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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

(Mark One)

Commission file number: 333-57009

Iron Age Holdings Corporation

Robinson Plaza Three, Suite 400, Pittsburgh, Pennsylvania 15205

(412) 787-4100

Not Applicable.

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

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PART 1 — FINANCIAL INFORMATION

Item 1. Financial Statements.

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Iron Age Holdings Corporation
Consolidated Balance Sheets

See accompanying notes.

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Iron Age Holdings Corporation
Consolidated Statements of Loss (Unaudited)

See accompanying notes.

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

See accompanying notes.

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

July 27, 2002

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 six month period ended July 27, 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 was required to adopt 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 six months ended July 28, 2001, was $0.6 million and $1.1 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 date of adoption, January 27, 2002. Holdings has identified two reporting units, distribution and

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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 is 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 six month period ended July 27, 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 six month period ended July 27, 2002 and July 28, 2001, respectively.

Amortization expense for other intangible assets subject to amortization for the three month and six month periods ended July 27, 2002 and July 28, 2001 are $0.3 million, $0.3 million, $0.6 million and $0.6 million, respectively. Estimated amortization expense for the fiscal year ended January 25, 2003 and the succeeding five fiscal years is approximately $1.1 million per year.

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4. Comprehensive Loss

5. Related Party Transaction

On May 23, 2002, Iron Age Corporation, Holdings’ wholly-owned subsidiary (“Iron Age”), purchased 25.08 shares of Iron Age Holdings Corporation’s 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 $0.13 million. Following the purchase, these officers will hold 22.67 shares of Holdings Series B Preferred Stock. Holdings recorded $0.13 million as stock-based compensation expense for the three months and six months ended July 27, 2002.

6. Long-Term Debt

Iron Age’s Bank Credit Facility, which is guaranteed by Holdings, requires Holdings to maintain certain financial ratios. Effective September 6, 2002, Holdings obtained a Letter Waiver from the lenders related to the Bank Credit Facility, waiving the requirements of those financial ratios for the period from July 27, through October 25, 2002 with the intention of refinancing its existing bank credit facility by September 30, 2002. Consequently, the Company has not violated its debt covenants and the debt is not callable. However, if the Bank Credit Facility is not refinanced, Holdings’ projections indicate that it will likely be in violation of certain financial covenants under its existing Bank Credit Facility within the next twelve months unless such covenants are amended or waived.

On August 27, 2002, Holdings obtained a $50.0 million commitment for a new five-year bank credit facility, consisting of a revolving credit facility, a letter of credit subfacility and three term loans. The proceeds from the new bank credit facility are expected to be used to fully repay the obligations of the existing Bank Credit facility, fund other capital initiatives, and to provide Holdings with capital to fund its anticipated cash requirements. The commitment stipulates that the lender will extend the new bank credit facility unless certain conditions are not met, including, but not limited to, the completion of due diligence by the lender (which Holdings believes to be substantially complete) or a material adverse change in Holdings’ financial condition or prospects or in the value of collateral. The commitment will terminate, unless extended by the lender, if the new bank credit facility is not closed on or before September 30, 2002.

If Holdings is unable to refinance its current Bank Credit Facility on or before October 26, 2002, and Holdings is unable to obtain additional waivers from the lenders or amend the Bank Credit Facility, the lenders have the right to accelerate the bank debt, which would cause the Senior Subordinated Notes and Senior Discount Notes to also be in default. In accordance with SFAS No. 78, Classification of Obligations That Are Callable by the Creditor an amendment of ARB No. 43, Chapter 3A, and SFAS No. 6, Classification of Short-Term Obligations Expected to Be Refinanced, Holdings has classified its Bank Credit Facility, Senior Subordinated Notes and Senior Discount Notes as current liabilities because the existing lender has not waived its right to accelerate the debt for a period of at least twelve months and the commitment letter contains certain subjective cancellation provisions. Holdings expects to complete the refinancing by September 30, 2002, at which time, these obligations would be reclassified as long-term.

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would become callable by the creditors, resulting in a reclassification of the Bank Credit Facility, the Discount Notes and the Senior Subordinated Notes as a current liability.

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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 July 27, 2002, and Holdings’ audited consolidated financial statements and Annual Report on Form 10-K for the fiscal year ended January 26, 2002.

Results of Operations

Three Months ended July 27, 2002 compared to
Three Months ended July 28, 2001

Net Sales for the three months ended July 27, 2002 (“second quarter 2003”) were $23.8 million compared to $25.5 million for the comparable three month period ended July 28, 2001 (“second quarter 2002”), a decrease of $1.7 million, or 6.7%. The decrease in net sales was attributable to a decrease of $1.1 million, or 4.3%, in Holdings’ footwear distribution business line, primarily related to a decrease of $0.9 million, or 21.0%, 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. Further, the economy continues to adversely impact Holdings’ direct mail business line. Net sales in the direct mail business line decreased by $0.2 million, or 13.3%. Partially offsetting the decrease in net sales in Holdings’ industrial direct and direct mail business lines, was an increase of $0.1 million, or 0.5%, in Holdings’ retail business line, Holdings’ largest business line, which continues to benefit from the addition of new customers and a product line that is the industry’s most extensive. In addition, Holdings has opened three new retail locations and has relocated several others to be in a better position to serve its industrial customer base. The decrease in net sales was also related to a decrease of $0.3 million, or 15.6% of the overall decrease in net sales, in Holdings’ branded wholesale