Back to GetFilings.com

Table of Contents

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

(Mark One)

Commission file number: 333-57009

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 o

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

APPLICABLE ONLY TO CORPORATE ISSUERS

Table of Contents

PART 1 — FINANCIAL INFORMATION

Item 1. Financial Statements.

Table of Contents

Iron Age Holdings Corporation
Consolidated Balance Sheets

See accompanying notes.

-3-

Table of Contents

Iron Age Holdings Corporation
Consolidated Statements of Operations (Unaudited)

See accompanying notes.

-4-

Table of Contents

Iron Age Holdings Corporation
Consolidated Statements of Cash Flows (Unaudited)

See accompanying notes.

-5-

Table of Contents

Iron Age Holdings Corporation
Notes to Consolidated
Financial Statements (Unaudited)

October 26, 2002

1. Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ended October 26, 2002 are not necessarily indicative of the results that may be expected for the fiscal year ended January 25, 2003. 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 26, 2002.

2. Inventories

Inventories consist of the following:

3. Intangible Assets

Effective January 27, 2002, Holdings adopted Statement on Financial Accounting Standards (SFAS) No. 141, “Business Combinations”, and Statement on Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets” (the “Statements”). Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the provisions of SFAS No. 142. While amortization of goodwill will no longer be reflected in Holdings’ financial statements, amortization related to certain of Holdings’ other intangible assets will continue to be deductible for income tax purposes. Amortization expense related to Holdings’ goodwill for the three months and nine months ended October 27, 2001, was $0.6 million and $1.7 million, respectively.

In connection with the adoption of SFAS No. 142, Holdings tested its goodwill for impairment, which required an assessment of whether there is an indication that goodwill is impaired as of the

-6-

Table of Contents

date of adoption, January 27, 2002. Holdings has identified two reporting units, distribution and manufacturing, and determined the carrying value of those units as of the date of adoption. Only the distribution reporting unit had related goodwill. Holdings assessed the fair value of the distribution reporting unit and compared it to the reporting unit’s carrying amount, as computed in Step 1 of the evaluation. The fair value of the distribution reporting unit in Step 1 of the evaluation was determined using a 5-year discounted cash flow model. Key assumptions included management’s estimates of future profitability, capital requirements, a discount rate of 14.6% and a terminal growth rate of 2%. Based upon the initial evaluation, Step 2 of the evaluation was required, as the distribution reporting unit had a carrying value in excess of its fair value. In conjunction with Step 2, Holdings retained an independent appraisal firm to prepare a valuation of Holdings’ assets and liabilities. Step 2 requires the implied fair value of goodwill to be calculated by allocating the fair value of the reporting unit to its tangible and intangible net assets, other than goodwill. The remaining unallocated fair value represents the implied fair value of the goodwill. Management and the independent appraisal firm have determined that all of Holdings’ goodwill was impaired at January 27, 2002. Accordingly, Holdings has recorded a goodwill impairment charge of $77.5 million, net of tax of $1.7 million, as a cumulative effect of change in accounting for goodwill, for the nine month period ended October 26, 2002. The goodwill impairment charge has no effect on cash, the ongoing operation of Holdings, the covenants relating to the Bank Credit Facility or the indentures for the Discount Notes and the Senior Subordinated Notes.

The following table presents reported net loss exclusive of goodwill amortization expense for the three month period and the nine month period ended October 26, 2002 and October 27, 2001, respectively.

Amortization expense for other intangible assets subject to amortization for the three month and nine month periods ended October 26, 2002 and October 27, 2001 are $0.5 million, $0.5 million, $1.6 million and $1.5 million, respectively. Estimated amortization expense for the fiscal year ended January 25, 2003 and the succeeding five fiscal years is approximately $2.2 million per year.

-7-

Table of Contents

4. Comprehensive Gain (Loss)

5. Related Party Transactions

On October 1, 2002, Holdings and Iron Age Corporation, Holdings’ wholly-owned subsidiary (“Iron Age”), entered into a promissory note permitting Holdings to borrow up to $4.8 million for purposes of repurchasing Holdings’ 12 1/8% Senior Discount Notes due 2009 (the “Discount Notes”). The promissory note bears interest at 14.0% and matures on October 1, 2009. Holdings borrowed approximately $1.04 million from Iron Age under the promissory note on October 11, 2002 to partially fund its repurchase of $6.801 million in face value of its Discount Notes.

On May 23, 2002, Iron Age purchased 25.08 shares Holdings’ Series B non voting, cumulative, redeemable preferred stock with a par value of $.01 per share (the “Holdings Series B Preferred Stock”) from certain officers of Iron Age, in exchange for the unpaid balance of principal and accrued interest of their outstanding Term Promissory Notes in the amount of approximately $0.14 million. Following the purchase, these officers held 22.67 shares of Holdings Series B Preferred Stock. Holdings recorded $0.13 million as stock-based compensation for the nine months ended October 26, 2002.

6. Long-term debt

On September 23, 2002, Holdings, Iron Age and Falcon Shoe Mfg. Co. (“Falcon”), one of the Holdings’ wholly-owned subsidiaries, entered into a $50.0 million Loan and Security Agreement (the “Bank Credit Facility”) with a financial institution and another lender. The Bank Credit Facility consists of a $38.0 million revolving credit facility, including a $2.0 million letter of credit subfacility, and two term loans: Term Loan A of up to an aggregate of $1.0 million and Term loan B of up to an aggregate of $3.0 million. In addition, the Bank Credit Facility includes a third term loan, Term Loan C, of up to an aggregate of $12.0 million. Availability under the Bank Credit Facility is governed by a borrowing base determined by advance rates against the qualified inventory and accounts receivable of the Company and Falcon.

The revolving credit facility and the Term Loan C are due in full on September 23, 2007. The

-8-

Table of Contents

outstanding balances of the Term Loan A and the Term Loan B are due in installments through September 23, 2007. Term Loan A, Term Loan B and the revolving credit facility bear interest at either the prime rate or LIBOR, at the option of Holdings, plus an applicable margin. Outstanding borrowings on the revolving credit facility at prime rate plus a margin of 1.50% and LIBOR plus a margin of 3.75% are approximately $3.0 million and $12.0 million, respectively. Borrowings of approximately $1.0 million for Term Loan A are at prime rate plus a margin of 1.50%. Borrowings on Term Loan B at prime rate plus a margin of 3.25% and LIBOR plus a margin of 5.50% are approximately $0.4 million and $2.5 million, respectively. The interest rate for Term Loan C is 13.25%, including 2.0% paid-in-kind. Outstanding borrowings For Term Loan C approximate $12.0 million. Holdings pays a 0.375% commitment fee on the undrawn amounts of the revolving credit facility. Holdings pays a 2.00% letter of credit fee on any outstanding Letters of Credit.

At closing, Holdings drew the entire amount of Term Loan A, Term Loan B and Term Loan C and approximately $14.2 million on the revolving credit facility, to refinance its previous bank credit facility of approximately $27.6 million, including accrued interest, and to pay certain financing fees and expenses. In connection with the refinancing of Holdings’ previous bank credit facility, Holdings wrote-off approximately $0.2 million, net of tax of $0.1 million, of unamortized debt issuance costs remaining from its previous bank credit facility. The write-off of the unamortized debt issue costs was recorded as an extraordinary loss.

Holdings incurred approximately $2.0 million in capitalizable debt issuance costs which are being amortized over the term of the Bank Credit Facility.

The Bank Credit Facility contains certain financial and other covenants, including covenants requiring Holdings to maintain various financial ratios, limiting its ability to incur additional indebtedness, restricting the amount of capital expenditures that may be incurred, and limiting transactions with affiliates. The Bank Credit Facility also limits Holdings’ ability to engage in mergers or acquisitions, sell certain assets, pay dividends or repurchase its stock. The Bank Credit Facility is secured by a first priority security interest in substantially all of Holdings’ assets. Holdings’ domestic and Canadian subsidiaries are required to guarantee its obligations under the Bank Credit Facility.

Although the Bank Credit Facility expires on September 23, 2007, the revolving credit facility has been classified as current in accordance with Statement of Financial Accounting Standards (SFAS) No. 6, Classification of Short Term Obligations Expected to be Refinanced.

On October 11, 2002, Holdings purchased $6.801 million in face value of its Discount Notes for $1.037 million. The purchase was funded by borrowings under the Bank Credit Facility, which were loaned to Holdings pursuant to the promissory note between Holdings and Iron Age. Holdings recorded an extraordinary gain of $4.33 million, net of unamortized deferred financing costs of $0.14 million and income taxes of $0.85 million. Following the purchase, such principal amount of the Discount Notes was retired.

-9-

Table of Contents

7. Subsequent Event

On November 27, 2002, Holdings purchased $3.205 million in face value of its Discount Notes for $0.617 million (the “November 2002 Transaction”). The purchase was funded by borrowings of Iron Age under the Bank Credit Facility, which were loaned to Holdings pursuant to the promissory note between Holdings and Iron Age. Holdings will record an extraordinary gain of approximately $1.96 million, net of unamortized deferred financing costs and expenses of $0.07 million and income taxes of $0.41 million. Following the purchase, such principal amount of the Discount Notes were retired.

-10-

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

General

The following discussions should be read in conjunction with the accompanying Condensed Consolidated Financial Statements for the period ended October 26, 2002, and Holdings’ audited consolidated financial statements and Annual Report on Form 10-K for the fiscal year ended January 26, 2002.

October 2002 Transaction

On October 11, 2002, Holdings purchased $6.801 million in face value of its Discount Notes for $1.037 million (the “October 2002 Transaction”). The purchase was funded by borrowings under the Bank Credit Facility, which were loaned to Holdings pursuant to the promissory note between Holdings and Iron Age. Holdings recorded an extraordinary gain of $4.33 million, net of unamortized deferred financing costs of $0.14 million and income taxes of $0.85 million. Following the purchase, such principal amount of the Discount Notes was retired.

Results of Operations

Three Months ended October 26, 2002 compared to
Three Months ended October 27, 2001

Net Sales for the three months ended October 26, 2002 (“third quarter 2003”) were $24.9 million compared to $25.5 million for the comparable three month period ended October 27, 2001 (“third quarter 2002”), a decrease of $0.6 million, or 2.4%. The decrease in net sales was attributable to a decrease of $0.3 million, or 4.2%, in Holdings’ primary footwear distribution business line, primarily related to a decrease of approximately $0.3 million, or 6.6%, in Holdings’ industrial direct business line, as a result of decreases in purchases by several customers, reflecting a continued softness in the general economic environment. Net sales in third quarter 2003 were flat in Holdings’ retail business line at $19.1 million and Holdings’ direct mail business line at $1.5 million, compared to third quarter 2002. In addition, for third quarter 2003, there were no sales relating to Holdings’ vision products business line, which was sold in December 2001, compared to $0.3 million in net sales for third quarter 2002, a decrease of $0.3 million, or 50.0% of the overall decrease in net sales.

Gross Profit for third quarter 2003 was $12.2 million compared to $12.4 million for third quarter 2002, a decrease of $0.2 million, or 1.6%. The decrease in gross profit was primarily related to the decrease in net sales as discussed above. As a percentage of net sales, gross profit for third quarter 2003 increased to 48.9%, an increase of 0.2% from third quarter 2002. Gross profit percentage decreased in Holdings’ primary footwear distribution line by 0.1% in third quarter 2003, due primarily to general changes in product mix and the impact of competitive pricing strategies. The

-11-

Table of Contents

decrease in gross profit percentage in the primary footwear distribution line was offset by a 2.0% increase in gross profit percentage in Holdings’ manufacturing subsidiary.

Selling, General and Administrative Expenses for third quarter 2003 were $10.4 million compared to $10.9 million for third quarter 2002, a decrease of $0.5 million, or 4.6%, due primarily to decreases of approximately $0.4 million in employee costs, including salaries and wages and approximately $0.1 million in advertising cost reductions.

Provision for impairment for third quarter 2002 was $1.8 million. The provision for impairment relates to the optical business line that Holdings sold in December 2001. There were no material favorable effects on the financial statements associated with the assets that were sold. The provision for impairment included goodwill and certain other intangible assets, including customer lists, that Holdings’ management determined was impaired.

Operating Income for third quarter 2003 was $0.8 million compared to an operating loss of $1.9 million for third quarter 2002, an increase of $2.7 million, or 142.1%. As a percentage of net sales, operating income was 3.2% of net sales for third quarter 2003 compared to an operating loss of 7.5% of net sales for third quarter 2002. The decrease in gross profit was offset by reductions in selling, general and administrative expenses as discussed above, the provision for the optical business line impairment in third quarter 2002 and by decreases in amortization expense, primarily goodwill, in conjunction with the adoption of Statement of Financial accounting Standards (SFAS) No. 142.

Interest Expense for third quarter 2003 was $3.6 million compared to $3.2 million for third quarter 2002, an increase of $0.4 million, or 12.5%. Interest expense for third quarter 2002 included the favorable change of approximately $0.2 million in the fair market value of Holdings’ interest rate swap agreement due to the decrease in interest rates in third quarter 2002. The interest rate swap agreement was terminated in October 2001. Excluding the favorable impact of the interest rate swap agreement in third quarter 2002, interest expense for third quarter 2003 increased due to the effect of higher interest rates and increased indebtedness relating to the Bank Credit Facility.

Income Tax Benefit for third quarter 2003 and for third quarter 2002 was $1.0 million. Income tax benefit for third quarter 2002 differs from that of the statutory income tax rate due primarily to nondeductible goodwill amortization. Upon adoption of SFAS No. 142, Holdings recorded no goodwill amortization for third quarter 2003.

Extraordinary Item for third quarter 2003 was an extraordinary gain of approximately $4.3 million, net of income tax effect of $0.85 million, due to the repurchase of a portion of the Discount Notes in the October 2002 Transaction. In addition, for third quarter 2003, Holdings recorded an extraordinary loss of approximately $0.2 million, net of income tax effect of $0.14 million, related to the write-off of unamortized debt issue costs for the previous bank credit facility which was refinanced in September 2002 as discussed above.

-12-

Table of Contents

Nine Months ended October 26, 2002 compared to
Nine Months ended October 27, 2001

Net Sales for the nine months ended October 26, 2002 (“first three quarters 2003”) were $76.3 million compared to $81.0 million for the comparable nine month period ended October 27, 2001 (“first three quarters 2002”), a decrease of $4.7 million, or 5.8%. The decrease in net sales was attributable to a decrease of $3.3 million, or 4.2%, in Holdings’ primary footwear distribution business line, primarily related to a decrease of $2.2 million, or 16.0%, in Holdings’ industrial direct business line, as a result of decreases in purchases by several large customers, reflecting a continued softness in the general economic environment. In addition, net sales decreased by $0.3 million, or 0.6%, in Holdings’ retail business line, reflecting a decline in the general economic environment, including plant closings and employee layoffs that affected Holdings’ customers. Further, the economy continues to adversely impact Holdings’ direct mail business line. Net sales in the direct mail business line decreased by $0.3 million, or 6.3%. The decrease in net sales was also related to a decrease of $0.4 million, or 8.5% of the overall decrease in net sales, in Holdings’ branded wholesale business line, as there were no sales to Holdings’ primary wholesale customer in first three quarters 2003, due to the bankruptcy of that customer in October 2001. In addition, sales decreased by $0.4 million, or 24.3% in Holdings’ manufacturing subsidiary, due to decreased sales to its external customers. Also, for first three quarters 2003, there were no sales relating to Holdings’ vision products business line, which was sold in December