAM J. TAAFFE
-5-
<PAGE>
Exhibit 10.34
EXECUTION COPY
LETTER WAIVER
Dated as of August 28, 1998
To the banks, financial institutions
and other institutional lenders
(collectively, the "Lenders")
-------
parties to the Credit Agreement
referred to below and to Banque Nationale
de Paris, as agent (the "Agent") for the Lenders
-----
Ladies and Gentlemen:
We refer to the Credit Agreement dated as of April 24, 1998, (as
amended, supplemented or otherwise modified through the date hereof, the "Credit
------
Agreement") among the undersigned and you. Capitalized terms not otherwise
- ---------
defined in this Letter Waiver have the same meanings as specified in the Credit
Agreement.
Pursuant to an Asset Purchase Agreement dated as of August 31, 1998
(the "Asset Purchase Agreement") among the Borrower and its subsidiary, Falcon
------------------------
Shoe Mfg. Co. ("Falcon"), as sellers (the "Sellers"), and New Balance Athletic
------ -------
Shoe, Inc. ("NBAS") and New Balance Trading Company, Ltd., as buyers (the
----
"Buyers"), the Sellers intend to sell certain of their assets (which assets are
- -------
associated with the Sellers' "Dunham" trademark; the "Dunham Property"),
---------------
including inventory and intellectual property, to the Buyers (the "Dunham
------
Sale"). The Sellers will receive a total consideration of no greater than
$2,800,000 to be comprised of (i) a $1,600,000 cash payment (for the Dunham
trademark) to be paid at the closing of the Asset Purchase Agreement, (ii) a
$400,000 Promissory Note (the "Buyers' Note") from NBAS payable to the order of
------------
Falcon (also for the Dunham trademark) payable August 31, 1999 and (iii) a cash
payment expected to be approximately $700,000, but in any event no greater than
$800,000 (for an initial on-hand bulk Dunham inventory sale) to be paid within
10 days after the closing of the Asset Purchase Agreement (each, individually, a
"Payment" and collectively, the "Payments").
------- --------
We have reviewed the Credit Agreement and note that the following
provisions will restrict our ability to consummate the Dunham Sale:
1. Section 2.06(b)(ii) requires mandatory prepayment of the
Acquisition Facility upon receipt of the Net Cash Proceeds from
each Payment;
<PAGE>
2. Section 2.01(d) provides that amounts prepaid under Section 2.06
may not be reborrowed;
3. Section 2.05(b)(iv) will require automatic and permanent
reduction of the Acquisition Facility on the date of the
mandatory prepayment required by Section 2.06(b)(ii);
4. Section 5.02(e)(iv) permits a sale of assets for less than
$3,000,000 only if such sale is not "a bulk sale of Inventory and
a sale of Receivables other than delinquent accounts for
collection purposes only"; and
5. Section 5.02(f) does not permit the Sellers to invest in the
Buyers' Note as a Payment.
Accordingly, we hereby request that you waive, solely with respect to
the Payments and solely to the extent necessary to consummate the Dunham Sale,
the following provisions of the Credit Agreement:
1. Section 2.01(d), which prevents reborrowing of prepaid
Acquisition Advances;
2. Section 2.05(b)(iv), which automatically and permanently reduces
the amount of the Acquisition Facility;
3. Section 5.02(e)(iv), which does not permit bulk sales of
inventory; and
4. Section 5.02(f), which does not permit investment in the Buyers'
Note.
This Letter Waiver shall become effective as of the date first above
written when, and only when, the Agent shall have received counterparts of this
Letter Waiver executed by us and the Required Lenders or, as to any of the
Lenders, advice satisfactory to the Agent that such Lender has executed this
Letter Waiver, and the consent attached hereto executed by each Guarantor and
each Grantor. The effectiveness of this Letter Waiver is conditioned upon the
accuracy of the factual matters described herein. This Letter Waiver is subject
to the provisions of Section 9.01 of the Credit Agreement.
The Credit Agreement, the Notes and each of the other Loan Documents,
except to the extent of the waiver specifically provided above, are and shall
continue to be in full force and effect and are hereby in all respects ratified
and confirmed. Without limiting the generality of the foregoing, the Collateral
Documents and all of the Collateral described therein do and shall continue to
secure the payment of all Obligations of the Loan Parties under the Loan
Documents. The execution, delivery and effectiveness of this Letter Waiver
shall not, except as expressly provided herein, operate as a waiver of any
right, power or remedy of any Lender or the Agent under any of the Loan
Documents, nor constitute a waiver of any provision of any of the Loan
Documents.
<PAGE>
If you agree to the terms and provisions of this Letter Waiver, please
evidence such agreement by executing and returning a counterpart of this Letter
Waiver to Philip R. Strauss at telecopier number (212) 848-7179 and at least
four executed originals to Philip R. Strauss at Shearman & Sterling, 599
Lexington Avenue, New York, NY 10022.
[The remainder of this page left intentionally blank.]
<PAGE>
This Letter Waiver may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement. Delivery of an executed counterpart of a
signature page to this Letter Waiver by telecopier shall be effective as
delivery of a manually executed counterpart of this Letter Waiver.
This Letter Waiver shall be governed by, and construed in accordance
with, the laws of the State of New York.
Very truly yours,
IRON AGE CORPORATION
By
--------------------------------
Title:
IRON AGE HOLDINGS CORPORATION
By
--------------------------------
Title:
Agreed as of the date first above written:
BANQUE NATIONALE DE PARIS,
as Agent, Swing Line Bank,
Issuing Bank and as Lender
By
---------------------------------
Title:
By
---------------------------------
Title:
<PAGE>
KEYBANK NATIONAL ASSOCIATION
By
---------------------------------
Title:
PNC BANK, NATIONAL ASSOCIATION
By
---------------------------------
Title:
FIRST BANK NATIONAL ASSOCIATION
By
---------------------------------
Title:
SWISS BANK CORPORATION,
NEW YORK BRANCH
By
---------------------------------
Title:
By
---------------------------------
Title:
<PAGE>
CONSENT
Dated as of August 28, 1998
Each of the undersigned, as a Loan Party party to certain of the Loan
Documents (as defined in the Credit Agreement referred to in the foregoing
Letter Waiver), hereby consents to such Letter Waiver and hereby confirms and
agrees that (a) notwithstanding the effectiveness of such Letter Waiver, each
Loan Document to which it is a party is, and shall continue to be, in full force
and effect and is hereby ratified and confirmed in all respects, except that, on
and after the effectiveness of such Letter Waiver, each reference in such Loan
Document to the "Credit Agreement", "thereunder", "thereof" or words of like
import shall mean and be a reference to the Credit Agreement, as amended by such
Letter Waiver, and (b) the Collateral Documents to which such Loan Party is a
party and all of the Collateral described therein do, and shall continue to,
secure the payment of all of the Secured Obligations (in each case, as defined
therein).
IRON AGE HOLDINGS CORPORATION
By
---------------------------------
Title:
IRON AGE INVESTMENT COMPANY
By
---------------------------------
Title:
FALCON SHOE MFG. CO.
By
---------------------------------
Title:
<PAGE>
Exhibit 10.35
AMENDMENT NO. 2 AND WAIVER
TO THE CREDIT AGREEMENT
Dated as of February 26, 1999
AMENDMENT NO. 2 AND WAIVER TO THE CREDIT AGREEMENT among Iron Age
Corporation, a Delaware corporation (the "Borrower"), Iron Age Holdings
--------
Corporation, a Delaware corporation (the "Parent Guarantor"), the banks,
----------------
financial institutions and other institutional lenders parties to the Credit
Agreement referred to below (collectively, the "Lenders") and Banque Nationale
-------
de Paris, as agent (the "Agent") for the Lenders, initial issuing bank and swing
-----
line bank.
PRELIMINARY STATEMENTS:
(1) The Borrower, the Lenders and the Agent have entered into a Credit
Agreement dated as of April 24, 1998, and a Letter Waiver thereto dated as of
August 28, 1998 (such Credit Agreement, as so amended, the "Credit Agreement").
----------------
Capitalized terms not otherwise defined in this Amendment No. 2 and Waiver have
the same meanings as specified in the Credit Agreement.
(2) The Borrower and the Required Lenders have agreed to amend the
Credit Agreement as hereinafter set forth.
SECTION 1. Amendments to Credit Agreement. The Credit Agreement is,
------------------------------
effective as of the date hereof and subject to the satisfaction of the
conditions precedent set forth in Section 3 hereof, hereby amended as follows:
(a) The definition of "EBITDA" in Section 1.01 is amended by deleting
the proviso and substituting therefor the following:
"; provided that, for purposes of Section 5.04 and Schedule IV for
--------
each month ending during Fiscal Year 2000 included in any Rolling
Period, EBITDA shall be the amount for such month as set forth on
Schedule V hereto".
(b) Section 3.02(iii) is amended in its entirety to substitute
therefor the following:
"(iii) for each Acquisition Borrowing, (a) such Borrowing shall
be in compliance with the terms set forth in Section 5.02(f)(xi),
5.02(f)(xvi) or 5.02(f)(xvii), as applicable, and, if requested by the
Agent or the Required Lenders, the Borrower will provide the Lender
Parties
<PAGE>
with certificates and letters of the type referred to in Section
3.01(k)(xv) after giving effect to the application of proceeds from
such Borrowing and (b) with respect to each Acquisition Borrowing
occurring prior to April 30, 2000, the Parent Guarantor shall also be
in compliance, before and after giving effect to the Investment
related to such Acquisition Borrowing, with the financial covenants
set forth in Schedule IV hereto; and"
(e) Section 5.01(d) is amended in its entirety as follows:
"(d) Maintenance of Insurance. Maintain, and cause each of
------------------------
their Subsidiaries to maintain, insurance with responsible and
reputable insurance companies or associations in such amounts and
covering such risks as is customarily carried by companies engaged in
similar businesses as the Borrower and owning similar properties in
the same general areas in which the Borrower, the Parent Guarantor or
such Subsidiary operates; and, prior to April 30, 1999, obtain and
thereafter maintain, key man life insurance on William J. Mills in an
amount not less than $6,000,000 (which amount may be reduced by
$2,000,000 on April 27, 2000 and on each anniversary thereafter), for
the period from the date such insurance was obtained until the earlier
of (i) the Termination Date or (ii) the date that William J. Mills
ceases to be an employee of the Borrower of the Parent Guarantor, with
an insurance carrier and pursuant to an insurance policy reasonably
satisfactory to the Agent, which policy shall at all times be subject
to an Assignment of Life Insurance Policy to the Agent for the benefit
of the Secured Parties."
(d) Section 5.04(c) is amended by deleting the amounts set opposite
the following dates and substituting therefor the amount set forth below
opposite each such date:
<TABLE>
<CAPTION>
Rolling Period Ending Closest To Ratio
---------------------------------- -----------
<S> <C>
January 31, 1999 1.50 : 1.00
April 30, 1999 1.40 : 1.00
July 31, 1999 1.40 : 1.00
October 31, 1999 1.40 : 1.00
January 31, 2000 1.50 : 1.00
</TABLE>
(e) Section 5.04 is amended by adding at the end thereof a new Section
5.04(e), to read as follows:
(e) Senior Leverage Ratio. Maintain a Senior Leverage Ratio for
---------------------
each Rolling Period set forth below of not more than the amount set
forth below for such Rolling Period:
<PAGE>
<TABLE>
<CAPTION>
Rolling Period Ending Closest To Ratio
- ---------------------------------- -----------
<S> <C>
January 31, 1999 1.30 : 1.00
April 30, 1999 1.25 : 1.00
July 31, 1999 1.25 : 1.00
October 31, 1999 1.20 : 1.00
January 31, 2000 1.10 : 1.00
</TABLE>
(f) A new Schedule IV to the Credit Agreement is added to the Credit
Agreement in the form attached hereto as Annex A.
SECTION 2. Waiver. The Required Lenders hereby waive, subject to the
------
satisfaction of the conditions precedent set forth in Section 3 hereof, the
requirements of Section 5.04(a) solely with respect to the Rolling Periods
ending closest to January 31, 1999, April 30, 1999, July 31, 1999, October 31,
1999 and January 31, 2000.
SECTION 3. Conditions of Effectiveness. This Amendment No. 2 and
---------------------------
Waiver shall become effective as of the date first above written when, and only
when, the Agent shall have received counterparts of this Amendment No. 2 and
Waiver executed by the Borrower and the Required Lenders or, as to any of the
Lenders, advice satisfactory to the Agent that such Lender has executed this
Amendment No. 2 and Waiver and the consent attached hereto executed by the
Parent Guarantor and the Subsidiary Guarantors. The effectiveness of this
Amendment No. 2 and Waiver is conditioned upon the accuracy of the factual
matters described herein. This Amendment No. 2 and Waiver is subject to the
provisions of Section 9.01 of the Credit Agreement.
SECTION 4. Representations and Warranties of the Borrower. The
----------------------------------------------
Borrower represents and warrants as follows:
(a) Each Loan Party is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction indicated in the
recital of parties to this Amendment No. 2 and Waiver.
(b) The execution, delivery and performance by the Borrower of this
Amendment No. 2 and Waiver and the Loan Documents, as amended hereby, to
which it is or is to be a party, are within the Borrower's corporate
powers, have been duly authorized by all necessary corporate action and do
not (i) contravene the Borrower's charter or by-laws, (ii) violate any law
(including, without limitation, the Securities Exchange Act of 1934, as
amended, and the Racketeer Influenced and Corrupt Organizations Chapter of
the Organized Crime Control Act of 1970), rule or regulation (including,
without limitation, Regulation X of the Board of Governors of the Federal
Reserve System), or any order, writ, judgment, injunction, decree,
determination or award, binding on or affecting the Borrower or any of its
Subsidiaries or any of their properties, (iii) conflict with or result in
the breach of, or constitute a default under, any contract, loan agreement,
indenture, mortgage, deed of trust, lease or other instrument binding on or
affecting the Borrower, any of its Subsidiaries or any of their properties
or (iv) except for the Liens created under the Collateral Documents, result
in or require the
<PAGE>
creation or imposition of any Lien upon or with respect to any of the
properties of the Borrower or any of its Subsidiaries.
(c) No authorization or approval or other action by, and no notice to
or filing with, any governmental authority or regulatory body or any other
third party is required for the due execution, delivery or performance by
the Borrower of this Amendment No. 2 and Waiver or any of the Loan
Documents, as amended hereby, to which it is or is to be a party.
(d) This Amendment No. 2 and Waiver has been duly executed and
delivered by the Borrower. This Amendment No. 2 and Waiver and each of the
other Loan Documents, as amended hereby, to which the Borrower is a party
is the legal, valid and binding obligation of the Borrower, enforceable
against the Borrower in accordance with its terms.
(e) There is no action, suit, investigation, litigation or proceeding
affecting the Borrower or any of its Subsidiaries (including, without
limitation, any Environmental Action) pending or threatened before any
court, governmental agency or arbitrator that (i) could be reasonably
likely to have a Material Adverse Effect or (ii) purports to affect the
legality, validity or enforceability of this Amendment No. 2 and Waiver or
any of the other Loan Documents, as amended hereby.
SECTION 5. Reference to and Effect on the Credit Agreement and the
-------------------------------------------------------
Loan Documents. (a) On and after the effectiveness of this Amendment No. 2 and
- --------------
Waiver, each reference in the Credit Agreement to "this Agreement", "hereunder",
"hereof" or words of like import referring to the Credit Agreement, and each
reference in each of the other Loan Documents to "the Credit Agreement",
"thereunder", "thereof" or words of like import referring to the Credit
Agreement, shall mean and be a reference to the Credit Agreement, as amended by
this Amendment No. 2 and Waiver.
<PAGE>
(b) The Credit Agreement and each of the other Loan Documents, as
specifically amended by this Amendment No. 2 and Waiver, are and shall continue
to be in full force and effect and are hereby in all respects ratified and
confirmed.
(c) The execution, delivery and effectiveness of this Amendment No. 2
and Waiver shall not, except as expressly provided herein, operate as a waiver
of any right, power or remedy of any Lender or the Agent under any of the Loan
Documents, nor constitute a waiver of any provision of any of the Loan
Documents.
SECTION 6. Costs and Expenses. The Borrower agrees to pay on demand
------------------
all costs and expenses of the Agent in connection with the preparation,
execution, delivery and administration, modification and amendment of this
Amendment No. 2 and Waiver and the other instruments and documents to be
delivered hereunder (including, without limitation, the reasonable fees and
expenses of counsel for the Agent) in accordance with the terms of Section 9.04
of the Credit Agreement.
SECTION 8. Execution in Counterparts. This Amendment No. 2 and
-------------------------
Waiver may be executed in any number of counterparts and by different parties
hereto in separate counterparts, each of which when so executed shall be deemed
to be an original and all of which taken together shall constitute but one and
the same agreement. Delivery of an executed counterpart of a signature page to
this Amendment No. 2 and Waiver by telecopier shall be effective as delivery of
a manually executed counterpart of this Amendment No. 2 and Waiver.
SECTION 9. Governing Law. This Amendment No. 2 and Waiver shall be
-------------
governed by, and construed in accordance with, the laws of the State of New
York.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No.
2 and Waiver to be executed by their respective officers thereunto duly
authorized, as of the date first above written.
By
-----------------------------------
Title:
BANQUE NATIONALE DE PARIS,
as Agent, Swing Line Bank,
Issuing Bank and as Lender
By
-----------------------------------
Title:
By
-----------------------------------
<PAGE>
Title:
KEYBANK NATIONAL ASSOCIATION
By
-----------------------------------
Title:
PNC BANK, NATIONAL ASSOCIATION
By
-----------------------------------
Title:
FIRST BANK NATIONAL ASSOCIATION
By
-----------------------------------
Title:
UBS AG, STAMFORD BRANCH
By
-----------------------------------
Title:
By
-----------------------------------
Title:
<PAGE>
CONSENT
Dated as of February __, 1999
Each of the undersigned, as a Loan Party party to certain of the Loan
Documents (as defined in the Credit Agreement referred to in the foregoing
Amendment No. 2 and Waiver), hereby consents to such Amendment No. 2 and Waiver
and hereby confirms and agrees that (a) notwithstanding the effectiveness of
such Amendment No. 2 and Waiver, each Loan Document to which it is a party is,
and shall continue to be, in full force and effect and is hereby ratified and
confirmed in all respects, except that, on and after the effectiveness of such
Amendment No. 2 and Waiver, each reference in such Loan Document to the "Credit
Agreement", "thereunder", "thereof" or words of like import shall mean and be a
reference to the Credit Agreement, as amended by such Amendment No. 2 and
Waiver, and (b) the Collateral Documents to which such Loan Party is a party and
all of the Collateral described therein do, and shall continue to, secure the
payment of all of the Secured Obligations (in each case, as defined therein).
IRON AGE HOLDINGS CORPORATION
By
-----------------------------------
Title:
IRON AGE INVESTMENT COMPANY
By
-----------------------------------
Title:
FALCON SHOE MFG. CO.
By
-----------------------------------
Title:
<PAGE>
Annex A
SCHEDULE IV
A. The Parent Guarantor shall maintain an Interest Coverage Ratio for
each Rolling Period set forth below of not less than the amount set forth below
for such Rolling Period:
<TABLE>
<CAPTION>
Rolling Period Ending Closest To Ratio
-------------------------------- -----
<S> <C>
January 31, 1999 1.60 : 1.00
April 30, 1999 1.60 : 1.00
July 31, 1999 1.75 : 1.00
October 31, 1999 1.75 : 1.00
January 31, 2000 1.75 : 1.00
</TABLE>
B. The Parent Guarantor shall maintain a Leverage Ratio for each Rolling
Period set forth below of not less than the amount set forth below for such
Rolling Period:
<TABLE>
<CAPTION>
Rolling Period Ending Closest To Ratio
-------------------------------- -----
<S> <C>
January 31, 1999 6.25 : 1.00
April 30, 1999 6.25 : 1.00
July 31, 1999 6.25 : 1.00
October 31, 1999 6.25 : 1.00
January 31, 2000 6.00 : 1.00
</TABLE>
<PAGE>
Annex B
SCHEDULE V
EBITDA Schedule - To be supplied by the Company
<PAGE>
Exhibit 10.36
March 5, 1999
Mr. Mitch Green
Banque Nationale De Paris
499 Park Avenue
New York, NY 10022-1278
Dear Mr. Green,
Pursuant to Section 2.05 (a) of the Credit Agreement Dated as of April 24, 1998
among Iron Age Corporation as Borrower and Banque Nationale de Paris as Agent,
the Borrower has elected to reduce Acquisition Commitments from $35,000,000 to
$22,000,000. Therefore, please reduce the Unused Acquisition Commitments from
$23,300,000 to $10,300,000.
Sincerely,
IRON AGE CORPORATION
Keith A. McDonough
Executive VP/CFO
KAM/al
c: Reza Satchu Fenway Partners, Inc.
Alan Mustacchi Banque National De Paris
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-30-1999
<CASH> 517
<SECURITIES> 0
<RECEIVABLES> 17,240
<ALLOWANCES> (275)
<INVENTORY> 36,681
<CURRENT-ASSETS> 59,493
<PP&E> 14,709
<DEPRECIATION> (3,701)
<TOTAL-ASSETS> 180,032
<CURRENT-LIABILITIES> 11,985
<BONDS> 150,514
0
0
<COMMON> 1
<OTHER-SE> 12,060
<TOTAL-LIABILITY-AND-EQUITY> 180,032
<SALES> 124,294
<TOTAL-REVENUES> 124,294
<CGS> 63,228
<TOTAL-COSTS> 63,228
<OTHER-EXPENSES> 50,218
<LOSS-PROVISION> 151
<INTEREST-EXPENSE> 14,844
<INCOME-PRETAX> (4,147)
<INCOME-TAX> (874)
<INCOME-CONTINUING> (3,273)
<DISCONTINUED> 0
<EXTRAORDINARY> (4,015)
<CHANGES> 0
<NET-INCOME> (7,288)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
