<PAGE> 1
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: May 1, 1999
-----------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from:________________to________________
Commission file number: 333-57009
-------------
Iron Age Holdings Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3349775
----------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
incorporation or organization Identification Number)
Robinson Plaza Three, Suite 400, Pittsburgh, Pennsylvania 15205
---------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(412) 787-4100
--------------------------------------------------
Registrants telephone number, including area code)
Not Applicable.
------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ x ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ] Not Applicable.
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date. Not Applicable.
<PAGE> 2
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The following financial statements are presented herein:
Condensed Consolidated Balance Sheets as of May 1, 1999 and
January 30, 1999
Condensed Consolidated Statements of Income for the three months
ended May 1, 1999 and May 2, 1998
Condensed Consolidated Statements of Cash Flows for the three
months ended May 1, 1999 and May 2, 1998
Notes to Condensed Consolidated Financial Statements
<PAGE> 3
Iron Age Holdings Corporation
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
MAY 1 JANUARY 30
1999 1999
(UNAUDITED) (NOTE)
ASSETS (Dollars in Thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 130 $ 517
Accounts receivable, net 17,531 16,965
Inventories (Note 2) 36,076 36,681
Prepaid expenses 3,531 4,469
Deferred income taxes 866 861
--------- ---------
Total current assets 58,134 59,493
Notes receivable and other assets 538 431
Property and equipment, net 10,860 11,008
Intangible assets, net 108,062 109,100
--------- ---------
Total assets $ 177,594 $ 180,032
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 527 $ 544
Accounts payable 2,519 3,307
Accrued expenses 9,218 8,134
--------- ---------
Total current liabilities 12,264 11,985
Long-term debt, less current maturities 147,755 150,514
Accrued pension liability 504 516
Deferred income taxes 4,956 4,956
--------- ---------
Total liabilities 165,479 167,971
Commitments and contingencies -- --
Stockholder's equity:
Common stock, $.01 par value; 200,000 shares
authorized, 99,625 issued and outstanding 1 1
Additional paid-in capital 38,086 38,086
Accumulated deficit (25,933) (25,840)
Other comprehensive (loss) income (39) (186)
--------- ---------
Total stockholder's equity 12,115 12,061
--------- ---------
Total liabilities and stockholder's equity $ 177,594 $ 180,032
========= =========
</TABLE>
See accompanying notes.
-3-
<PAGE> 4
Iron Age Holdings Corporation
Condensed Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MAY 1 MAY 2
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net sales $ 32,907 $ 32,167
Cost of sales 16,419 16,046
-------- --------
Gross profit 16,488 16,121
Selling, general and administrative 10,645 12,967
Depreciation 444 424
Amortization of intangible assets 904 846
-------- --------
Operating income 4,495 1,884
Interest expense 4,200 2,738
-------- --------
Income (loss) before income taxes 295 (854)
Provision (benefit) for income taxes 388 (128)
-------- --------
(Loss) before extraordinary item (93) (726)
Extraordinary item, net of tax effect -- (4,015)
-------- --------
Net (loss) $ (93) $ (4,741)
======== ========
</TABLE>
See accompanying notes.
-4-
<PAGE> 5
Iron Age Holdings Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MAY 1 MAY 2
1999 1998
------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) $ (93) $ (4,741)
Adjustments to reconcile net (loss) to net cash provided by (used in)
operating activities:
Extraordinary item, net of tax -- 4,015
Depreciation and amortization 1,462 1,378
Amortization of deferred financing fees included in interest 380 31
Accretion of original issue discount 806 58
Provision for losses on accounts receivable 30 47
Deferred income taxes (5) (134)
Changes in operating assets and liabilities:
Accounts receivable (596) (618)
Inventories 605 1
Prepaid expenses 938 (412)
Other noncurrent assets (290) (294)
Accounts payable (788) 388
Accrued expenses 1,084 (2,599)
------- ---------
Net cash provided by (used in) operating activities 3,533 (2,880)
INVESTING ACTIVITIES
Net cash used in business acquisitions -- (4,493)
Purchases of property and equipment (410) (374)
------- ---------
Net cash used in investing activities (410) (4,867)
FINANCING ACTIVITIES
Borrowing under revolving credit agreement 750 33,800
Proceeds from senior subordinated notes -- 100,000
Proceeds from the senior discount notes -- 25,001
Principal payment on debt (4,250) (111,063)
Payment of financing costs (75) (5,112)
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, net (82) 52
------- ---------
Net cash provided by (used in) financing activities (3,657) 5,707
Effect of exchange rate changes on cash and cash equivalents 147 9
------- ---------
(Decrease) increase in cash and cash equivalents (387) (2,031)
Cash and cash equivalents at beginning of period 517 2,069
------- ---------
Cash and cash equivalents at end of period $ 130 $ 38
======= =========
</TABLE>
See accompanying notes.
-5-
<PAGE> 6
Iron Age Holdings Corporation
Notes to Condensed Consolidated
Financial Statements (Unaudited)
May 1, 1999
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended May 1, 1999 are not
necessarily indicative of the results that may be expected for the fiscal year
ended January 29, 2000. For further information, refer to Iron Age Holdings
Corporation's ("Holdings" or "the Company") consolidated financial statements
and footnotes thereto for the fiscal year ended January 30, 1999.
2. INVENTORY MAY 1 JANUARY 30
Inventories consist of the following: 1999 1999
------- -------
Raw materials $ 2,259 $ 2,328
Work-in-process 662 815
Finished goods 33,155 33,538
------- -------
$36,076 $36,681
======= =======
THREE MONTHS ENDED
3. COMPREHENSIVE INCOME (LOSS) MAY 1 MAY 2
1999 1998
Net loss $ (93) $ (4,741)
Foreign currency translation gains 147 10
------- --------
Total comprehensive income (loss) $ 54 $ (4,731)
======= ========
-6-
<PAGE> 7
4. DIVESTITURE
On May 25, 1999, Holdings sold the assets (primarily inventory) of its safety
and medical products line with a carrying value of approximately $0.4 million to
Stratford Safety Products, Inc. for $0.5 million. The sale resulted in a gain of
$0.085 million, which was reflected as a reduction of goodwill that was recorded
in connection with the acquisition of Safety Supplies and Service Co., Inc.
Holdings' net income from the safety and medical products line was not material
from the date of the acquisition to the date of sale.
-7-
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The following discussions should be read in conjunction with the accompanying
Condensed Consolidated Financial Statements for the period ended May 1, 1999,
and Holdings' audited consolidated financial statements and Annual Report on
Form 10-K for the fiscal year ended January 30, 1999.
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 in the amount of $14.55 million
(net of a $0.45 million discount), (iii) Holdings issued 1,500 shares of the
Holdings Series A Preferred Stock for an aggregate consideration of $14.9
million, (iv) Holdings issued 88,625 shares of Common Stock for an aggregate
consideration of approximately $32.2 million, (v) Holdings issued warrants to
acquire approximately 7,000 shares of Common Stock of Holdings at an exercise
price of $185.52 per share for an aggregate consideration of $0.1 million, and
(vi) management rolled over certain options to acquire approximately 6,000
shares of the predecessor company at an exercise price of $62 per share into
options to acquire approximately 11,500 shares of Common Stock of Holdings at an
exercise price of $36.36 per share and were granted additional options to
acquire shares of Common Stock of Holdings at an exercise price of $363.60 per
share. The total fair value of the exchanged options was recognized as a capital
contribution to Holdings because the exchanged options represented a portion of
the purchase price for Holdings. The Fenway Acquisition was accounted for by the
purchase method and the purchase price has been allocated to Holdings' assets
and liabilities based on fair market value. The Fenway Acquisition resulted in
goodwill of approximately $84.1 million, which is being amortized over 40 years.
The exercise price of the options which were rolled over by management is
approximately $36 per share and represents the difference between the fair
market value of Holdings' Common Stock at the date of grant and the total fair
value of the exchanged options which was recognized as a capital contribution to
Holdings of approximately $3,772,700, or approximately $328 per share.
Holdings, through Iron Age, acquired Knapp Shoes, Inc. ("Knapp") on March
14, 1997 (the "Knapp Acquisition"). As part of the Knapp Acquisition, the Fenway
Fund and certain other stockholders of Holdings contributed an additional $4.0
million of common equity. The Knapp Acquisition was accounted for under the
purchase method for business combinations and, accordingly, the results of
operations for Knapp are included in Holdings' financial statements only from
the date of the Knapp Acquisition.
On April 24, 1998 in the April 1998 Transactions, (i) Holdings
consummated the sale of the Discount Notes, its 12 1/8% Senior Discount Notes
due 2009, in an aggregate principal amount at
-8-
<PAGE> 9
maturity of $45.14 million, in a transaction exempt from the registration
requirements of the Securities Act, (ii) Iron Age issued the Senior Subordinated
Notes, its 9 7/8% Senior Subordinated Notes due 2008, in an aggregate principal
amount of $100 million in a transaction exempt from the registration
requirements of the Securities Act, and (iii) Holdings and Iron Age entered into
the New Credit Facility, which, as amended, provides for a $51.6 million senior
secured credit facility consisting of a $30.0 million revolving working capital
facility and a $21.6 million revolving acquisition facility. 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 make compensation payments to certain members
of management, to pay a dividend to Holdings' stockholders and to redeem the
Holdings Series A Preferred Stock. The transactions described in this paragraph
are collectively referred to herein as the "April 1998 Transactions."
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 its subsidiary IA Vision Acquisition Co.,
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 1998 Acquisitions"). The combined
purchase price for the First Quarter 1998 Acquisitions was approximately $4.64
million, including transaction costs of approximately $0.15 million. In
addition, on July 7, 1998, Holdings acquired certain assets of Work-Saf, Inc.
for approximately $0.75 million (the "Second Quarter 1998 Acquisition"). The
First Quarter 1998 Acquisitions and the Second Quarter 1998 Acquisition have
been accounted for using the purchase method of accounting for business
combinations, and accordingly, (i) the results of operations for each of the
acquired companies are included in Holdings' financial statements only from the
date of the respective acquisitions and (ii) the purchase price has been
allocated to Holdings' net assets based upon their fair market values. The First
Quarter 1998 Acquisitions and the Second Quarter 1998 Acquisition resulted in
goodwill of approximately $2.8 million, which is being amortized over 40 years.
DIVESTITURES
Effective August 31, 1998, Holdings sold the Dunham trademark and related
trademarks with no carrying value to New Balance Athletic Shoe, Inc. ("New
Balance") for $2.0 million and recorded a gain of $1.7 million (the "Dunham
Sale"). Dunham wholesale sales were $3.1 million in fiscal 1999, consisting of
Dunham sales of $1.3 million prior to the Dunham Sale, sales of on-hand
-9-
<PAGE> 10
inventory to New Balance for approximately $0.6 million in conjunction with the
Dunham Sale and sales of Dunham products of $1.2 million to New Balance after
the Dunham Sale. In conjunction with the Dunham Sale, Holdings' subsidiary,
Falcon Shoe Mfg. Co., agreed to manufacture for New Balance certain products
which New Balance will continue to sell under the Dunham brand name pursuant to
a two year supply agreement with New Balance.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MAY 1, 1999 COMPARED TO
THREE MONTHS ENDED MAY 2, 1998
Net Sales for the three months ended May 1, 1999 ("first quarter 2000") were
$32.9 million compared to $32.2 million for the comparable three month period
ended May 2, 1998 ("first quarter 1999"), an increase of $0.7 million, or 2.2%.
The increase was attributable to growth in the Company's primary footwear
distribution business of $0.5 million, or 1.6%, and new sales of $0.7 million,
or 2.2%, related to the Company's vision and safety products business lines
which were acquired in the First Quarter 1998 Acquisitions. The increase in net
sales was partially offset by a $0.5 million, or 1.6%, decrease in net sales
from the Company's manufacturing facility, primarily related to the Dunham Sale.
Gross Profit for first quarter 2000 was $16.5 million compared to $16.1 million
for first quarter 1999, an increase of $0.4 million, or 2.5%. As a percentage of
net sales, gross profit for first quarter 2000 was the same as first quarter
1999.
Selling, General and Administrative Expenses for first quarter 2000 were $10.6
million compared to $13.0 million for first quarter 1999, a decrease of $2.4
million, or 18.5%. Excluding the effect of $2.2 million of compensation payments
to certain members of management in connection with the April 1998 Transactions
in first quarter 1999, selling, general and administrative expenses decreased by
$0.2 million, or 1.9%, due primarily to the effect of cost containment
initiatives which included the consolidation of the Knapp division into the
Company's primary footwear distribution business and redundant store closings.
Operating Income for first quarter 2000 was $4.5 million, or 13.7% of net sales,
compared to $1.9 million, or 5.9% of net sales, for first quarter 1999. The
increase was primarily attributable to the increase in gross profit and the
decrease in selling, general and administrative expenses as discussed above.
Interest Expense for first quarter 2000 was $4.2 million compared to $2.7
million for first quarter 1999, an increase of $1.5 million, or 55.6%. The
increase in interest expense was attributable to increased indebtedness of
Holdings related to the April 1998 Transactions and the New Credit Facility.
-10-
<PAGE> 11
Income Tax Expense for first quarter 2000 was $0.4 million compared to an income
tax benefit of $0.1 million for first quarter 1999. Income tax expense for first
quarter 2000 and income tax benefit for first quarter 1999 differ 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 first quarter 1999. Holdings needs to
generate $10.0 million of state taxable income to realize this benefit. 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 first quarter 1999 was an extraordinary loss of $4.0
million, net of a $2.9 million tax benefit, due to the early extinguishment of
indebtedness resulting from the repayment of the Old Subordinated Notes and the
Old Credit Facility in April 1998 in connection with the April 1998
Transactions.
LIQUIDITY AND CAPITAL RESOURCES
Holdings' primary cash needs are working capital, capital expenditures and debt
service. Holdings anticipates that it may use cash in the future to finance
acquisitions. Holdings has financed cash requirements primarily through
internally generated cash flow and funds borrowed under Holdings' and Iron Age's
credit facilities.
Net cash provided by operating activities was $3.5 million for first quarter
2000, an increase of $6.4 million as compared to net cash used in operating
activities of $2.9 million for first quarter 1999. The increase in cash from
operating activities is primarily the result of the increase in accrued interest
of $2.5 million in connection with the April 1998 Transactions and a decrease of
$0.6 million in inventory levels.
Excluding cash paid for acquisitions, Holdings' investing activities consisted
of capital expenditures of $0.4 million for both first quarter 2000 and first
quarter 1999. Capital expenditures for first quarter 2000 included capital
expenditures related to improvements in retail stores, shoemobiles and
equipment. Capital expenditures for first quarter 1999 included $0.2 million in
remaining costs related to the addition to Holdings' central distribution center
building. The remaining $0.2 million in capital expenditures was related to
improvements in retail stores, shoemobiles and equipment in the primary footwear
distribution business and installing POS (Point-of Sale) systems in stores and
trucks acquired in connection with the First Quarter 1998 Acquisitions.
Holdings' total working capital as of May 1, 1999 was $45.9 million. At January
30, 1999, working capital was $47.5 million. The primary reason for the decrease
to working capital was accrued interest incurred in connection with the April
1998 Transactions.
Holdings used approximately $3.7 million from financing activities for first
quarter 2000 due primarily to repayments of the New Credit Facility. Excluding
cash paid for the First Quarter 1998
-11-
<PAGE> 12
Acquisitions, Holdings generated cash of $1.2 million for first quarter 1999 due
primarily to borrowings under the New Credit Facility.
Holdings is a holding company, and its ability to pay interest on the Discount
Notes is dependent upon receipt of dividends from its subsidiaries. Holdings
does not have, and may not in the future have, any assets other than the common
stock of Iron Age (which is pledged to secure the obligations of Iron Age under
the New Credit Facility). Iron Age is party to the New Credit Facility and an
indenture pursuant to which the Senior Subordinated Notes were offered, each of
which imposes substantial restrictions on Iron Age's ability to pay dividends to
Holdings.
Cash flow from operations for first quarter 2000 was sufficient to cover debt
service requirements under the New 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 the Holdings' business will
generate sufficient cash flow from operations or that future borrowing will be
available under the New Credit Facility in an amount sufficient to enable
Holdings to service its indebtedness, including the Discount Notes, or to make
capital expenditures.
Holdings' debt consists of the Discount Notes, the Senior Subordinated Notes,
the New Credit Facility and certain other debt. The New Credit Facility, as
amended, consists of a $21.6 million multiple draw acquisition term loan
facility (the "New Acquisition Credit Facility") and $30.0 million in revolving
credit loans, letters of credit and swing line loans (the "New Revolving Credit
Facility"). Holdings' other debt of $0.9 million consists of capital leases and
other notes. As of May 1, 1999, approximately $11.7 million of the New
Acquisition Credit Facility and approximately $7.5 million of the New Revolving
Credit Facility were outstanding. Holdings has additional borrowing availability
of $9.9 million under the New Acquisition Credit Facility and approximately
$22.5 million under the New Revolving Credit Facility. The New Acquisition
Credit Facility matures in quarterly installments from July 2001 until final
payment in April 2004. The New Revolving Credit Facility will mature in April
2004 and has no scheduled interim principal payments.
The Senior Subordinated Notes are fully and unconditionally guaranteed on
an unsecured, senior subordinated basis by each Domestic Restricted Subsidiary
that is a Material Subsidiary (as such terms are defined in the indenture for
the Senior Subordinated Notes (the "Senior Subordinated Notes Indenture"))
(whether currently existing, newly acquired or created). Each such subsidiary
guaranty (a "Subsidiary Guaranty") will provide that the subsidiary guarantor,
as primary obligor and not merely as surety, will irrevocably and
unconditionally guarantee on an unsecured, senior
-12-
<PAGE> 13
subordinated basis the performance and punctual payment when due, whether at
stated maturity, by acceleration or otherwise, of all obligations of Iron Age
under the Senior Subordinated Notes Indenture and the Senior Subordinated Notes,
whether for payment of principal or of interest on the Senior Subordinated
Notes, expenses, indemnification or otherwise. As of January 30, 1999, none of
Iron Age's Domestic Restricted Subsidiaries was a Material Subsidiary, and
therefore no Subsidiary Guaranty was in force or effect.
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, assessment, renovation and validation of
its IT systems, and implemented these systems in March 1999. In the ordinary
course of business, Holdings upgraded the applications software covering the
main integrated system. As of May 1, 1999, Holdings had expended $37,000 and has
a total expected cost of $65,000 to replace, renovate, validate and implement
software to address the Year 2000 Issue. The cost is being funded out of
operating cash flow with the entire amount being capitalized as new hardware and
software, in accordance with EITF 96-14.
Holdings' inventory and assessment of its non-IT systems (including telephone,
heating/air-conditioning, electricity and security systems) was completed by
December 31, 1998. This is being followed by any required renovation in calendar
year 1999. Holdings is using internal resources to address the Year 2000 Issue
of its non-IT systems and has not incurred significant, separately identifiable
costs through May 1, 1999 and does not expect to incur significant additional
costs in order to upgrade its non-IT systems. All validation and implementation
of these non-IT systems is expected to be completed by mid-1999.
-13-
<PAGE> 14
The costs of systems implementation and Year 2000 modifications are based upon
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources, and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties. As of May 1, 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 the correspondence, management
has no reason to believe that Holdings' 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, Holdings may experience delays in
sourcing product to send to its customers. Holdings plans to address potential
problems with its vendors by identifying and arranging for alternate sources of
supply. Due to the nature of its product, Holdings does not believe it has any
exposure to contingencies related to the Year 2000 Issue for the products it has
sold.
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.
FORWARD LOOKING STATEMENTS
When used in this quarterly report, the words "believes", "anticipates",
"expects" and similar expressions are used to identify forward looking
statements. Such statements are subject to risks and
-14-
<PAGE> 15
uncertainties which could cause actual results to differ materially from those
projected. Holdings wishes to caution readers that the following important
factors and others in some cases have affected and in the future could affect
Holdings' actual results and could cause Holdings' actual results to differ
materially from those expressed in any forward statements made by Holdings: (i)
economic conditions in the safety shoe market, (ii) availability of credit,
(iii) increase in interest rates, (iv) cost of raw materials, (v) inability to
maintain state-of-the-art manufacturing facilities, (vi) heightened competition,
including intensification of price and service competition, the entry of 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.
-15-
<PAGE> 16
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IRON AGE HOLDINGS CORPORATION
By: /s/Keith A. McDonough
--------------------------
Name: Keith A. McDonough
Title: Vice President-Finance
Chief Financial Officer
Dated: June 15, 1999 (Principal financial and
accounting officer)
-16-
